6 Ways to Save Your Shirt
This article has been excerpted from Legal Guides: Business Contracts by Laura Plimpton, available from Entrepreneur Press .
After reviewing and drafting over 12,000 contracts as an in-house attorney and an attorney practicing business law in a law firm, I developed tools and techniques for quickly turning any contract into a business asset. My clients, business owners and managers, asked me to teach them how to utilize these tools to create their own contracts and be able to quickly review contracts drafted by other parties without consulting an attorney.
In one company I worked for, the sales staff never seemed to find the time or have the inclination to have the agreements they wrote documenting a sale between their company and its customers reviewed by me, their in-house attorney. In one year, 11 disputes on their way to becoming lawsuits involved these contracts. These disputes resulted from the two contracting parties having wildly different understandings of their duties under the contracts. After training the sales staff on contract drafting and review, none of the succeeding contracts--all drafted or reviewed by the sales staff--were the basis of an unresolved dispute or litigation.
It's always better to have an attorney review or draft an agreement and neither this excerpt nor the book of origin are legal advice. Nothing can substitute for the advice of an attorney, licensed in the state where you are doing business, reviewing your specific agreement or situation. Should you decide to skip an attorney this excerpt will provide invaluable assistance to achieve successful business contracts.
Hidden Contracts Hurt
Contracts do not have to be written. If you, on behalf of your company, make a verbal agreement and claim that the verbal agreement can't be enforced, it's possible you, and your company, will get a rude awakening when your company is sued to enforce the agreement. Contracts are enforceable in a court of law whether they are written or not.
Often verbal contracts are hidden. The verbal agreement is known to the few who were part of the agreement at the time it was made and maybe a few more who are part of fulfilling the agreement. Sometimes, because many business people believe contracts must be written, even the person making the agreement is unaware a contract exists until the other party tries to enforce it. Verbal contracts can hurt you and your company. Proving the terms of a verbal contract is always one party's word against the other. Because there is no definitive document or recording to prove what the agreement was, anything that either party can convince a judge or jury to accept as true could be determined to be enforceable. Successful business people write contracts down.
Drafting a contract and reducing an agreement to writing are just smart business. If you never need to look at that contract again, good for you. If there's a question or a conflict, a contract should answer it or resolve it. When the other party, or even someone on your side, suggests that everything is so friendly there is no need for a written contract--insist on one. After reading this book it will be no trouble at all to write down what you've agreed and either finalize it or send it to an attorney to be finalized.
Your Company Name Can Be Good as Gold
Well over half of the contracts I review have the name of one of the parties wrong. I don't mean spelled wrong, although that is a basic starting point, but legally wrong. The parties' names are the most basic part of the contract and they must be:
- included in the agreement
- indicated as a party to the agreement
- spelled correctly
- legally correct
What does this mean?
Most companies have an official legal name stated on a "birth certificate." Sole proprietorships will not have birth certificates; partnerships may or may not have them; but every other type of company will. A company's birth certificate is the form filed with the state where the company was started, which states the company's name, the type of company it is and its ownership. These forms may be called "Articles of Incorporation," "Articles of Organization," "Certificate of Limited Partnership," "Statement of Qualification," or other similar titles. The name stated on these forms, as filed with the state agency overseeing formations of companies (usually the Secretary of State or Corporation Commission) is the company's real name. Whenever you use your company's name or the name of a company you are contracting with it should be the exact name stated on the company's birth certificate.
Why is it important to state the legal name of the company? Because if you do not, it can be used as evidence that it was not the company that entered into the agreement but the individual who signed the contract. If you sign the agreement, your personal assets could be tapped to pay contract damages. Whether you are the owner of the company or an employee of a business signing a contract on behalf of that business, you probably don't intend to risk your personal assets when you sign the contract. Failing to use the company's real name could jeopardize your intentions.
Incorporated businesses must act as entities separate from the people that run them, and evidence of that is consistent use of the actual legal name of the company. This is a simple step that can save controversy in a lawsuit. Determine the correct legal name of your company and use it consistently in contracts.
Avoid Contracts That Threaten Your Home
Refer to Example A. The signature section contains three names, presumably one name associated with each company. By signing the contract this way, a controversy lies in wait. Were these individuals signing for the companies? Or were they really signing on behalf of themselves, even if the agreement itself contains the correct legal names of the companies? Because the way they signed the agreement makes it appear they signed on behalf of themselves, the signers' personal assets could be at risk.
The purpose of signatures on contracts is to memorialize the party's agreement to what is written down. Signatures, or signature blocks as you will often see them referred to in legal discussions, should clearly indicate who is agreeing.
The signature block should start with who is agreeing to the contract. If it's Miff Company of Boston, that's how the signature block should start. If it's a person, the signature block would start with that person's name. The Uffelhoop contract should be drafted as demonstrated in Example B.
Example A: Miff Company Inc. of Boston, Moff Inc., and Muff Company LLC agree that
they will split the cost of a booth at the Uffelhoop trade show. Each of us get to use it.
Signed: Peter Pink Georgia Grey Steven Silver
Example B: Miff Company Inc. of Boston, Moff Inc., and Muff Company LLC agree that
they will split the cost of a booth at the Uffelhoop trade show. Each of us gets to use it.
