Contracts

The information below, which provides background guidance for understanding and reviewing contracts and business agreements, is reprinted from the “blue pages” of the Guide to Reviewing Business Agreements and Contracts at Yale and Other Reference Information, a publication of the Contracts Subcommittee (led by OGC and Grants & Contracts- Medicine) of the University’s Business Standards and Practices Committee. An electronic version of the entire publication is available by clicking here.

Why have a written contract?

To prevent disputes
Having a good, clean written contract can prevent disputes between the parties. It defines their expectations about all elements of the transaction. It assigns consequences for departures from expectations or failure to abide by its terms. The process of negotiation, drafting, and review that leads to a document satisfactory to both parties should ferret out areas of potential difficulty in the relationship and give both parties confidence that they know what they are getting into when their institutions sign on the dotted line.

To create a cost management tool
A good contract aids in managing expected costs. It also provides a control on costs resulting from contingencies, and it allocates risks of the unexpected between the parties. It provides a framework for planning and managing ongoing projects with a complicated or variable cost structure.

To comply with legal requirements and for use in litigation
Some contracts must be in writing to be enforceable in the courts. These include contracts for the sale of goods with a value of $500 or more, contracts that will not be completely performed within a year, real estate contracts, and personal services contracts. Even if the law does not explicitly require one, a written contract will be the best way to show what the agreement of the parties was if one party is attempting to enforce the contract. A written contract helps exclude other extraneous evidence, such as what representations were made during negotiations.

To establish the nature of the relationship for tax and other purposes
A written contract provides evidence about the parties’ intent and relationship that may be important for reasons apart from contract enforcement. These include, for example, to establish the correct tax treatment of the transaction and to determine whether a joint venture or agency relationship was intended by the parties.

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Parties and Signatures

A letter agreement versus a “formal” agreement
Either will be binding if properly executed (i.e., signed) by both parties. Be careful to distinguish between a “letter of intent” and a letter agreement. The former, if carefully drafted, is not binding, but may still be useful in setting out the main components of a complex transaction under negotiation, or where needed for preliminary approvals, obtaining financing, etc. Inartful drafting may create binding obligations, however, in what was thought to be a letter of intent.

Note: A signed purchase order delivered to a party and accepted by performance creates a contract. Yale’s purchase order contains standard terms and conditions that ordinarily apply to such a contract. Many vendors attempt to substitute their own standard terms and conditions. Vendors’ terms and conditions can usually be negotiated, and should be negotiated on large purchases or contracts that are otherwise important because they create significant financial, time, or other exposure.

The Parties
Institutional contracts should be in the name of the correct legal entity (i.e., the correct corporate name, not the name of a Department or division). At Yale, Yale University is the correct corporate name: the individual Schools and Departments are not. The contracting party may be identified as “Yale University, on behalf of its School of _____” to identify the responsible entity within the University.

Signatures
The contract should be executed by an authorized officer or agent of the contracting entity. If the signer is not authorized to act on behalf of the entity, the contract may be void and unenforceable, and the unauthorized individual may be personally liable. The authority of officers is typically found in governing documents of the organization or in resolutions of its governing board. At Yale, certain officers are authorized to sign contracts for the University and to delegate their signature authority in certain limited ways, to, for example, the Director of Procurement or the Directors of Grant & Contract Administration. This Guide is intended to identify which office will obtain properly authorized signatures on contracts intended to bind the University.

Notes regarding signatures

“Apparent authority”: If an unauthorized agent (or employee) represents himself or herself to act with authority and the institution knows but fails to refute the misrepresentation, it may be bound in dealings undertaken by the agent with a third party who is misled by the representation. (This could occur, for example, in actions taken by officers of student organizations, unauthorized administrative officials, faculty committee chairmen, or program directors.) Make sure that the extent of one’s authority to bind the institution, and limits on that authority, are communicated to all persons who may be in a position to deal with third parties.

Always satisfy yourself as to the authority of the signatory for the other party.

