Springfield Business Journal Articles


A Handshake Isn't Enough Today

Since this issue is devoted to a retrospective of Springfield’s business history, it is also fitting to examine one important aspect of the law and how it intersects with that history. Although I have no first-hand experience, I think it’s fair to assume that in days gone by one’s handshake was enough to seal most any business deal, no matter the significance. Or, to the extent such deals were documented, the contracts likely were no longer than a page or two and failed to address important points of a business relationship. That may have been good enough in the past, but that’s no longer the case today.

As a lawyer who practices in both commercial litigation and business transactions, I am constantly amazed at how many litigation matters could have been avoided had a well thought-out contract been in place from the start. Although no contract can contemplate every eventuality, some effort and attention directed toward spelling out the parties’ relationship on paper can go a long way toward saving you pain and expense down the road.

First, the process of describing, in writing, how the business transaction or relationship will take place, and the obligations each party has to the other, will often reveal important issues that are best resolved before the money is paid and the venture started. The contract should be a road map in which the parties spell out all of the various needs and requirements each has, describe in clear terms how those needs and requirements are to be met, and provide the necessary assurance that both parts of the bargain will be fulfilled. Sometimes the parties realize, to their surprise, that the expectations each had for the other were so different that it is best not to enter into a relationship at all.

Second, pre-printed contracts or contracts from previous deals, although often providing good starting points, will rarely provide the protection you want and need. I often advise clients to “see me now, or see me later.” In other words, do it right from the beginning.

With these two points in mind, the following are some (but by no means all) of the issues that should be addressed in any contract documenting a business deal.

Termination. This is especially important in a business venture involving “partners.” Although everyone starts out as the best of friends and with the noblest of intentions, more often than not the relationship sours. You should have a fair and equitable exit strategy. For other contracts, decide whether termination should be permitted only “for cause,” or for any reason. How much notice must be given prior to the termination? If the termination is due to non-performance or poor performance, will the other party be given an opportunity to correct any deficiencies?

Remedies and Damages. If the contract is terminated or breached, the parties should consider how any damages will be addressed. Will the person responsible for the breach be responsible for compensating the other person for all actual damages? How will those damages be determined? Even though the parties might provide for “liquidated damages” (a set sum for a breach), courts often find such provisions unenforceable when the actual damages can be determined with reasonable accuracy. A party might also want to limit his or her potential exposure by limiting any recovery to a deposit previously given, or limiting damages to the price paid for the goods or services that should have been provided. Time spent attempting to manage your worst-case scenario may let you sleep better at night.

Venue and Choice of Law. In some instances, litigation cannot be avoided. Especially when dealing with other parties who are not local, the parties often spell out the location for any resulting litigation. This is known as venue. In general, if litigation is necessary, you want to have it in your back yard. When dealing with out of state parties, decide which state’s law will apply. In some instances, various state laws offer dramatically different answers to certain legal issues.

Performance Criteria. Identify a standard to measure performance under the contract. If a product is being manufactured or delivered, what specifications should the product meet? If services are being performed, what standard should be met? The parties may also want to identify how they will decide whether the services are satisfactory. Sometimes an independent third party such as an architect or engineer, may be designated as the one who determines satisfactory performance. In other instances, there may be an industry standard that must be met. Whatever the criteria, each side should understand before entering into the agreement what the performance expectation is.

Confidentiality and Non-Competes. Today, information is more important than ever. Protect your proprietary information by setting restrictions on the other parties’ disclosure and use of that information. Likewise, consider provisions that restrict the other party’s ability to poach your valuable customers through a non-compete clause.

by Thomas C. Pavlik, Jr.
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