Small business owners often wear many hats. On any given day, they might dabble in customer service, human resources, accounting, bookkeeping, and legal matters.
Resilient, confident, and flexible by nature, entrepreneurs often welcome the challenge to learn new skills by working outside of their core competencies. But for some matters, not working with an experienced professional can be counterproductive.
Contracts are an area where a do-it-yourself (DIY) approach can fall short. The many contract templates available online can make it seem as though a contract is simply one more business task that can be insourced. However, while DIY contracts are easy enough to print out and sign, once the signatures are in place, business owners may have to live with any mistakes and unintended obligations, which could have disastrous consequences.
How Contract Mistakes Are Made
Carefully drafted contracts are the backbone of business operations and transactions. They dictate each party's rights and obligations, clarify expectations and consequences, and eliminate confusion and ambiguity that could lead to a deal never getting off the ground.
The absence of written contracts exposes businesses to unacceptable risks and leaves them unable to protect their interests. Without written contracts in place, many could not function at all. A poorly executed contract, however, can be as bad as no contract. Contracts must be detailed, precise, and tailored to the specific situation.
Mistakes in contracts can occur in several ways. Some of the most common are explored in greater detail below.
Failure to Perform Due Diligence
Personal relationships and business relationships are not the same, but the former can provide lessons relevant to the latter. Namely, looks can be deceiving, and you must be careful about whom you choose to become involved with.
Every party that you are considering for a potential business relationship should be thoroughly vetted before you enter into a contract with them. Even a cursory internet search of a party's name can uncover red flags, such as ongoing or past disputes. It could be that the dispute is perfectly reasonable and reveals no concerning conduct, but it may reveal that the party you are considering was at fault. A more thorough investigation might uncover unreliable, untrustworthy, or illegal actions.
Revelations of this kind are a strong indicator to avoid a particular party. While a well-drafted contract can mitigate risks, enforcing it may still require costly legal action if somebody does not uphold their end of an agreement.
Improper Use of Terms
Theuse of legalese by attorneys is much decried. In everyday speech, technical legal terms can indeed be unnecessary. In a contract, though, eliminating specialized legal terminology is not always desirable.
Contracts should leave as little as possible to interpretation. If they do not, one party may try to find ways to avoid their obligations and impose new terms on the other party. Substituting vague or poorly defined contractual language for precise legal terms can leave too much wiggle room in a contract, opening the door to disputes.
Contractual terms may be difficult to understand, either by themselves or in the context of the document. That does not mean that they should be abandoned; it just means that an attorney should clarify them prior to signing so there is no misunderstanding.
Not Including All of the Necessary Provisions
An off-the-shelf contract solution from an online document provider can give the impression that executing contracts is little more than a fill-in-the-blank exercise. Contracts with boilerplate or standard provisions may be a starting point. But every contract must contain provisions tailored to the particular deal.
Even if a nonlawyer can adapt the boilerplate provisions to their situation, the bigger mistake could be neglecting to include provisions that are often absent from the template, such as the following:
- If the parties are from different states, in which forum will legal disputes be handled (i.e., a choice of law provision)?
- The party that breaches a contract may have a contractual duty to pay damages to the other party. But what type of damages (e.g., liquidated damages, attorney's fees, etc.) and remedies, such as specific performance or the ability to terminate the contract upon default, are actually available in the contract?
For business contracts, missing provisions—including prices, delivery dates, product specifications, and delivery locations—can be filled in by default terms provided in your state's version of the Uniform Commercial Code without voiding the contract. But relying on the default terms provided by state law to fill in the gaps is never an optimal choice. A better option is to have a lawyer draft the contract to include all necessary provisions or review an existing contract to address any missing provisions, terms, or elements.
Missing Contract Elements
Contracts can be customized to the nth degree. The terms that should be included in a contract depend on what the parties want to achieve. As long as both parties agree on the terms and sign the contract, the document is typically legally binding.
There may be an exception to this general rule if a contract is missing an essential element. Under contract law, a contract is formed only if the following elements exist:
For example, a contract cannot contain provisions that violate the law or public policy. In addition, both parties must agree to the same terms through a meeting of the minds. Each party must also have the mental and legal capacity to enter into an enforceable contract. Contracts lacking these basic elements may be void or voidable.
Not Consulting with an Attorney
It is important to keep in mind that state law varies, and DIY contracts may either include provisions that do not comply with your state's law or lack provisions required by your state's law. As mentioned, some mistakes may cause a contract to be void and unenforceable. Errors and oversights may not be apparent until an issue arises. At that point, it may not be possible to go back and negotiate a change in the contractual terms, and the negatively impacted party may have to live with the repercussions.
Many common contract mistakes can be avoided by meeting with an experienced business law attorney who can carefully draft or review the agreement to ensure that it includes all essential terms and protects your interests. The other contracting party has no obligation to look out for you. They could let you sign on to a bad deal knowing it works to their advantage.
A lawyer has your best interests in mind. They can perform due diligence on a prospective contracting party, negotiate terms that protect your interests, develop creative solutions to overcome impasses, and make everything official in a legally enforceable document.
Business owners who are on a tight budget might think they are saving money by using DIY contracts. But in the long run, the resulting contracts could contain mistakes that lead to expensive lawsuits and threaten what they have worked so hard to build. For help drafting or reviewing a business contract, please contact our office to schedule an appointment.