As you might imagine, this firm spends a significant chunk of time on contract disputes. There are two reasons we see in most contract disputes:
- The parties didn’t resolve all outstanding issues before drafting their contract. Or…
- The parties started doing business before finalizing their contract.
Negotiating a Contract is Necessary to Enforce a Mutual Promise Between Two Parties
This blog article is written to help you avoid these common contract pitfalls. Please note that entire dissertations exist pertaining to contracts. It is simply impossible to write a blog article that can possibly cover all the issues that pertain to contract law. What I’m trying to do is present those issues I see most often with defective contracts.
#1: Proper Legal Names of the Parties Being Used?
You’d be surprised to learn that many business leaders don’t even know the actual legal name of their business. Read, Are You Using the Wrong Company Name?
It’s easy for many business leaders often confuse themselves with their companies, when trying to decide what name to put on a contract. Here are the general rules:
- If you have a corporation or LLC, it’s the name of that company, corporation or LLC that should be listed as the party, not your personal name. Your name will be listed at the signature block (usually on the last page), with the title of your position for the company.
- If you are operating as a sole proprietorship or partnership, and not a corporation or LLC, then you use your personal name in the form of “Your Name d/b/a Name of Company”.
- NEVER put down “Your Name d/b/a Name of Company, LLC/Inc” if you have a LLC or Corporation. This is ambiguous and forces you into a contract personally.
- Make sure the other party puts down the correct name for themselves. If you’re concerned about getting paid, consider requiring the other party to ALSO put their personal names, and then make both the company and their personal names “jointly and severally” a party to the contract.
#2: All Promises Mentioned in Detail in the Contract?
There is a rule called the Parol Evidence Rule. In general, the Parol Evidence Rule means contracts may not be contradicted by other evidence! This rule is very complicated and varies somewhat from state to state in the US. Therefore, you cannot (generally) rely on promises that are not contained within the contract. Most contracts will contain a “merger clause” or “integration clause,” which declares that the contract is the complete and final agreement between the parties.
This means that if you’re relying on a key promise, it needs to be explicitly spelled out in the contract. Are you expecting a website? Are you expecting franchise support? Are you expecting rapid growth, significant marketing support and more? Considering joining a partnership? Make sure it’s all in the contract.
An interesting issue arises when looking at the Parol Evidence Rule and business leases. This is a big problem for many businesses, because a business lease is a huge expense! If a business owner isn’t careful, they will find themselves personally liable for a long-term lease even if their business isn’t generating the cashflow to pay the lease. Worse, in most jurisdictions, commercial leases are not covered in typical landlord / tenant laws. We have several articles about commercial leases you should consider reading:
- 4 Red Flags in a Commercial Lease
- Commercial Leases: Avoid Getting Screwed
- How to Negotiate Good Lease Terms
#3: What Could Go Wrong? Does the Contract Adequately Address Potential Problems?
I often joke with clients that the reason most people hate lawyers is not because of the threat of a lawsuit, but because we lawyers are always looking for problems. Most business owners are optimists, while attorneys become the eternal pessimists of a deal. Attorneys are not trying to kill negotiations. Rather, they are trained to look at possible issues that could arise or become a problem in the future. Consider the following:
- What happens if a party dies or becomes incapacitated? What if your business partner improperly leaves or simply fails to perform? What if they outright steal?
- How could a party leave the contract?
- Are there penalties for failure to perform?
- Will the deal expose sensitive company information? Is there a process in place?
- How does the deal handle intellectual property?
- What if a goal is not reached?
Make sure your contract predicts potential issues.
Writing and negotiating a contract is very much like trying to predict the future: What could go wrong, and do you have a contingency? You may find our blog article, The Art of Contracts – Predicting the Future, entertaining.
#4: Dates and Dollar Amounts Correct?
Please double-check and recheck your dates and amounts. Do they add up? Read our blog article, 5 Reasons Why You Must Not Forget Key Contract Dates.
#5: Making Too Many Promises? What Happens If You Cannot Fulfill Your Obligations?
Are you being overly optimistic in your ability to meet the promises or conditions of the contract? Think optimistically, but plan pessimistically.
All too often, I see new business leaders excited about the prospect of their new business, enter into a five, seven or 10-year commercial lease. This can backfire on them. New businesses should enter into short leases, and it’s worth it to pay a bit more in your lease for a shorter term. This is pessimistic thinking that could help you avoid bankruptcy.
Is your deal complicated or dealing with certain subject matter, such a securities, intellectual property or other specialized topics? Most business leaders don’t bother with the fine-print of a contract, such as an indemnity clause. Read our blog article, Don’t Permit a Patent in Your Indemnity Clause, to learn how a simple little word could create a vast liability for you business if you’re not careful.
#6: Is the Contract Fair and Balanced?
Too many times, I am confronted with clients seeking our assistance in getting out of truly one-sided contracts. Oftentimes by a larger vendor providing merchant services, consulting services or some other service that is very poorly or vaguely defined on the part of the vendor, but with very clear payment terms.
Don’t agree to contracts that are one-sided. Make sure there are “escape clauses” that permit you to terminate the contract if you are dissatisfied with the service.
#7: Is the Contract Mission Critical or Important to Your Business?
Finally, the self-serving plug: If you are looking over a contract that is truly important or mission critical to your business, why aren’t you hiring a professional to review the contract and make sure it’s meeting the needs of your business? We offer a $20/page (min. 5 page) limited flat-rate contract review. That’s a lot cheaper than having to shell-out tens-of-thousands or hundreds-of-thousands of dollars in a bitter contract dispute down-the-road.
Is a lawyer the enemy of a deal?
A business lawyer is not out to slow down or kill your deal. Most business lawyers will turn around documents quickly if asked. Furthermore, if a business attorney finds a problem that “kills the deal,” isn’t it better to find out now rather than after you’ve signed the contract?
Always remember these three rules:
- If it’s not in the contract, it’s simply not relevant.
- Account for possible changes (over time) in life, circumstances and business.
- Write your promises in terms of “SMART Goals.” Read our blog article, S.M.A.R.T. Goals are Smart to Have.
If your contract is important, please do yourself a favor and hire competent assistance.