Formalities of execution (signature): An acknowledgment by a notary is required for documents to be recorded in public offices. An acknowledgment commonly also serves as a confirmation or representation of the signatory’s authority. Acknowledgment is not necessary for a contract to be effective.

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Comments on Customary Contract Provisions

Recitals or “whereas” clauses
These statements customarily appear on the first page of the contract. They set the stage for the transaction and are useful also for establishing the general intent of the parties in entering into the contractual obligations. They may aid in the interpretation of the contract in litigation or for other reasons (e.g., for tax reasons it may be important to articulate the relationship of a transaction to the exempt purpose of the college or university, as in a research contract, to distinguish the work from providing services for a fee).

Date, term
A contract usually states its effective date, which may be as of the date of last signature on the contract, or “as of” a prior date if retroactive effect is mutually desired and appropriate. The term of the contract should be specified, including options for extension, if any. A failure to state the duration of a contract may be construed to create a term of “reasonable” duration or an indefinite term. If the contract is to be terminable at will by either party, it should so state, including applicable notice provisions.

Performance
The obligations of the parties with respect to performance should be set forth in explicit detail. The deliverables must be well-defined. Where the contract is for acquisition of a custom product or service, such as customized computer software or construction, detailed plans or specifications are imperative and should be explicitly incorporated into the contract. (Note that a Request for Proposal is not automatically part of a final contract.) Where plans are not yet complete, the institution should have a right of approval (but beware of committing the University to acting ‘reasonably’ in approving plans: this will limit its ability to reject an offering that it finds unsuitable).

In contracts for the sale of goods (governed by Article 2 of the Uniform Commercial Code), additional or modified terms in an acceptance which differ from the terms in an offer may become part of the final “contract” if not objected to. Purchase order forms have terms and conditions that are usually incorporated into the contract and should be referred to conspicuously on the face of the form (a web reference may be provided). Personnel responsible for placing purchase orders should be carefully instructed in the use of forms and should always examine acknowledgments and confirmations of orders for inconsistencies with the purchase order terms. In conflicts between a typewritten or handwritten entry and a printed form, the former will control.

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Time for performance should be specified. If time is “of the essence” —meaning that it is critical to acceptable performance—the contract should so specify. Timing of performance may be linked to penalties or right of termination. If performance or delivery is to be in stages or installments, method of acceptance of stages should be specified, and payment should generally be made in stages that are linked to performance.

A “force majeure” clause may excuse or defer performance obligations upon the occurrence of specified events beyond the parties’ control—e.g., “acts of God,” strikes, wars, etc. Often the list is unreasonably inclusive and should be pared down. Note whether performance is excused or merely delayed. Link the occurrence of a force majeure event to early termination rights.

Be wary of obligations that might be difficult to meet because they are not entirely within the institution’s power to control. For example, it may be difficult to comply with obligations to maintain the confidentiality of proprietary data. Insist upon “reasonable effort” standard of compliance or other form over which the University does have control.

All aspects of the required performance should be reviewed for consistency with applicable institutional policies, e.g., right of publication without delay, patent policy, use of institutional name, etc.

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Payment: how much, when, to whom, and in what manner
Payment terms should be clear. Confirm that promises to pay within a certain number of days of receipt of invoice are realistic. A payment schedule may be linked to performance or delivery in stages, with partial “holdbacks” until satisfactory completion of performance by the other party. If payment is to be received from the other party in installments, the payee institution should have the option to accelerate remaining payments in the event of default on payment of one installment. In international transactions, specify the currency and method and timing of determining the exchange rate.

Prepayment should be avoided, as should extended payment arrangements, and profit- or risk-sharing with the vendor (which may trigger negative tax treatment).

In most procurement transactions, payment should not be promised for sooner than 30 days of Yale’s receipt of invoice. In addition to other options offered by Procurement, checks are a common mode of payment by the University; on large transactions, wire transfers may be made. Payment direction is available from Procurement or GCA, and, if a vendor proposes payment terms that vary from those contained in the University’s standard purchase order, consult with Accounts Payable before proceeding with the vendor.

