Contracts and legal agreements can play a key role in determining whether a company flourishes or flounders, but it’s easy to skip over the details when more urgent matters come into play. Those who don’t come back to those details when the fire has been put out, however, run the risk of bigger problems down the road.
But sometimes the perceived urgency to get the deal done becomes the driving force, undermining the effort, quality, judgment and scrutiny needed to pen a solid contract that’s in the company’s best interest. If the analysis and due diligence takes more time than anticipated, impatience grows and the decision may be made to just get it finished so you can move on.
With so much on the line, you can’t afford to do that. You need to do what it takes to ensure that every agreement is in the best interest of your company and that your rights are safeguarded for the agreement’s term.
Do you sign, or are you responsible for, the contracts your business concludes? Savvy leaders keep their focus on getting the right deal and then they watch for potential pitfalls and red flags in the fine print. They conduct reviews, ask probing questions, understand the terms and financial impact of the deal and are alert for liability issues and balanced termination provisions in the contract.
Here’s some advice that will help safeguard your company’s future:
Put all business dealings
Do this even with your partners, family and employees. When there are modifications or changes to your agreement, put them in writing so both parties are aligned. Not only will having a written agreement prevent issues and misunderstandings in the future, in certain situations, verbal contracts can be legally binding.
Clarify the scope of
What rights do you have? What can you do? And often more important, what can’t you do? Be sure the boundaries are very clear. Describe geography, markets, improvements and noncompete terms.
Define all of the important contractual terms
Be sure that performance criteria, metrics, timelines and detailed services required by both parties are set out clearly, as well as the consequences of nonperformance along with remedies. Define price, cost, volume by product, forecasting, payment terms, licenses or permits required, registration cost, etc.
Understand the legal terms and their implications
Don’t be embarrassed to ask your colleagues who negotiated the agreement or to ask your legal team the same question multiple times. As a check, ask an individual who hasn’t been associated with the contract to review it and point out potential areas of concern.
Don’t assume anything is obvious or clear
As the saying goes, the devil is in the details. Include formulas, definitions and examples of calculations. Set out potential problems and disputes and how they will be resolved. Define it in a manner where someone not familiar with the business could fulfill and understand the terms of the agreement.
Define the duration of the agreement and the terms for early termination
All business relationships have an end point, so it’s critical that contracts between business entities or individuals make provisions for unwinding the relationship when all obligations are fulfilled. Carefully define each party’s rights and obligations after termination.
Monitor performance and fulfillment of the terms of the agreement
Make sure the company lives up to its responsibilities under the contract to protect its reputation and business relationships.
A solid contract answers all of the “what ifs.” What if the other company goes out of business or is acquired? What if your contractual partner doesn’t fulfill its obligations under the contract? What if there’s a truckers’ strike that prevents ground shipment of the raw goods you need?
Become practiced in setting out and answering all the “what ifs,” and you’ll find yourself among the gold medalists in the contract game.
Tony Arnold is founder and principal of Upfront Management, a St. Louis-based management and executive consulting firm. He can be reached at (314) 825-9525 or email@example.com.
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 firstname.lastname@example.org.
Smart Business spoke to Lee Dresie, a partner at Greenberg Glusker Fields Claman & Machtinger LLP, about ensuring that your business does not assume all the risk in a transaction by carefully examining form contracts.
Form contracts account for more than 80 percent of all agreements used to complete business transactions today. That percentage may be even higher when it comes to commercial real estate transactions like the ones you signed to acquire a corporate headquarters or satellite offices.
Unfortunately, many executives do not carefully review the specifics of a form contract before signing. Instead, they assume the form contract to be an agreement equitable to both parties. However, unless the form is an industry-neutral form such as one from the AIR Commercial Real Estate Association or Commercial Association of Realtors, terms in a standard form contract are designed to favor the party that presents it.
To limit your company’s risk, it is vitally important to be able to recognize and negotiate unfavorable provisions out of form contracts. This may necessitate a call to in-house or outside counsel with expertise in the area.
