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An ounce of prevention Featured

5:13am EDT July 19, 2002

Any business, whether just starting out, growing by leaps and bounds or well established, should take the time to carefully consider and analyze the terms and provisions of contracts it intends to execute.

Too often, a situation that might have been quickly and easily resolved by simply referring to well-drafted contract language turns into costly and time-consuming litigation. More significantly, problems or questions concerning the contract that could have been avoided by a carefully crafted agreement drain valuable time and resources from your business.

Whether the contract is simple or complex, it should never be overlooked. It may be that by merely adding or deleting a key phrase or provision, you can minimize the possibility of lawsuits, as well as reduce the expense of litigation should a problem develop. The ultimate goal is to make a short-term investment of time to avoid longer term headaches and aggravation.

Here are five factors to consider before signing that contract.

Terms and conditions. The contract's terms and conditions should be, to the extent possible, stated with specificity. Avoid ambiguity. Specificity leaves the parties with no doubts as to their respective obligations and, in that regard, minimizes later questions.

Second, it eliminates the need for the court to later construe the agreement and supply contract terms that were left open. In Ohio, contract ambiguities will be construed against the party drafting the agreement.

Signature/execution. Make sure that the contract is properly executed. It should be signed by individuals who have the authority to bind the company. Oftentimes, it will be assumed that the contract was properly executed when, in fact, there is a blank signature block.

Although the contract may still be enforceable based on course of dealing and the parties' performance of the unsigned contract, the better practice is to ensure proper execution. This will eliminate the validity of the contract being called into question at a later date.

Choice of law. The parties may wish to choose which laws will govern their contract. For example, Ohio law may be favorable to your company in one contractual situation, but not in another.

Knowing how a state's law affects a given contract will help you decide whether a choice of law clause should become part of the final contract.

Arbitration. This alternative dispute resolution procedure is often cost-effective and enables the parties to air concerns more quickly than with traditional litigation. The parties can agree to binding or nonbinding arbitration and can provide for how the arbitration provision is to be triggered, where it will take place, under what rules it will be conducted, and, in some circumstances, who will serve as the arbitrator.

Forum selection. Where are the parties to the agreement located? You may want to select where a suit will be heard. An Akron-based company may want to select the Summit County courts; a Lorain-based company may want to select the Lorain County courts.

If your company is dealing with an out-of-state business, you may want to negotiate that disputes be heard in Ohio. Recent Ohio law suggests, however, that such clauses need to be worded so that the parties not only submit to the jurisdiction of a particular forum, but also waive their right to have the dispute heard in a forum that would have had proper jurisdiction absent the forum selection clause.

Selecting the forum in which a contract dispute is to be heard will keep it close to home and less costly. It is also an easy way to eliminate the need for challenges to jurisdiction in the event suit arises.

Entering into any contract is an exercise that should be undertaken carefully and after consulting with counsel. Analyze the proposed contract's terms and provisions. Give them thoughtful consideration.

Ask how they will affect not only the contract, but your company and your business over the life of the contract. The up-front investment of a little extra time will pay dividends. Daniel C. Urban (durban@arterhadden.com) is an attorney at Arter & Hadden LLP and is a member of the firm's E-Group. The E-Group is a multidisciplinary group of attorneys which focuses its practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-4193.