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Warranties and Representations

Express warranties and representations
If you are the buyer, insist on them; if you are the seller, limit or disclaim them. A “merger” clause (often inserted by vendors) will bar a claim based on earlier oral or written representations, for example, about the quality or suitability of goods. Distinguish between representations and conditions of performance obligations: breach of representation by the vendor gives the buyer a right to sue but does not necessarily excuse payment; failure of condition gives the buyer a right to cancel. It may be advantageous to restate some warranties as conditions in order to have an “out” as an alternative to (or in addition to) an action for breach of warranty.

Implied warranties
The Uniform Commercial Code provides that there are implied warranties of “fitness for a particular purpose” in all sales of goods, and of “merchantability” in all sales by merchants. In some states, there is an implied warranty of title and against infringement. Buyers should get express warranties wherever possible and not rely on implied warranties. Be specific – refer to specifications incorporated in the contract.

Disclaimers of warranties
Warranties, both express and implied, usually can be disclaimed. Disclaimers must be conspicuous and carefully drafted or may be ineffective. A disclaimer of all warranties that is contradicted by limited express warranties will likely be invalid. Always have counsel review disclaimers, warranties, and limitations of warranties. (Disclaimers may not affect rights of third parties to whom implied warranties may be extended by statute.)

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Remedies, Insurance, and Indemnification

A contract may extend or limit the remedies available to parties for breach. Note carefully any attempt to limit damages (e.g., to exclude liability for consequential damages or to limit liability to the contract price) or the assertion of claims (e.g., provision for short time bar on bringing claims). If extreme, such provisions may be “unconscionable” and unenforceable.

Arbitration and other alternative dispute resolution
Arbitration offers a substitute to resort to the courts for dispute resolution. Consider carefully the pros and cons of arbitration and know the practice in the particular trade or field before accepting an arbitration clause. The primary advantages are likely to be cost and time savings (although arbitration is not necessarily inexpensive). Disadvantages include the nature of arbitration, as it is not bound by legal precedents, insulated from judicial review, and typically conducted in secret. An arbitration clause may be broad, subjecting any dispute relating to the contract to arbitration, or narrow—subjecting only certain types of claims to arbitration. Mandatory binding arbitration clauses are common in construction and labor contracts and in many types of sales contracts, but may not be preferred in other settings. Arbitration may be compelled under Federal Arbitration Act (transmittal involving interstate commerce) or state statutes. Other alternative dispute resolution techniques (e.g., mediation) and international dispute resolution agencies may also be referred to as preferable to suit.

Insurance
Identify the risks in the transaction and consider whether they are insurable. Review carefully insurance requirements applicable to the other party; if insurance is required (for example, to support an indemnity), have the other party include Yale as an additional insured on its policy and have the party furnish a certificate of insurance prior to or upon execution of the contact. (Consult with the Office of Risk Management and provide that office with a copy of the party’s certificate.) Be sure that the contract requires that the policy be continued in effect and calls for adequate notice of cancellation.

Indemnification
Indemnification clauses should be reviewed by counsel. Distinguish between indemnification against liability (requiring prior determination of liability) and indemnification against costs arising from claims. In general, indemnification clauses obligating the University should be negotiated out wherever possible. (Note that state institutions may not be permitted under state law to agree to indemnify; they may be able to agree to defend an action.) Contracts granting the use of the institution’s facilities or of its real property should carry indemnification clauses in favor of the institution as well as insurance requirements. Indemnity obligations may and sometimes should be insured: check with Risk Management and counsel.

Releases and caps on liability
Vendors may attempt to limit their liability for delivered goods by advising that they will not be held liable for consequential or incidental damages caused by their products, or to obtain a release in advance for liability occasioned by them. Such clauses should be reviewed by counsel or procurement experts. They allocate risk in the transaction and should be a part of the calculus of exposure and benefit that is performed before entering into the agreement.

