Just because there’s a dotted line on a contract does not mean a party is required to sign there, says Karen Ludden, a commercial and business attorney with Garan Lucow Miller.
“Many business owners feel they have to agree to certain terms because they are already printed on the page, but a contract is just a written version of an agreement between parties,” says Ludden. “The terms of a contract are meant to be negotiated.”
Contracts can be intimidating. The format is formal. The terminology is precise. And a deadline could be looming. There’s that line where you are expected to pen your signature.
But before you do, consider whether the contract contains all the necessary terms and contingencies. Will it protect your business if the contract doesn’t play out as expected? Or will you end up footing a hefty bill if a dispute arises later?
Smart Business spoke with Ludden about common trouble spots in contracts and what measures a business owner should take before entering into any agreement.
Is it ever alright to sign a contract without consulting an attorney?
Law is a lot like medicine in this way. You don’t need a doctor to treat every common ailment, but you do need to know the difference between a common ailment you can treat yourself and a serious one that requires professional help. And like medicine, an ounce of prevention is worth a pound of cure, and it is certainly less expensive.
Along those lines, you might sign a contract without an attorney if the stakes aren’t high, if you understand and agree with everything in the contract, and if the contract considers all likely outcomes, not just the one everyone hopes will take place. It also helps to have a strong working relationship and history with the other party.
Conversely, you should never sign a contract without legal counsel if the stakes are high, if you don’t understand all of the terms of the contract, or if the contract does not address the possible complications that could arise.
What contractual issues commonly cause problems for businesses?
One costly element of many business contracts is a defense and indemnification clause. This clause essentially holds one party harmless and the other responsible for paying damages, attorneys fees and other costs in the event of a dispute. Often, this clause is boilerplate language or ‘fine print’ that parties, intent on closing a deal, skim over. If a dispute arises, the party that agreed to defend and indemnify can be faced with stiff legal fees and judgments that they never really considered.
Another common trouble spot is an agreement to litigate a case in another state. For example, a company in Michigan might sign a contract with a New York supplier that states that all disputes will be litigated in New York under New York law. Litigation in New York tends to be expensive compared to the Midwest, and it is rarely advantageous to lose the home court advantage, unless the law of another state is more favorable.
Also make sure that there are adequate contingencies. A contract should address what happens if the desired outcome does not occur, or if some, but not all, of the intended outcome falls short.
How can a business owner effectively read a contract?
The law assumes that you both read and understood every part of any contract that you sign. With very few exceptions, you are not excused because you did not have the time to read it, you read only the key parts, or you did not understand all of it.
The most important thing a business owner can do, then, is to sit down and take the time to read the contract carefully, line by line. Flag areas of concern. Even if the contract is 100 pages or longer, do not be tempted to skim it. That’s when you open the door to trouble.
How can you ensure that a contract is tight, and that it considers all of the what-ifs?
First, consider your goals for the contract. What do you hope to accomplish, and how? Is there a time frame that is important to you? Who is involved, and why? Can substitutions of services, labor, parts or equipment be made?
Then consider what could possibly go wrong. Do you want to scratch the whole agreement if every aspect is not performed, or can you agree upon a contingency plan?
While this seems like a negative approach, reviewing your contract with a critical eye is essential for creating a contract that performs. It’s a good idea to enlist the expertise of an experienced commercial attorney to troubleshoot your contract because, ultimately, if the contract does not consider these issues, you might end up in costly litigation.
And when there is a clause that you do not want to agree to, a skilled attorney can negotiate on your behalf so that you and the other party can constructively address the issue without costing you the deal.
How can you write a contract that is thorough, yet concise?
Contracts have come a long way since the early days, when it seemed like lawyers were deliberately using language that no one else could understand. Today’s contracts should be clear and concise, but they should still be comprehensive.
Stick to the keep-it-simple language rule and be smart about including contingencies to ensure the contract offers you adequate protection.