Miff Company Inc. of Boston
Peter Pink, Purchasing Officer
Georgia Gray, Officer
Muff Company LLC
Steven Silver, Treasurer
These signature blocks start with the names of the parties agreeing to the contract, then follow with evidence of the agreement (an actual signature) and then documentation of who belongs to the signature and that person's status with the contracting party.
It's important to think this through. Who or what do you want to enforce this agreement against if there is a conflict? Is it the company? Is it the company's rich owner? I have seen the signature block used to "capture" an unknowing person or business as a party to a contract. If you want to potentially have access to the owner's personal assets in a contract dispute then draft the signature block like Example A, it's likely the person signing won't realize the legal implications. If Peter Pink was a billionaire and had signed the agreement in Example A it's possible his personal assets could be used to satisfy a judgment issued against Miff Company resulting from a dispute over the contract.
One Missed Point Can Kill a Legal Contract
Lack of specificity can kill a legally perfect contract. The basic terms of the contract need to be accurate and detailed to the smallest degree. The best way to look at this is that someone completely unfamiliar with your company, the other contracting party, and the subject of the contract should be able to pick up the contract and understand what is being contracted for, the criteria the product or service must meet to be satisfactory, when the service or product is to be delivered, how it is to be delivered, and for what cost. There should be no chance that the subject matter of the contract can be confused with any other service or product than the one the parties to the contract intend to contract about.
Example B might have the correct signature blocks, but are the parties agreeing to split the cost of a booth, whatever that cost may be? Are they intending to split the cost of a standard size booth? A booth with premium location? Is there only one Uffelhoop trade show? Or is this held every year? What if an Uffelhoop trade show is held in most major cities once a year--are they agreeing to split the booth costs for every Uffelhoop trade show in every location forever? Are they really intending to state that each of the three parties can use the booth equally at all times? Or do they mean that each of them gets to use it one day of the three-day trade show?
The agreement may in fact be that the three parties split the costs of any booth they can get at all Uffelhoop trade shows now and in the future and that they all get to use it all the time. If so, this contract does a great job of documenting the parties' agreement. If that is not the agreement, this contract contains numerous opportunities for misunderstandings and litigation.
3 Hazardous Deal Points
The three contract terms that most often result in conflict are money, service or product specifications, and how a contract can be terminated.
Any time there is the possibility one party is assuming something that another party could be assuming differently, there is a potential for conflict. If there is a possibility that one party could be assuming, for example, that payment will be made to take advantage of early payment discounts, when others are assuming otherwise, the contract should specifically state when payment will be made by each party.
Service or product specifications are another common source of conflict due to inadequate documentation of expectations in a contract. One party may assume a report they contract to have researched and drafted will cover certain subjects or be of a certain length. The other party has a different expectation. When the two expectations conflict, litigation can result unless the contract is specific enough. Every detail of the service your company is having performed or is performing, or every detail of the product your company is producing or buying should be detailed in the contract. Assume that if you do not state the specification for what your company is buying, you will get the opposite. Assume that if you do not state the specification of what your company is producing, the buyer intends to receive something else. A further incentive to be specific is that, contractually, if something is not stated as included it's likely you cannot use the contract to make the other party provide it. This will be discussed in greater detail related to independent contractor agreements for services and to purchase orders for products.
How a contract can be terminated is a provision that often results in conflicts, usually because it is not included in contracts. If there is no provision in a contract describing how the contract can be terminated, the contract lasts until each party has performed all of their duties under the contract. In the Uffelhoop contract, the contract would exist until the close of the last Uffelhoop trade show held in Denver or Dallas in 2010. This could be a bad thing if one of the companies decides to close down its Uffelhoop business. It is obligated to participate in a trade show for a product it no longer produces. In almost all cases there should be a provision stating how a contract can be terminated before the natural conclusion of the contract.
Avoid Harmful Changes After the Fact
Assuming your company has a provision in all its contracts that requires any modification of the agreement to be in writing and signed by both parties, it should not be possible to change a contract after both parties have signed it unless your company agrees to the change. Yet it is possible, if your company doesn't take action to make this difficult.
It is not at all uncommon in a contract dispute for the other party to produce a contract with original signatures by both parties that contains different terms, invariably benefiting that party, from the contract the company had in its possession. How is that possible?
It's a simple matter to retype, and change any page of a contract except the signature page. Even the signature page can be retyped if the other party can forge your company representative's signature, although I have never to my knowledge seen this. A written contract is a documentation of the agreement the parties reached on some matter. If there are two differing contracts, both signed by the parties, a court would have a difficult time using either contract to decide the dispute.
The easiest way to discourage changing a contract after it is signed is to have both parties initial every page of the contract in a colored ink that is difficult to photocopy (purple seems to work well) and use that same colored ink to sign the agreement. This procedure creates a way to authenticate each page of the agreement as one that was part of the agreement at the time it was signed. It's a simple procedure that does not take much time but can save a lot of trouble later.
Laura Plimpton has over 26 years experience as a corporate lawyer, business owner and management consultant. She has reviewed and drafted over 12,000 contracts. She has served chief legal counsel for several companies as well as worked in law firms where she litigated contract actions and advised businesses on operating with the least risk of facing litigation.
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