Legal Mistake #3: How to Keep From Entering into Bad Contracts
Everyone in business deals in contracts, whether they are written or oral. As your business becomes more sophisticated, it becomes increasingly important that you get more of your contracts in writing. While a handshake may seem like a fine way to do business, a more sound way of thinking is “Good Fences Make Good Neighbors.” Written contracts are the good fences you need to run your business effectively.
Do be fair to yourself in customer and vendor contracts
On one hand, your in-house contracts that you use with customers or vendors need to be fair. On the other hand, they should provide you with protection. For instance, on payment terms, omitting to provide for interest on late payments can prevent you from collecting it while just adding a reference to it makes it a part of the contract.
Do protect yourself in goods and services contracts
When providing goods and services, it is common to add on interest provisions. If the deal goes bad and you do not have provisions in your contract, you’re likely to be stuck with minimal interest.
If you’re a business owner, then you’re probably busy running your business. You’re not thinking about the legal details required to keep your limited liability status. Recently, a client came to us and had been stiffed on a nearly $20,000 job. His contract did not provide for interest. We got a judgement for him, but because there was no interest provision, the judge awarded interest at a rate much lower than the customary 18% on commercial deals.
Do protect yourself from the negligent or wrongful acts of your vendors/contractors
Similarly, putting indemnification, exculpatory, or hold harmless clauses can protect you from expenses caused by the negligent or wrongful acts of your vendors or contractors. If, for instance, a contractor injures another person while working on your job, you will likely get named in the suit. If, however, your agreement with the contractor contains provisions requiring them to not only defend you, but also to pay for any damages, it is very possible that they will have to pay for your attorney’s fees and any judgment obtained by the third party. There are many exceptions to this rule, but it is worthwhile to make the effort to protect yourself in this way.
Do be fair to yourself when signing contracts with other businesses
Making sure the outside contracts you sign are fair is also of critical importance. Frequently, other businesses stack the deck in their contract and some even go as far as refusing to negotiate. The former requires a close eye and an understanding of the law. Many companies sign contracts without damage limitations that are readily negotiable. For instance, if you sign a contract without a consequential damages litigation, you can be liable for the other party’s lost profits, lost opportunities, and many other factors. These sort of damages are commonly negotiated out of contracts, but in many instances, this clause is overlooked and you lose valuable ground to defend yourself.
Another type of contract that trips up many business leaders is the evergreen contract. These are contracts with automatic renewal clauses. Some states have statutes that limit the enforceability of these, but it remains a very good idea to catalog and calendar these. Many times, companies have come to us who want out of a contract but since they did not cancel it in time, they had to fulfill another term.
The content on this page has been reviewed and approved by Matthew Davis: CEO of Davis Business Law.