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 protected].
