Get It In Writing
Everyone has heard the saying "an ounce of prevention is worth a pound of cure." When it comes to your business, where just one bad deal can spell doom and disaster, this is especially true. Written contracts are that ounce of prevention in the business world.
I am constantly amazed at how many litigation matters could have been avoided had a well thought-out contract (or sometimes any contract at all) been in place from the start. Although no contract can contemplate every eventuality, some effort and attention directed toward spelling out the parties' agreement on paper can go a long way toward saving 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, often 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.
Interest and Attorneys' Fees. Nobody wants to finance clients or business partners, even with today's low interest rates. Accordingly, it you want to charge interest on unpaid fees or bills, your contract must state an interest rate and when it will start to accrue. Likewise, if you want to recover attorneys' fees in the event of litigation, your contract must state that intent. Otherwise, even if payment is wrongfully withheld, you probably won't be able to recover interest or attorneys' fees. This becomes particularly crucial when, absent that ability, it would otherwise not be cost effective to litigate.
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 the performance expectations before entering into the agreement.
Confidentiality and Non-Competes. Today, information is more important than ever. Protect your proprietary information by setting restrictions on the other party's 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.
Warranties. In today's increasingly competitive business environment, customers often demand that services and products meet certain specifications – what lawyers refer to as warranties. If you do offer express warranties, your contract should specifically define those warranties and state that no warranties beyond those stated are being offered. Or, if no express warranties are offered, the contract should state that. But even if you disclaim any express warranties, the law sometimes implies certain warranties that require you to stand behind your product or service. One type of warranty is the implied warranty of merchantability. It exists in every sale of a product and requires that the product be reasonably satisfactory to the typical customer. Another such warranty is the implied warranty of fitness for a particular purpose. If neither warranty is part of your deal, language should be included to the effect that the deal is "as is" and/or that there are no warranties beyond those specifically contained in the contract.
Your Business. The law might require specific things to be in writing for your particular business. For example, there are many more requirements for consumer transactions than for business to business transactions. Make sure you know the particular rules for your business, as violating them may not only void your contract, it may subject you to penalties.