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Termination
Rights may be granted to early termination with or without cause, usually upon written notice to the other party. Make sure notice is adequate. If one party has the unqualified right to terminate at any time without obligation to give notice, that party’s promise to perform may be deemed “illusory” and neither party may be bound.

Upon default
It is customary to provide an opportunity to remedy a default without a given period after written notice specifying the default, before the right of termination accrues (courts are reluctant to enforce forfeitures). Default should be defined with precision; it may include breach of certain performance obligations, failure to make a payment on time, for example. If the termination right is linked to a “material” default, be certain such default is adequately defined.

Audit of books and records

Any contract calling for payment based upon a percentage of receipts or sales (e.g., percentage leases, royalty agreements) or income of another party should have a clause entitling the institution to audit the financial information underlying the determination of the payment. Periodic financial reporting may be necessary in other types of agreements as well. Where financial reports are to be obtained from the other party, require that they be certified if possible by an independent auditor; if not, by an officer.

Title and ownership
If property is to be transferred, specify when title is to be transferred. In sales contracts under the UCC, title is now less important as a determinant of risk of loss, but it is nonetheless useful to be clear. Ownership of ideas and inventions and other intellectual property arising in the course of custom services should be specified. Special language is needed to ensure that a vendor assigns relevant intellectual property rights to the University so that the University may use the work repeatedly and in varying circumstances.

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Miscellaneous clauses

Use of Yale name
Clauses restricting the use of the Yale name by the other contracting party are of great importance, although they are not ordinarily found in standard contract forms. They should prohibit any use in public documents (including client lists and the like, for advertising, publicity or any other purpose) without advance written consent. The Secretary’s office is charged with deciding whether to approve a public use of the Yale name.

Survival of terms
If obligations are to survive termination of the contract (such as the obligation to maintain confidentiality), they should expressly be stated as surviving, either for a specified period following termination (often the case with warranties) or indefinitely.

Assignments
Prohibition of all assignments (i.e., in which the rights and obligations under a contract are transferred from the original party to another party) may be invalid; instead, require advance written consent. In the absence of an express provision, personal service contracts and contracts involving extensions of credit are normally not assignable.

“Merger” clause
This clause states that the written contract document supersedes all prior representations and agreements, the latter being “merged” into the final contract. Make certain that all agreements and representations that are to stay in effect are restated in the body of the final contract.

Amendments
Require that all amendments be in writing and signed by both parties.

Notices
Make sure the institution’s representative(s) designated to receive notices are the appropriate persons; that correct and complete contact information is clearly provided in the contract; and that the manner of delivery is adequate (e.g., reputable national overnight mail service with a tracking capability; fax with a confirmation capability); and that days within which to perform an obligation are clearly calculated.

Governing law
Parties may select the governing law, as long as it bears some relationship to the transaction. For Yale contracts, Connecticut law is preferred, but New York law may be acceptable. In international contracts, New York law may be specified. Silence on the question may be appropriate in some instances. Yale does not ordinarily agree to submit to jurisdiction (i.e., to appear in court) in remote locations.

Confidentiality; Personal Financial Information
The University often requires, in some cases because of legal requirements, that data provided to vendors be treated confidentially. This is particularly important with regard to any personal financial or health data, and social security numbers, of course. Vendors or other contractors may also require that information they provide to the University be treated confidentially. Special contract provisions should be used in these circumstances. The Procurement Office and the Office of General Counsel can help craft contractual language appropriate for addressing such requirements.

Preference for Use of Yale Forms
Using standard University terms and conditions, as embodied in various forms such as the University Purchase Order, can save time and effort. Where possible, resist vendor insistence on use of its forms of agreement. Tailoring vendor forms to Yale standards is rarely worth the effort, and may cause delays. Appropriate forms can often be found through the Procurement Office. Suggestions for the development of new forms are welcome.

Tax considerations
Tax considerations affecting transactions to which Yale is a party are addressed in the legal reference section on Taxation.