The latest edition of the eight biggest vulnerabilities focuses on Contracts. Everyone in business deals in contract, whether they are written or oral. In fact, some can even be implied at law. 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 business a sounder way of thinking is adopting a “Good Fences Makes Good Neighbors” approach that written contracts gives you.
On one hand your in-house contracts that you use with customers or vendors need to be fair but also 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.
When providing goods and services it is common to add on interest provisions. If the deal goes bad and you do not, you are likely stuck with minimal interest. 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.
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 while working on your job injures another person you will likely get named in the suit. If, however, your agreement with the contractor contained 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 this is a shot that you are going to miss every time if you do not take it.
Making sure the 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 parties’ lost profits, lost opportunities, and many other factors. Sadly, this sort of damages is commonly negotiated out of contracts, but likewise in many instances it is overlooked.
Another type of contract that trips up many businesses 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, we have had a company that want out of a contract only to learn that they did not cancel it in time and have to fulfill another term of it.