It seems in these uncertain economic times that more individuals and small businesses are forgoing legal advice and formal written agreements. Don’t do it. Don’t do a handshake deal. Don’t assume the other party will perform. Don’t assume you can work out the details as you go. Don’t trust that your prior dealings with any person or business are any indication that you can proceed in any transaction without a proper written contract. You may need the deal, but you don’t need the fallout if it falls apart and you have nothing in writing to protect you or your business.
There, I said it. That’s the deal.
Now let me explain. I agree some business opportunities are fleeting and risks sometimes must be taken. However, if a business deal or transaction has any real value to you or any potential risk, it is imperative that you properly document every critical aspect. Why gamble on the good faith of another party or the proper interpretation of your agreement by a court? Even if not acting in bad faith, sometimes well-meaning parties to a handshake deal simply do not have the same understanding or expectations. Furthermore, sometimes the judge assigned to your matter may not have the time or expertise to properly interpret your “agreement”. If you or your attorney prepare a written agreement, a good agreement includes at the very least the following:
Proper identification and understanding of the parties. Seems simple enough? It’s not. Who is the entity with whom you are contracting? Where was it formed and where does it do business? You need to know exactly with whom you are contracting. More often than not I see agreements that define a party my clients had no idea was involved. In the sales and negotiations process, you are sometimes distracted by the deal points and then presented with a contract that is tantamount to bait and switch. Pay attention and have your attorney run a public records search and advise you about the parties. Are they solvent? Have they been sued for breach of contract or fraud? If applicable, do they have many poor consumer or vendor reviews? Are they really someone with whom you want to do business? Don’t overlook these details. If it’s a big enough contract, I have been known to recommend even further investigative work-up. To date, I have not regretted any such instance. It always proves valuable and informative.
Term. How long will the agreement last? Will it renew and if so, how? My experience is that disputes may arise when the parties do not have the same understanding of the term of the agreement or how it can be renewed. Be clear and specific in setting forth the term.
Very clear description of the duties and responsibilities of the parties. Again, this may seem obvious or simple but it is not. This is where the most disputes arise. This is where we look for the “meeting of the minds”. It’s your obligation to carefully analyze and set forth your expectations of the other party and to verify that they understand those expectations. Similarly, it’s your chance to spell out precisely what you believe are your responsibilities and obligations. What are the deliverables? What are the metrics that must be achieved? Is there an opportunity to cure a defect if delivery dates or deadlines are not met? What are the payment terms? What specific triggers are involved? This is your time to use your critical thinking skills. Consider every angle and especially consider every possibility for a conflict and how it will be resolved. You can dictate the future of your dealings. Don’t leave the fate of your business or this deal to speculation.
Representations and warranties. These are tricky. Here, a warranty is not what most view as the traditional guarantee of a product’s performance. Rather, it is an affirmative representation of facts by a party. If you did not draft the agreement, verify that all representations are correct. If not, you could be setting yourself or your company up for a fraud claim. If you draft the agreement, be sure to include basics such as the legal standing of the parties to enter into this agreement and the fact that doing so does not violate any laws or other agreements, etc. These provisions should survive the termination or end date of the contract. If the other party makes a misrepresentation or breaches a warranty then the ramifications could present themselves well after the termination of the agreement. Sometimes, you need to be able to seek relief from the party or a court at a later date. Don’t foreclose on that opportunity.
Indemnity. This is a week long seminar unto itself. However, suffice it to say that if you are drafting the contract you want the other party to indemnify and defend you in the event you are sued or are required to defend against a claim based on their actions. If you did not draft the agreement, be very careful of the indemnity language. Larger corporations notoriously strap small businesses with oppressive indemnity language that requires them to pay even when there has been no actual improper conduct by the small business-there merely needs to be an allegation. Such a provision can bankrupt a small business, especially if the claim involves patent infringement. You are strongly recommended to seek legal counsel to review any indemnity provisions.
Choice of law/venue. If you draft the contract, then you may want to provide that your state’s laws apply and that any dispute is governed by the laws of your state. This will save you significant time, travel costs and ambiguity in the event of a dispute. If the party drafts the agreement and is located in another state, they may include a provision that specifies that the laws of a state other than your state will be applied to your agreement and further that if there is a dispute- that you are required to come to their state to sue or defend yourself. That can be incredibly costly (and cost prohibitive) for individuals and small businesses.
Obviously, there are many issues you can and should consider and the above is not exhaustive. I am not your attorney and no one article can substitute for case-specific legal advice, but it’s my hope that that these factors will put you in the correct frame of mind if you currently are commencing a new business relationship. Feel free to email me at firstname.lastname@example.org if you need further input or would like an attorney to draft or review your agreement.