Contract Tip – Merchants

In contracts for the sale of goods, the law has some special rules for merchants. What is considered a merchant?

A merchant is basically a person or entity that is in the business of selling a particular type of product. For example, if a hardware store enters into a contract to sell hammers, that hardware store is a merchant because hardware stores regularly deal in the sale of hammers. On the other hand, if the hardware store enters into a contract to sell its old delivery truck, that hardware store would not be a merchant for this contract because hardware stores are not in the business of selling old delivery trucks.

Merchants are held to a higher standard of good faith and the observance of reasonable commercial standards of fair dealing. In addition, many of the special merchant rules allow greater flexibility in enforcing contracts between business professionals, such as easing the restrictions on the Statute of Frauds, firm offers, and modification of contracts. Moreover, if the seller is held to be a merchant, the product will include an implied warranty of merchantability.

Contract tip – The Exculpatory Clause

An exculpatory clause is a provision in a contract that grants one party relief from liability if there are any damages caused during a performance of a contract. For example, a lease might contain a clause saying the landlord will not be liable for damage or injury that occurs on the property.

In general, exculpatory clauses are enforceable when the party is disclaiming liability for negligence. However, a party can NOT disclaim liability for intentional acts or reckless behavior.

Courts will also look at various other factors when determining whether to enforce the contract’s exculpatory clause. For example, is it reasonable? Is it understandable? Is it conspicuously stated in the contract, or is it hidden away in the fine print? Is there a disparity of bargaining power between the parties? States may also have laws imposing additional requirements for valid exculpatory clauses.

Contract Tip - The Non-Compete Clause

Non-compete clauses (also known as covenants not to compete) are typically found in employment contracts as well as contracts for the sale of a business. In a non-compete clause, one party (usually the employee in an employment contract or the seller in a sale of business contract) agrees not to work for a competitor or start a competing business against the other party (usually the employer or the buyer of the business).

A non-compete clause is enforceable only if it is reasonable. It must be reasonable in terms of time, geography, and business need.

● Time: The reasonableness of a particular time restriction will vary depending on the industry and the business. One year or less is usually considered reasonable, while time restrictions greater than five years are likely to be unreasonable.

● Geography: As with time, a reasonable geographic area can vary from case to case. Limitations in a certain metro area are usually considered reasonable. A nationwide geographic limitations is usually unreasonable unless the business is truly nationwide. A non-compete clause that fails to include a geographic restriction is likely to be invalidated, regardless of whether the omission was intentional or by mistake.

● Business need: The non-compete clause must be reasonable in terms of the scope of the restricted activity (i.e. it must be limited to the same or similar job functions). The non-compete clause must be necessary to protect a legitimate business interest without being unduly burdensome to the other party's ability to earn a living.