Get Value for Your Contracts: And Be Prepaed for Your Next Contract Lawsuit
Your agreements are only valuable to the extent you can enforce them. If you develop good business habits, you can get full value for those agreements.
Good Habits Make Valuable ContractsWhen you decided to start your business, your business plan identified sources of revenue and expenses, listed the equipment and technology you would need, and described your target market. However, if you were like most new business owners, you may not have considered just how much you would be Ain [email protected] with key clients, suppliers, lenders, and even employees: They can short circuit your business with just a threat of litigation, and the time and distraction your business will suffer from even a small dispute can halt its growth.
To round out your business [email protected], you should first rid yourself of two common misconceptions. First, reject the notion that you only need a formalized contract to do business with someone you do not trust: It is just the opposite; the process of negotiating and preparing a writing fosters trust by clarifying expectations. Second, never make the mistake of thinking that a contract=s work is done once it is signed: As explained below, you often do more to protect your business after the agreement is signed, by pro-actively enforcing it throughout its term.
To enjoy full value from your agreements, make it your habit to practice a three-step process for tracking rights and obligations in those agreements, by (i) preparing a contract file during negotiations, (ii) monitoring the parties= compliance after the agreement has been executed, and (iii) evaluating each agreement at the end of its term. If you give just a little time to each transaction, you can earn big benefits in managing risk and protecting growth. If a dispute does arise, the products of these routines will give your attorney the ammunition you need to keep your business on track.
Keep a File on Every Negotiation and ContractThe first step is preparing a file that will allow you to remember each negotiation. You may want to do this only for agreements that seem [email protected], but remember that contracts may be significant whether oral or in writing, and regardless of their dollar value. You may even be sued on negotiations that you believe ended without any agreement at all. Therefore, make it a habit to prepare a file for every negotiation, but be a little less formal with obviously small deals.
For all written agreements, your contract file should include (i) the original draft agreement, (ii) the final, fully executed writing, (iii) notes and letters discussing terms, (iv) a simple calendar of when each party must perform its obligations, and (v) a brief summary of how you understand the discussion of key terms changed during the negotiation. Since all businesses are different, you will need to learn through practice what other materials you need, but include written phone messages, dated and timed, and print outs of informative e-mails.
A special note about e-mails. They are easy to use and often are prepared informally which invites us to use them carelessly. But they will be ineffective as evidence if they fail to communicate a whole idea at a specific time. The habit of creating good records begins by confirming the accuracy of your computer=s clock and calendar. Train staff to draft e-mails in a consistent format, beginning with a symbol or Aletter [email protected] that identifies your business. Follow that with a brief opening statement that
(i) states what you are responding to, (ii) sets the business context of your message, and (iii) explains why the sender is authorized to act within that context. Finish with the sender=s full name. These habits will help to create records that carry weight in resolving disputes in your favor.
Your most valuable contribution to the contract file will be the summary of your understanding of the agreement. People often sue when they think a term, or part of its meaning, was intentionally or innocently omitted, reducing their rights. That often happens when one party tries to avoid language that could interfere with other agreements or relationships. That can be difficult to establish at best, but almost impossible without records to refresh memory and your summary can be the key.
If a negotiation is lengthy, make a simple calendar of negotiation events to further aid your memory, including things that happen in your personal life that may jog your memory: While you could record this in a personal calendar, you may have to produce it to the other side in a litigation, so protect your privacy by preparing a calendar specific to the negotiation. But prepare something or you may be left at the mercy of an adversary that has better managed its information.
Special Issues for Verbal AgreementsFor oral agreements, a contract file is even more important since you can only prove contract terms with circumstantial evidence from which a court may infer your version of the agreement. If an oral agreement is part of a long-term course of conduct, you might prove it with writings that were part of an earlier agreement: If not, proof of prior performance may demonstrate the terms of this deal. If the parties performed part of obligations of this deal, evidence of that performance might prove the rest of the terms.
You may discover during negotiation that your state=s law requires a writing. Statutes, usually referred to as statutes of frauds, refuse to enforce certain oral agreements, including sales of real estate, promises to be bound by another=s debt, and contracts that cannot be performed within one year. Even if writing is not required by law, it may be the only way to confirm detailed terms or complex timing, or protect intangible assets such as intellectual property. The expense of a brief consultation with counsel will be money well spent if you are uncertain whether you need a writing.
Consider also the practical reality that a contract is only as good as your financial ability to enforce it. When you are considering an oral agreement with a new client for $25,000, ask whether your business will have the $50,000 or more it will cost for legal fees to enforce unwritten terms. Even if the money is available, it is usually bad business to spend fresh money to chase a stale, weak oral agreement.. Therefore, at each stage of the negotiation, you must evaluate the size of the deal and the other party=s business ethics. Some deals are of no value without a writing.
Monitoring Contract ComplianceThe second key habit is to pro-actively monitor contract compliance so you can plan a response if either party breaches a term. The best practice is to keep a single business calendar. Assign a code to each agreement and enter that code on each date when that contract requires performance so your compliance officer can determine what performance is due. Consistent phrases, such as "payment due", "product to ship" or "regulators to inspect", will allow you to prepare, evaluate and follow up. But you have to make sure that your staff (i) faithfully incorporates the information from each contract file onto your universal calendar and then (ii) inspects the calendar regularly.
If a contract requirement involves significant funds, or time and effort, the date should be preceded by a warning entry so that you can have the resources ready. The compliance officer should also know when to contact counsel, as contract and collection actions are often hampered when counsel is involved too late.
You will have to take special steps for specific types of agreements, such as those for employment, which include not only periodic reviews of performance and compensation, but benefits issues arising from statutes or case law which may require comment from legal counsel.
Be particularly careful with commercial leases, which can be difficult to manage even if the leased space is small. For example, you may be aware that tax and cost of living escalations are calculated annually, but may not know if they accrue at the same time of year: Without a check list to simplify your review of each month=s rent bill, you may overpay and even give up your right to a refund or credit. Some provisions threaten expense even though they do not involve payment, such as requirements for giving the landlord notice of a problem, or defining relationships with other tenants. You should have counsel review the contract file so your compliance officer can have the tools they need to both monitor compliance and understand the whole agreement.
Another special concern is insurance contracts. When you apply for coverage, you have to disclose detailed, sensitive business data. If you make a claim, the carrier may review that date and deny coverage if it decides that your disclosure was insufficient or misleading. The contract file for that insurance contract must include evidence of why you believed your data was accurate when you stated it. The compliance officer must also know what is required to give the carrier notice of covered events. Any doubts about the meaning of the policy should be clarified by counsel - in advance.
It should be obvious that your compliance officer is critical to your business=s capacity to protect itself. You should choose them based on loyalty and anticipated longevity as well as competence. Depending on the size of your business and the number of contracts it involves, you may want to bind them to an agreement that attempts to compel at least four weeks' notice of resignation in order to effect a seamless transition to a replacement.