Contract Tip: Top 6 Problems in Contracts
No one likes to pay a lawyer, but it’s always good practice for a small business owner or leader to hire an attorney to review contracts before signing them. Even the most basic or simplest of services can turn into a debilitating debate or fight under the right circumstances. There are many problems in contracts, which is why we’ve put together a list of the most important ones.
To illustrate why it’s critical to hire an attorney even for the simplest of contracts, I’ve put together a “Top 6” problems to avoid in a contract. If you are looking at a contract, and even just one of these problems are contained within that contract, you should simply not sign it. These are the “Top 6” problems in contracts that we find, over and over and over again, but please be aware that there are literally hundreds of potential problems in a contract that you need to watch out for. These are just the “Top 6”.
These are the Top 6 Problems in Contracts:
- Includes your personal name as a party to the contract, even though you’re doing business as a LLC or Corporation
- Doesn’t have ALL the terms of your deal
- You must pay, but no way to cancel if you don’t like the other party’s performance
- Attorneys Fees, but only for the other party
- Broad indemnity, in the other party’s favor, including for patent infringement
- One-sided indemnity clause, for the other party
These problems create what I call an “inequity” in the contract, making it difficult to (1) get out of the contract if you needed to, and (2) enforcing as against the other party if you wanted to. These problems are almost always present in commercial leases, and should be negotiated out of the lease.
Don’t Sign Contracts Making You a Personal Party
If you are conducting business, you should be conducting business under a corporation or limited liability company (or LLC). Read our blog article, Not Incorporating is Risky Business. If you are operating as a company, and not as a sole proprietorship or partnership, then if you sign a contract that you sign as an individual, you commit to cardinal sins (as it relates to running a business).
First and most importantly, signing a contract with you as a party to that contract on behalf of your company, places you at personal risk with respect to that contract — destroying the liability protection a company otherwise gives you. Specifically, you’re placing yourself at risk with respect to any disputes arising out of the contract, and exposing you to claims of harms by third-parties that might otherwise go against the company, do to that contracting relationship.
Second, you co-mingle your personal assets with the company assets, further eroding the liability protection you would otherwise enjoy with the company.
In short, make sure your company — and not you personally — is the party to each and every contract.
Contracts Must Have All Important Terms to Avoid Problems in Contracts
The general rule is, if it’s not in the contract, it’s not enforceable. If the contract you’re thinking about signing doesn’t have all the important terms, make sure such terms are in there.
This is a BIG PROBLEM for businesses, when dealing with fast-talking sales people. If a particular contract doesn’t contain an important term or clause, and the other party gives you any excuse (i.e. “That’s assumed,” or “That’s how we do this” or “It’s not needed”) assume they are lying. While it’s possible, under certain circumstances and scenarios, depending on which state’s laws you can rely on, to introduce extrinsic evidence regarding a contract, assume that it’s hard and it’s rare.
Why bother taking the risk? Instead, insist that all terms (especially those terms important to you), make it into the contract. Read more about this, with our blog articles entitled, The Contract: Details are Important and The Parol Evidence Rule and Contracts.
Your Duty to Pay Must be Balanced With Their Duty to Perform
It’s easy to have enforce a contract against someone not paying properly. The facts are clear: a party is simply not getting paid. The damages are easy: it’s the payments not received, plus any penalties and other damages permitted in the contract (i.e. attorneys fees, more on this below).
It’s much harder, typically, to enforce a contract as against someone who is not performing a service adequately. What does poor performance mean? What is “performance” versus “poor performance?” How can you measure it, and more importantly, what would your damages be? Because of these difficulties, businesses who sign contracts for important services are at a disadvantage.
Whether the service is marketing, building a website, consulting or more, the performance that is important to your business may be very subjective. A marketing professional may be working on on marketing for you, but you receive no additional business from their efforts. How do you get out of a contract, if you’re not happy with the results?
One way to address this is with SMART Goals. Read our blog article entitled, S.M.A.R.T. Goals are Smart to Have. Being very specific on the goals, objectives and/or deliverables of the other party will help you determine when the other party hasn’t met their duties within the contract.
Avoiding Problems in Contracts Means Attorneys Fees Award Should be Balanced
While this sounds self-serving coming from an attorney, what you want to make absolutely sure is that if you get into a fight with the other party to a contract, you don’t want to have to pay their attorneys fees. Some contracts, if you’re not careful, may award attorneys fees to the other party — even if they lose a lawsuit. At a minimum, you want to make sure attorneys fees are awarded to the prevailing party. This helps keep people honest and negotiating in good faith.
Learn more by reading our blog article entitled, Contract Tip: Attorneys Fees.
Broad Indemnities in Favor of the Other Party are Bad
You must resist the temptation of the other party’s standard contract, that includes all sorts of disclaimers, limited liability and indemnity that is broad and all-encompassing. For example, if you’re a software developer or photographer or writer, and a client is asking you to do something, how do you know what your client is asking won’t infringe on someone else’s rights? Unless you’re being paid to verify, you cannot agree to indemnify against all possible claims related to the services you provide.
An example of this, is when an indemnity clause requires you to indemnify against all claims by third-parties, including claims of patent infringement. Read more in our blog article, entitled Don’t Permit a Patent in Your Indemnity Clause.
One-Sided Indemnities are Bad Too
Finally, of all the boring language in a contract, it pays to review the indemnity clause. If it’s one-sided, favoring the other party, it can spell real trouble for you and your business, if a claim is received by the other party (even through no fault of your own). Read more about indemnity clauses in our blog article, entitled Contract Tip: What is an Indemnity Clause?.