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Basic Issues in Business Contracting

“You don’t get what you deserve; you get what you negotiate” is perhaps a clichéd contracting mantra, but it continues to ring true. The days of a handshake agreement are waning in our increasingly litigious culture, and school districts are facing an increase in both the type and amount of business contracts – cleaning, transportation, food service, software licens­es, property acquisition and disposition, utilities, construction, professional services, and cooperative arrangements, to name a few.

The terms of any contract will vary with the subject matter, but there are many important issues that arise even within the very basic aspects of a con­tract, some of which can be inconspicuous when only given a cursory review. While certainly not an exhaus­tive list, school officials should be cognizant of at least the following basic contract issues:

  • Parties. The parties must be competent and authorized to contract. For example, minors are generally legally incompetent. School buildings (e.g., Smith Road High School) are not separate legal entities capable of contract­ing. School district signatories should be authorized by the board of education to enter into contracts (directly through a resolution or motion, or by policy, or job description). Contracts signed by unauthorized individuals can lead to rescission, unenforceability, and even personal liability for the signer.
  • Scope. The agreement’s scope should be identified, verified, and legal. Because the terms and conditions within a contract will generally be enforceable upon execution, school officials must use caution before sign­ing a contract. Check for an integration clause – meaning a statement that there are no other agreed-upon terms outside of the written document. Check for incorporation by refer­ence – meaning an often significant number of terms in a separate document becomes merged with and a part of the written con­tract. Ensure the school has authority to enter into the contract. Michigan public schools are creatures of statute, obtaining their powers from the Legislature. While those powers are broad, contracts must fall within appropriate legal parameters with respect to both subject matter (e.g., school-related) and process (e.g., conflicts of interest, competitive bidding).
  • Duration. Term and termination rights should be clear and reasonable.  A contract’s duration is usually up to the parties, but it may be limited by law and it should reflect the rea­sonable purposes of the transaction.  Be cognizant of the risks associated with unexpectedly long or short terms. Be sure to pay particular attention to “rolling” terms, re­newal/extension requirements, and unusual notice periods (e.g., the parties may terminate by providing written notice not more than 180 days and not less than 120 days before termination). Unusual notice requirements may be forgotten during performance, re­called too late, and lead to an unintentionally long agreement. Similarly, contract termina­tion can be made easy (e.g., at will) or difficult (e.g., for cause after a multi-step negotiation) at the parties’ choosing. Termination provisions should be consistent with the scope, intent, and importance of the contract.
  • Liability. Liability should be reasonably and legally apportioned.  Responsibility for dam­ages often triggers insurance requirements. School officials should verify that contracts address adequate insurance types, amounts, and duration before execution. Discussions with insurance consultants, legal counsel, and providers are almost always warranted. Be wary of indemnification provisions (which are rarely enforceable against schools), limita­tions of liability (which are legally questionable and in any event often disproportionately affect schools to their detriment), and personal guarantees (an unnecessary risk for signers).
  • Governing Law. Parties can often choose which laws they would like to govern their contractual relationship. In almost all cases, Michigan school contracts should be governed by the laws of Michigan. Some agreements with out-of-state parties will attempt to incorporate the laws of their home state, which can be significantly detrimental. Unfa­miliarity with those laws can create increased legal costs for investigation and research. Dispute resolution could be mandated in another state or in multiple states, generating significant travel costs, time costs, and ulti­mately a disincentive to resolve problems through litigation. School officials should also be wary of jury waivers, a common request for contracting parties who feel the jury pool may be sympathetic to schools, which may very well be true and thus a right to be guarded by schools.

A complete list of contract concerns is impossible to create given the wide variety of agreements re­quired for modern school operations. “Basic” contract issues will vary with the subject matter, be it inde­pendent contractor/employee concerns, real property limitations, financial constraints, construction requirements, or the like. It is rarely a bad idea to have your school contracts reviewed by legal counsel before execution.  Spending resources on legal review up front can often reduce legal expenses if and when avoidable contract issues become a problem.