Avoiding Contract Disputes
Let's face it: No matter how hard you try to avoid it, one of these days you and your business may unfortunately end up in court over a contract dispute.
One very simple, inexpensive but very effective legal tip that could provide the winning edge in court is to have all the signatures on important contracts or agreements acknowledged by a notary public. In plain English, have the signatures notarized.
Yes, I understand that locating a notary public to witness the signing of a contract can be difficult. But smart business owners know the financial and legal value of having signatures on that important contract or agreement notarized.
A notary public is a person who has a special commission from a state or county government to allow him or her to acknowledge or officially witness another person's signature on a document. The purpose of the law is to provide a form of legal guarantee that the person signing the document is "The Real McCoy" (or "The Real John Hancock" for that matter).
Long ago, it was legally essential to have many types of contracts notarized. Today, however, the law typically requires that only a few types of documents have to be notarized to be lawful and valid. The most common area where notarization of signatures is still required is on real estate deeds.
So if the law doesn't require you to notarize signatures on your contracts, why would you want to? There are two very practical and money-saving reasons.
First, as unbelievable as it may sound, a person may actually deny in court that he signed a contract, particularly if that contract placed him on the short end of the deal. Once a person denies signing a contract, there are big (read: very expensive) legal hurdles you and your lawyer have to jump over to win in court.
Fortunately, having all signatures notarized can be a very simple and inexpensive way to prevent this very expensive nightmare from happening to you.
The magic behind the notarization of signatures is that many state courts and all federal courts automatically declare a notarized signature to be authentic in court. For example, Rule 902(8) of the Federal Rules of Evidence in a U.S. court goes like this:
Extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:
- Acknowledged documents. Documents accompanied by a certificate of acknowledgment executed in the manner provided by law by a notary public or other officer authorized by law to take acknowledgments.
What this bit of legal "mumbo jumbo" means is that when a person's signature has been notarized, many courts waive the legal requirement of proving authentication of the contract and that alone can save you a great deal of time and money in court.
There's a second important reason to require notarization of signatures on important documents: Notaries are typically required by states or counties to be bonded by insurance companies.
To show why this can be important to you, let's take the example of a contract where all the signatures have been notarized but later in court one of the parties denies ever having signed the contract.
The notary is then brought into court to testify that he did in fact witness the signatures of all the parties to the contract as is indicated in the notary acknowledgements. If it turns out that the notary made a mistake in verifying the signatures (for example, failed to check their identification or failed to actually witness the signing), then the insurance company who issued the bond for the notary will very likely be responsible for any damages that your business incurs if the notary's mistake causes you to lose the contract lawsuit.
Although the dollar amounts of notary's bonds are not huge (typically in the range of a few thousand dollars), you need to ask yourself this money-saving question the next time you sign a big contract: If I can't prove in court that the other party actually signed my contract, who's going to pay for that mistake, me or some notary who is bonded by an insurance company?
The answer to that question is best stated by eminent legal scholar and business tycoon Homer Simpson: "d'oh!"
The key to notarization of signatures on key contracts is that it is very much a bottom-line proposition: The bottom line you save may be your own.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
is an award-winning small-business advisor and attorney and the founder of The Law Firm For Businesses, a boutique law firm that helps entrepreneurs solve their business and legal problems.
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