By negotiating the form contract presented to him, a savvy building owner in Los Angeles was able to collect 15 years of rent from an outdoor sign company even though the sign company was prevented by law from constructing a sign on the building. The building owner had been approached by a well-known outdoor sign company about leasing the roof of his building for a large billboard. After reaching an agreement on the rent amount and term of the lease, which totaled $750,000 over 15 years, the sign company presented the building owner with its “standard” form lease. The form lease provided that if the sign company could not obtain a building permit to erect the billboard, or if applicable building codes changed, the sign company could terminate the lease with no penalty or payment. The form lease placed all risk on the building owner if the sign company could not construct the billboard.
The sign company was the expert in the field and familiar with the building permit process. Unknown to the building owner, the sign company was aware of a movement by the Los Angeles City Council to ban all new signs. Since the possible ban did not affect existing signs, the sign company was anxious to get this deal done quickly by having the billboard constructed before any ban occurred. Once the ban went into effect, all existing signs became that much more valuable.
Instead of the lease provision allowing the sign company to terminate the lease if it could not obtain a building permit, the building owner requested a different provision noting that the sign company had done all necessary investigation concerning city regulations and the availability of building permits. Because the sign company was anxious to acquire this site and get started on the construction of the billboard, the sign company agreed to replace its provision with the building owner’s provision.
Immediately after the parties signed the lease, the sign company’s engineer re-measured the distance from the proposed sign location to the nearest competing sign, since city codes provided minimum distances between billboard signs. The sign company’s preliminary measurements had been inaccurate. The sign company learned, after signing the lease, that the proposed sign location in the lease violated city codes. The sign company therefore informed the building owner that the lease was terminated because it was illegal and impossible to construct its sign. Subsequently, a citywide ban on new signs was in fact instituted, giving the sign company a second basis to claim a lease termination.
Believing that the sign company assumed the risk of an inability to construct its sign, the building owner filed suit in order to enforce the lease. The sign company vigorously protested, asserting that no court would require it to pay 15 years of rent for a sign which it could not construct.
The building owner argued that the sign company had knowingly assumed a foreseeable risk, and that the parties had re-allocated this risk to the sign company, and away from the building owner. From the judge’s point of view, the key fact arose when the building owner elected not to simply sign the form lease.
Consequently, the judge agreed with the building owner’s position and ruled in favor of the building owner for the entire 15-year term, and $750,000, despite the fact that no sign could ever be constructed. Additionally, the court awarded the building owner the attorney fees incurred in the enforcement of the lease.
This example highlights the importance of carefully negotiating all contracts, especially those presented as the other party’s “form contract.” Such form contracts extend beyond real estate transactions, and could include executive employment contracts, lending transactions, and confidentiality or non-disclosure agreements.
You can rest assured that the other party in a transaction will take the time and make the effort to carefully construct each provision to shift as much risk away from them as possible. Unless you are willing to assume all of that risk, you should spend the same time and make the same effort to re-allocate the risk back to the other side.
Lee Dresie is a partner specializing in real estate with the Los Angeles-based law firm of Greenberg Glusker. He can be reached at (310) 201-7466 or at LDresie@greenbergglusker.com.
Businesses use a number of legal documents, such as purchase orders, confirmations, invoices, leases and employment contracts, but despite the importance of such documents, the process of generating and updating them is frequently haphazard.
“Disputes often arise out of ambiguous, confusing, conflicting or outdated provisions in forms and standardized contracts,” says Michael A. Weinberg, a partner with the business litigation specialty firm Novack and Macey LLP. “Companies spend millions to litigate disputes that could have been avoided had they invested mere thousands in periodic reviews and updates of their core contractual documents. Quality forms and standardized agreements can be as important to success as physical, human and financial assets, yet they often go unreviewed and unrevised for decades. Such complacency and inattention can lead to disaster when the neglected documents become Exhibit A in a lawsuit.”
