Business owners enter into written contracts all the time, and they enter into them without reading the fine print - understandable, they probably aren’t lawyers and don’t have a lot of free time to sift through a bunch of legalese and make sense of it all. Or, often they use an online form builder or template as a legal agreement without considering whether or not it really protects them and works with the specifics of the deal they are putting together. But, what happens when a business enters into an agreement that isn’t working out, or they aren’t getting what they expected or were promised?
What happens when a business finds itself stuck in a bad contract? Options may be limited unless you can show a breach of contract, misrepresentation, fraud or some other reason to formally end the agreement - and that may not be very likely. Many times the contract just isn’t working out like the business hoped it would, or the need for the service/product ceases to exist and there isn’t a real legal claim that would justify getting out of the contract.
So, what should businesses do in order to avoid getting stuck in a bad contract? No business wants to end up in court fighting over a contract. It is a loss regardless of whether or not you “win” a judgment - you’re still out time and money. So, it is in a company’s best interest to take some steps upfront to protect itself, reduce the risk of an issue coming up, and proactively address potential contract issues. Here are some suggestions on how to limit the chances your business ends up in a bad contract, and how to deal with the repercussions of that:
- Understand who you’re doing business with. Believe it or not, there are bad companies out there and unreliable/unscrupulous freelancers. Do a little research, have some conversations and ask some questions before you jump into signing an agreement.
- Define the important terms of the agreement. Don’t rely on things like “industry standard” and “best practices”. They are vague and can mean different things to different companies.
- Look for ways to shift some of the risks associated with the deal. This could be done through indemnification and hold harmless provisions.
- Spell out how dispute resolution will be handled. You can include options such as negotiation, mediation, and arbitration in the contract and take steps to avoid a court case even in the event the agreement doesn’t pan out the way you expected it to.
- Look for ways to limit your potential liability using disclaimers, limitations on liability, and limitations on recovering certain damages (for example - incidental and punitive damages).
- Don’t overlook the so-called formalities of a contract - severability, governing law, entire agreement, authority - all of these are considered boilerplate contract provisions. But, if something starts to go wrong they can have major implications on the enforceability and the manner for bringing claims.
- Don’t use templates that weren’t created for your specific business and the specific situation. It’s fine to have standard agreements in place that you regularly use (in fact it’s probably better to operate this way) but make sure the agreement was drafted for your company, properly reflects the individual situation, and that any standard agreement is regularly reviewed.
- Read and understand what’s in the agreement. One of the biggest causes of contract disputes and litigation is that someone failed to read and understand what was in the agreement. If you don’t want to do it yourself (and most businesses don’t) have a lawyer advise you on it.
- Think about how insurance can play into limiting potential risk and liability and whether or not it needs to be addressed in the agreement.
- Make sure to address what happens if there is a breach of contract. Ideally, you’ll want to get notice of a breach and then have an opportunity to cure it before any additional action can be taken. This can prevent a disagreement or misunderstanding from going straight to a dispute or lawsuit, saving time and money.
- Understand how the agreement can be terminated. There may be options to terminate for convenience where you can get out quickly and easily, or you may be locked in for the entire term of the agreement unless there is a material breach by the other party.
Generally speaking, it’s not a good idea for businesses to enter into agreements without carefully reviewing them and understanding what’s actually in writing. It doesn’t always reflect discussions that might have been had leading up to the point of signing. If something doesn’t look right or doesn’t make sense, don’t ignore it, ask about it until you understand, and feel comfortable, it’s too important not to.
Have questions about contracts or want help reviewing them? Contact us for a free consultation about handling contracts or legal and risk management in general.