Why a Simple Business Contract Can Make or Break Your Business
Over 29 years, writing business contracts as a business attorney, I have represented startup businesses in virtually every sector of the economy from Intellectual Property Technology Companies to Construction Companies and Restaurants. Large or small – LLCs or Corporations or Partnerships – the owners of these businesses face common challenges, particularly in the initial years of operation. Given the stiff competition in an economy that is consolidating, profit margins tend to be slimmer than they used to be. What is most heartbreaking for business owners is to face a major reduction or even loss of that profit window as a result of a legal mistake. The leading culprit in my legal book is the use of a problematic business contract. Here are a few pointers.
1. Say “No” to Oral Business Contracts!
I’ll start out by making clear that oral contracts are usually enforceable so long as they don’t provide for the performance of the parties for a period in excess of one year or involve the sale of land…. or an illegal object. Other than that, a handshake will do, assuming, of course, you want to pay thousands of dollars of legal expenses and find yourself in a contentious lawsuit. The major problem of an oral contract is the inability of either side to prove the terms through writing. And even if the client can dredge up an email or two or twenty, invariably the response of the other party is unclear and there are major concerns as to whether the parties have agreed on anything at all. All of this leads to huge problems and major headaches for my clients. In the worst-case scenario, the contract itself may be deemed not to have existed at all because of a problem in what courts refer to as “formation”. In legal cases going back to Old English Common Law, a purchaser will contract for the acquisition of a horse when the seller has a mule in mind. In this situation, there is no “meeting of the minds” as to the basic terms of the agreement and the entire deal fails. In more typical cases, there is a major disagreement as to what the parties intended because of imprecise language in the contract. This is referred to by lawyers as “ambiguities” and all you need to know is that it means lots and lots of attorney’s fees and extreme aggravation! That’s the only result that is not ambiguous!
2. Say “Yes” to Written Business Contracts!
Now that we are on the same page, keep in mind that a written contract can also create serious problems and expenses if it is drafted incorrectly. In virtually all of the contract lawsuits I have dealt with over the years, the clients on both sides are fighting over the meaning of a phrase or word. Typically the language is unclear and requires the lawyers and courts to figure out what the parties intended. Unfortunately, the wheels of justice move slowly and the costs increase. The best way to avoid these problems is to have an experienced contract lawyer review your agreement to make sure that what you intended in the deal is reflected in the contract itself. Remember that the improper use of a single word or even punctuation can totally change the interpretation of the contract itself.
3. So What is Your Adversary’s Next Move?
Contract disputes are not a game. However, comparison to a chess match for analytical purposes is not a bad idea. If you believe that you have two major challenges to a contract – what will be the possible responses or “moves” by your opponent? Those moves are referred to in the law as “defenses” to your legal “claims”. Even if you think you have terrific claims – some defenses are impossible to beat and you can be checkmated almost immediately after a lawsuit is filed. For example, let’s say you have a perfect claim against a purchaser who simply took the goods and never paid. You file a lawsuit for breach of contract four years and one day after the breach occurred (i.e., refusal to pay for the goods). Result – CHECKMATE for the breaching party! Why – because the time to bring a contract action is four years in Texas which is known as the “statute of limitations”. Wait a day too late and you lose. That simple. And lawyers have a bag full of defenses to assert. If the statute of limitation defense doesn’t work – they will try another and another.
Businesses rise and fall based on the specificity and content of their contracts. Don’t draft a contract on your own and stay away from contracts on the web. Get good legal advice before signing on the dotted line!