Karen Ludden is an attorney specializing in commercial and business law at Garan Lucow Miller. Reach her at (248) 641-7600 or email@example.com.
A business partnership is like any relationship. You want to partner with someone who shares your long-term goals and complements you, someone who shares your work ethic, values and vision. Without this common ground, a marriage in business or in life is bound to unravel. And that can get ugly, says Tom Christy, an attorney at Garan Lucow Miller PC.
“What business owners often forget when they enter into a new partnership is that once you let someone into your business, it can be hard to get them out unless you have a proper buy-sell agreement in place,” says Christy.
Whether your reason for inviting a partner into the business is to infuse capital into the organization, to reward a longtime employee or to execute a succession plan, you need to proceed with caution and prepare formal documentation to protect the business.
Smart Business spoke with Christy about what to consider before bringing on a new partner in order to ensure a successful relationship that benefits all parties and the business.
Under what circumstances might an owner consider bringing in a new partner?
Some owners decide to reward employees with partnership if they are top performers or are part of a succession plan that is being executed over time. In other instances, equity partners are brought on to help infuse capital into a business. Also, you may take on new partners — and I’m using ‘partners’ loosely here, as the actual form of the business today is almost always a corporation or LLC — after a merger or acquisition; these arrangements are the product of the newly formed business structure.
Whether new partners are invited to join an existing firm, or owners decide to partner and launch a business together, the same rules apply: Be sure you truly know your partner, that you share common goals and a vision for the business and that your roles are complementary and defined. Go into the deal with your eyes wide open to your partner’s perspective.
What determinations should an owner carefully weigh before inviting a partner into the business?
It’s important to have those tough conversations about money and control before entering into a partnership. How much decision-making power will each partner have? How will disputes be resolved? Do not make the mistake of assuming that your 51 percent stock in the business means that the other partners must yield to your authority. Disputes can result in litigation in which a minority partner can argue shareholder oppression. So talk about how much power the new partner will have and what this means in the board room.
Be sure that you have the same goals for the company. Your opinions on how to reach those goals may differ, but successful partners work toward a shared vision for the company. Ask yourself, ‘Can I work with this person?’ The main reason partnerships eventually fail is because the partners failed to address the tough questions in advance.
Remember, a business partner is more than a manager or someone you hire to help run the company. This person shares in the decision making and the resulting profits, and this person can drive the success or cause the failure of a business. Take on new partners with caution, and always consult with an adviser who can provide a third-party perspective and challenge owners to dig deeper before entering into a formal arrangement.
What common mistakes do owners make when making an employee a partner?
In the case of making an employee a partner, first consider whether this is the best reward for that person. Giving an employee stake in the business is not the only way to financially reward him or her for top performance. Consider whether a profit-sharing plan would provide a more appropriate financial reward. Even if you do not want to meet the stringent requirements of a tax-advantaged profit-sharing plan, you can still create profit-based incentives.
Partners not only gain financial stake in the business, they also get a voice and some control. Decide if the employee you want to reward will be happy with a financial reward and if giving that person voice and control is truly beneficial for the organization.
What steps can an owner take to protect the business when bringing in a new partner?
First, be sure that a partnership is the best arrangement. Would you be better served by setting up a profit-sharing plan to reward employees if that is your goal? Second, be sure that all terms of the partnership arrangement are on paper, and consult with a legal professional who can be sure there aren’t any issues in your agreement that could result in litigation down the road. Third, establish a buy-sell agreement to determine, before you get into a partnership, how you can get out.
Other ways to protect the business include setting up a probationary period for the new partner during which he or she earns a financial stake in the company after a determined period of time. Also, if you plan to bring in a partner who specializes in one area of your firm – for example, design — you may consider splitting your business and creating separate companies so this partner does not gain control over all operations.
Splitting up the company can preserve control and profit in areas where the new partner is not involved.
Tom Christy is an attorney at Garan Lucow Miller PC. Reach him at firstname.lastname@example.org or (248) 641-7600.