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THERE’S NO SUCH THING AS A “STANDARD” CONTRACT

Take the time to customize your contracts to fit your business deal

Small to mid-size companies often ask for a “standard” contract for a particular business matter thinking that something “off the shelf” will suffice and save them money. Optimism reigns supreme until something goes wrong and you have to rely on your contract to resolve a dispute with the other party to the contract. While it is understandable why some business people assume that a particular transaction will happen without any hiccups and sometimes that is the case. In such cases, a formal written contract probably wasn’t even necessary because the parties acted in good faith, had common goals and neither was trying to take advantage of the other.

However, the prudent business person will “hope for the best and prepare for the worst” as the saying goes. It is fine to be optimistic and trusting of the other party but all parties will be better served if they sign on to a written contract that spells out the relative rights and obligations and accurately memorializes their expectations to minimize the possibility of misunderstandings and conflicts. That’s where a properly crafted contract comes into play because every business deal is unique and deserving of a contract drafted to address that uniqueness. Negotiating a clear and fair contract is also useful in revealing any ulterior motives of the other party – if the other party balks at a clear and well-balanced written contract, that will signal that the transaction is in jeopardy from the start and you ought to think twice about jumping into bed with a business person who is reluctant to enter into a written contract.
History is replete with examples of expensive disputes that could have been avoided by a well-written contract. For example, a case that went to trial in California a few years ago centered around an ambiguous contract provision in a franchise agreement about whether the franchisee had to utilize a certain financing company or not. The franchisor’s practice was to insist that its franchisees finance their inventory purchases with the financing company that the franchisor was most comfortable with and with whom the franchisor’s computer systems were linked to enable the franchisor to carefully track purchases and payments by the franchisee. The problem was that the franchise agreement did not expressly require that and when the franchisee financed his purchases with its own bank, accounting problems arose that led the franchisor to terminate the franchisee. Had the contract provision explicitly required what the franchisor had expected of its franchisees, the franchisor might have been able to avoid litigating the issue to a jury trial and after spending over $1 million in legal fees. The franchisor prevailed at trial but it was not able to recoup its attorneys’ fees. The victory came at great expense. Word to the wise – make sure your contracts embody your intentions and expectations in a clear and unambiguous manner to immunize you from attack (and great expense) later.

Committing yourself to a written contract with the help of an experienced attorney does not necessarily mean you will incur a ton of legal fees in the process. Consider it a cost of doing business and a necessary investment that will pay for itself if your business deal goes smoothly. Compare the cost of engaging an attorney at the front end to the litigation costs you might get mired in at the back end if a business transaction goes bad and you have little to no leverage to extricate yourself or lean on the other party for a quick resolution.

Too many lawsuits are the result of a poorly written contract or no contract at all. If you have been involved in a litigation, you know how expensive and risky it can be. If you have no experience litigating a breach of contract case, rest assured that it is always sufficiently expensive, time-consuming, and risky to make you wish you had spent the time and money at the front end to draft a written contract in anticipation of the dispute that you find yourself engulfed in.

A good lawyer will be able to help you draft an agreement that fits your budget and situation. Consider it cheap insurance. Here are a few things to always consider when working with a lawyer to draft a business contract for your particular deal:

• Write the first Draft. As the person most familiar with your business and the contemplated transaction, it helps minimize your legal costs if you first create a rough draft of the transaction as you understand it. Don’t worry about legal language – just write down the parties and what their respective rights and obligations are as you understand them. Then give that memorandum to your attorney for further discussions.

• Simplicity is Best. Some folks think a contract needs to contain fancy legal terms or long narratives. It really doesn’t and, in fact, less is more. A good lawyer will be able to assist you in boiling the contract down to its essentials with little to no fat. One thing to consider (however unthinkable it may seem), you should draft and enter into contracts that an ordinary person on a jury will be able to understand. Most contracts do not get litigated or go to trial but if you are the unlucky person whose contract ends up at the center of a trial, you will then wish your contract could be understood by a non-business, non-lawyer, type person. If your contract is too complicated, your chances of prevailing in a litigation are diminished.

• Carefully Define the Obligations of the Parties. Give some careful thought to what each party will be obligated to do to perform the contract. Do not “assume” that an obligation is understood – if it isn’t clearly stated in the written contract, you will be running the risk that a third person will make the same assumption. The rule of thumb is “if it isn’t in the contract, it doesn’t exist.” Do not leave anything to chance – protect yourself by making sure the contract clearly and expressly describes what each party will be obligated to do and by what date or within what period of time. If you have to litigate the contract in a trial, the time you devoted to draft a contract with a comprehensive description of who must do and when, your chances of prevailing at trial will improve dramatically (it will also deter the other party from playing games and forcing the dispute to litigation).

• Anticipate Termination of the Contract. No one likes to think of a contract failing or being in the position of having to pull the plug and move on. Yet, prudent business people will make sure their contracts contain exit language that suits their needs. Your contracts should clearly what circumstances or events will give a party the right to terminate the contract, how much notice is required, what form the notice of termination must be in, when the termination becomes effective, and what happens after the termination. All of these factors must be anticipated and addressed in the contract so there is no misunderstanding if and when the time comes to part ways and put an end to the contract.

• Dispute Resolution and Attorneys’ Fees. Another matter is how, when and where must disputes over the contract be arbitrated or litigated? The parties can negotiate whether the contract dispute must be submitted to arbitration first and what is the accepted “venue” (place) of the arbitration or lawsuit. This becomes important particularly when the parties are located in different states or regions – the location where a dispute must be resolved will create leverage for one party over the other.
You should almost always include what is often referred to as an “attorneys’ fees clause.” This type of clause typically gives the prevailing party in a dispute the right to recover his/hers/its attorneys’ fees and costs incurred in the arbitration or lawsuit. Many business people assume that a party who wins is entitled to get back attorneys’ fees and costs. That is not the case. Laws in most states, including California, only allow recovery of such costs in limited situations where there is a statute or law that awards attorneys’ fees and costs to a prevailing party, unless their contract includes an attorneys’ fees clause. If your contract does not have one, you should expect that if you bring an arbitration or other action, you will have to spend money that you will never recoup, even if you prevail in the case.

These tips apply to most contracts but how the language is drafted will depend on your particular situation. Also, some contracts are highly regulated by regulation or law and must meet certain mandatory requirements. Either way, you are well advised to contact an experienced attorney to assist you in assessing the need for a written contract and what it should contain. Some contract clauses are somewhat standard but the crux of a contract, the part that describes what each party is obligated to perform, is almost always unique to each transaction and for that reason, demands a customized contract to fit the situation.

You may never have to call on the terms and conditions in your contract because the other party is performing as expected. However, if you find yourself in a dispute over the performance of a contract, your best friend will be the contract that you took the time to carefully draft in anticipation of the problem at hand. Oftentimes, a well-written contract will make it more likely that the other party will abide by the terms of the agreement because it knows if it doesn’t, that you will have the upper hand in enforcing your rights under the contract.

So don’t wait till its too late. Contact us today, and let us work with you to ensure your agreement say what you mean them to say, and are actually protecting your interest.

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