Let’s say your business is expanding quickly and you are looking to hire a new employee. You are busy managing the day-to-day, so you don’t really have time to interview. You decide your best option is to hire someone from a temp agency. You contact an agency, and the contract they give you says that they will provide “experienced, trained individuals.” Sounds good right? Experience and training are important qualities in an employee. You sign the contract thinking you will be getting someone who has spent some time working in your field, and maybe even has a relevant degree to go with it. Meanwhile, the agency ensures that all their employees have at least one month of work experience (regardless of field) and have sat through a 15-minute training slideshow on general workplace safety. If the agency provides you with an employee who barely meets their minimum requirements, have they breached your contract? If the contract didn’t give any more details on the level of training and experience provided, the answer is probably no. The agency may very well have acted in good-faith; there was just a disagreement as to what the wording “experienced, trained individuals” really meant.
Verbal Agreements Can Mean Different Things to Different People
Contracts are often crucial to the survival of small businesses. The purpose of putting a verbal agreement into a formal, written contract is to provide tangible proof that all parties involved know exactly what they are binding themselves to. You want to be sure that everyone knows things like what they’re supposed to do, how they’re supposed to do it, how much they’re getting paid, etc. But what happens when the parties both think everyone is on the same page, but they’re really not? Perhaps even more importantly, how would that sort of misunderstanding happen in the first place? It’s actually a lot more common than you might think.
Many small business owners view contracts as a necessary evil. Contracts can be lengthy and difficult to understand, but only making handshake agreements can leave you in a very vulnerable position if the other party doesn’t hold up their end of the bargain (for example, having to pay for contractors you cannot use). The result is that many business owners will use contracts, but they often try to keep the contracts short and simple, which can mean a lot of the finer details of the agreement get excluded. Although long contracts with clauses you don’t understand can be a problem, short contracts that omit key details or clauses can be equally problematic. Pro tip: If your entire contract fits on one page, automatically assume it’s not enough — it needs a lot more detail. Often, the lack of detail makes it extremely difficult to predict how contractual disputes will play out. Therefore, details are crucial to avoiding unpredictable results. Read, for example, one of our previous blog articles entitled Boilerplate Matters in Contracts.
A Written Contract Isn’t Just For You
A good contract should be written for multiple audiences. Not only do you want the parties to fully understand the terms, but if there is ever a contract dispute, you want the court, the arbitrator, or whoever is responsible for resolving the dispute, to know EXACTLY what was intended by the parties. Let’s use another example. Imagine you are about to hire a contractor to repair and repaint your walls. You plan on spending $6,000 for the work. You know your walls are old, cracking and peeling, and that’s why you’re hiring the contractor to do this job in the first place. Does “repair and repaint” simply mean painting over the cracks? Or, does it mean scrape the old paint off, use a quality vinyl filler to fill in gaps, sand the walls smooth, rinse dust off the walls, tape and mask the ceiling and floor before painting, and use a high-quality paint from an approved supplier with the right color match? Typically, the contractor thinks the former and the employer thinks the latter.
If you end up in court over it, you’re stuck hoping the judge will see things your way. If they don’t, you’re probably going to end up paying the contractor the $6,000, and then paying another contractor to come in and do the job you wanted in the first place.
This sort of ambiguity can be catastrophic in contracts. Before signing a contract, you want to make sure you know what exactly each party is promising and what each party expects to be held accountable for. That is not to say that your contract needs to be overly complex. It’s all about finding the right balance. You want the contract to be simple and straight-forward enough that it is understandable but detailed enough that the parties’ responsibilities are clear to everyone. Why so much emphasis on clarity? Because the likely outcome of an ambiguous contract is that you will end up arguing the requirements of the contract in court. Litigation can be very costly and if the court doesn’t decide in your favor, you could end up owing damages, or stuck in a contract with terms that are completely different from what you thought you were agreeing to.
So, what are some common pitfalls to watch out for?
- Using Familiar Language. One common pitfall is not recognizing your own familiarity with the circumstances of the contract. Since you already know what you’re trying to say, you may not be able to identify where the ambiguities lie. Things may seem perfectly clear to you, but an outsider (or more importantly, a court) without the proper context, may not be able to understand the full intent. Even if you decide not to have your contract reviewed by an attorney, consider having an uninvolved third-party take a look at it. Anytime they say, “What does this mean?” you’ll know you have something to at least double-check for clarity.
- Not Spelling Things Out. Another pitfall is not taking the time to spell things out. This means literally writing phrases out instead of using acronyms. Acronyms can be problematic in a contract because a single acronym can refer to two completely different things. For example, if I say DBA do I mean “doing business as” or “database administrator?” Does IP refer to “intellectual property” or “Internet-Protocol?” Context can be helpful in determining the acronym’s meaning, but depending on the reader, there may be a pre-existing understanding of the acronym, which can be difficult to overcome. Even regular words, such as “Tax” can be a problem. Do we mean sales tax or income tax? If you are using a term a lot, your best bet is probably to include it in a definitions section. If you’re only using it once or twice, just spell it out.
- Making Assumptions. Don’t assume anything when you’re writing your contract. You may be 90% sure the other party knows what you mean, but what if they don’t? The cost of being wrong on an assumption is too high. You don’t want to rely on someone else drawing the correct inference. If something is important enough to put in the contract, it’s important enough to state precisely. Consider using S.M.A.R.T. goals in your contracts. You can read more about S.M.A.R.T. goals in one of our previous blog articles entitled S.M.A.R.T. Goals are Smart to Have. Codifying your S.M.A.R.T. goals in your contract provides specificity, which helps combat confusion.
- Not Considering “Edge-Cases”. What do you want to happen, if the other party doesn’t perform to your expectations or at all? What happens if you cannot perform according to the contract? Do you care about confidentiality, or non-compete, or exclusivity, or intellectual property? Does the contract reflect these issues adequately and clearly?
Contracts are all about clarity. Keep in mind when you’re working on your contracts, the details can mean the difference between getting a job done right the first time, and paying to have it done twice. Or worse, they could be the difference between your business thriving, or declaring bankruptcy. It is not worth sacrificing clarity merely for the sake of brevity.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.