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 (email@example.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.
Gone are the days when an employee hires in with a company and remains to earn a gold watch. In today's marketplace, movement from one company to another is inevitable. Sooner or later, a key employee will announce on a Friday afternoon that he or she will be leaving and starting with your competitor Monday morning. What has you done to limit the impact this will have on business?
If you're smart, your company requires key employees to enter noncompetition agreements. These are invaluable and will protect your company and its confidential and proprietary business information. However, to pass legal muster, such agreements must be properly designed. Careful drafting, proper consideration and inclusion of relevant clauses is of critical importance in the event a court is called upon to enforce an agreement.
Careful drafting means the agreement is drawn to protect your company's legitimate business interests. Legitimate business interests that can be protected include your company's relationships with its clients. An employer has a legitimate business interest in limiting the ability of an employee to take advantage of personal relationships developed while representing the employer to the employer's established clients.
Another legitimate business interest is protecting trade secrets from being divulged by the employee to a competitor. Lastly, your company has a legitimate business interest in restricting competition from the employee based on skill, experience or talent developed during the period of employment.
In Ohio, an agreement restraining an employee from competing with a former employer is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.
Factors to be considered in determining ''reasonableness'' include:
- The absence or presence of limitations as to time and space;
- Whether the employee represents the sole contact with a customer;
- Whether the employee is in possession of confidential information or trade secrets;
- Whether the agreement seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition;
- Whether the benefit to the employer is disproportional to the detriment to employee;
- Whether the agreement operates as a bar to the employee's sole means of support; and
- Whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment.
A noncompetition agreement, like any other contract, must be supported by proper consideration. In Ohio, proper consideration is present when the agreement is entered into by the employee at the time he or she accepts employment.
In this situation, a valid exchange of promises occurs: The employee promises not to compete upon termination of employment and the employer promises to hire the employee. Keep in mind, when the agreement was not agreed to by the employee upon initial hire, it must be supported by something more than a promise of continued employment, i.e., an increase in salary or other job-related privileges.
A noncompetition agreement should include other relevant clauses, including one relating to the protection of trade secrets and other confidential and proprietary business information. In Ohio, contractual provisions that restrain employees from misappropriating such information for their own gain are enforceable.
It should contain a clause specifically allowing your company the right to seek an injunction should the employee breach the agreement. It should also provide for the immediate return of all company property in the employee's possession. These are but some of the relevant clauses to consider.
While the loss of a key employee is always disruptive, the disruption will be minimized if proactive steps have been taken to reasonably restrict unlawful competition by the departing employee. Protection of your business interests and client relationships, as well as prevention of disclosure of trade secrets and confidential and proprietary business information, are valuable nontangibles worth protecting from the inception of the employment relationship with a noncompetition agreement.
Remember, the only thing worse than not having a noncompetition agreement to point to in the event a key employee tells you he or she is joining a competitor is having a noncompetition agreement that is unenforceable.
Dan Urban is an attorney at Arter & Hadden LLP and a member of the firm's Business Litigation Group, the E-Group and the Growth Group. The E-Group and Growth Group are multidisciplinary groups of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-4193. For additional information about the E-Group and to read SBN ''Matter of Law'' reprints, visit the Arter & Hadden E-Group.