Smart Business spoke with Weinberg about how companies can make sure their forms and contracts are up to date and maximally enforceable, and what contract provisions might deserve special attention during the review and revision process.
How can a company start reviewing and upgrading its forms and standardized contracts?
The review and drafting process should be a collaboration between management, which knows the business, and corporate counsel, who knows the law. Companies too often think that, without lawyer involvement, they can simply copy forms and contracts that are being used by competitors or cherry-pick provisions from a variety of such documents.
That’s a mistake. Borrowed terms may be poorly drafted, out of date, specific to the requirements of a different state, or otherwise unsuitable as templates. Moreover, copying from multiple documents can lead to internal inconsistencies, variations in definitions and other anomalies that may result in confusion.
The goal of the drafting process is more than the generation of up-to-date documents that fulfill your business objectives; it’s also to ensure that such documents are clear and comprehensible. When a document is finalized, the non-attorney who participated in its creation should understand every word of it. While technical phrasing may be required in certain circumstances, forms and contracts with confusing ‘legalese’ are more likely to land a company in court than those expressed in straightforward standard English.
Given the rapid pace at which the law changes, biannual review of forms and contracts is warranted. All such documents should be reviewed concurrently, even though they likely were created at different times by different people using different terms. By putting documents on the same review timetable, their terms can be harmonized and the potential for future problems reduced.
What role should business litigators play in the review process?
Once documents have been drafted or updated, they should be looked at by a commercial litigator who will approach them from a perspective different than that of corporate counsel. The litigator can perform a ‘stress test’ on the documents, vetting their provisions to see if their language could be exploited by an adversary in a hypothetical dispute situation.
By playing devil’s advocate, the litigator can help pinpoint document provisions that need more work, or identify language or clauses that should be added to the documents to strengthen or clarify them.
What kinds of provisions give rise to problems?
There are myriad standardized documents, and within those a plethora of provisions, any of which may present problematic language. Certain provisions, however, may merit extra scrutiny. For example, a contract might provide for consent to jurisdiction in a certain state or court but then fail to include a stipulation that such state or court is the only place where suit can be brought.
Integration clauses can also lead to problems. Such clauses provide that the contract represents the entire agreement of the parties and supersedes all other agreements or negotiations. But, in Illinois, such language is likely insufficient to prevent a party from asserting that it entered into the agreement in reliance on an untrue ‘outside-the-document’ representation. To maximize the prospect that such an assertion will be rejected by a court, a separate ‘nonreliance’ clause should be included in the contract.
Warranty provisions are likewise tricky. If you want a warranty, use warranty language. Drafters sometimes employ words like ‘promise’ or ‘guarantee’ to describe something they really intend to be a warranty, but failure to use the correct technical term can be fatal. Moreover, when drafting warranties that run in favor of the drafting party, attempts to overreach can backfire. Overly broad warranties that go beyond those set forth in the Uniform Commercial Code are sometimes deemed commercially unreasonable and unenforceable, leaving the party seeking warranty protection with fewer rights than narrower language would have afforded it.
Restrictive employment covenants and confidential information protection provisions also give rise to disputes, but good drafting can improve your odds of success. A drafter should avoid attempting to define every type of information as proprietary or confidential, as such breadth of definition, if rejected by a court, can void the provision. Likewise, drafting covenants not to compete that are overly harsh or excessive in duration or geographic scope can leave you without any valid competition restrictions. A reasonable restriction that is enforceable is better than an overbroad restriction that is struck down.
Where terms of form documents are ambiguous, outdated, confusing, incomplete or poorly worded, misunderstandings can arise, relationships can be undermined and litigation can ensue. For this reason, when it comes to scrutinizing documents, every sentence should be viewed as a potential source of trouble.
Michael A. Weinberg is a partner with the business litigation specialty firm Novack and Macey LLP. Reach him at (312) 419-6900 or email@example.com.