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  • Writer's pictureMyndee Lee

Contract Pitfalls

Here’s food for thought. Everything we think and experience becomes a memory and those memories continue to be constructed, altered and fused. Scientific studies show that we need to be suspicious of even our most vivid and confident memories because: 1) we don’t recall memories as much as we reconstruct them; 2) our memories are constantly updated which results in an alteration of the memory each time we access it; and, 3) our brains actually fill in the gaps of our memory by making up information as needed.[1]

Knowing this should convince even the most skeptical that written contracts are important. I often tell clients that requesting a written contract is not an insinuation that one party or the other can’t be trusted. Having a well-written contract is quite simply the best way to avoid conflict in the future. If the agreement is in writing, signed by all parties, then there is no need to resort to our flawed memories to determine the expectations of the parties or to fill in the gaps.

What if you, as a business owner, are asked to sign a contract? As self-serving as this advice may sound, you need to hire an experienced attorney to review the contract so you are confident it says what you think it says, and that you fully understand what you are agreeing to do.

Although not a substitute for having legal counsel review and negotiate contracts, I have developed a list over the years of contract provisions that small businesses should note. These provisions are often included in “boiler plate” agreements and appear seemingly innocuous, but if ignored can result in costly mistakes.

Termination Provisions. Often a contract will allow one or both parties to terminate it, but only if done a certain way. As an example, Party A may terminate this contract for any reason upon 20 days’ written notice to Party B. But as Party B you may not want Party A to have the ability to simply terminate the contract upon notice. In addition, what are the consequences and potential liabilities upon termination? If you are the party wishing to terminate, it is vitally important that the termination provisions be followed to the letter to avoid conflict later.

Auto Renewals. Ah, a close cousin to the Termination Provision. Pay attention to whether a contract renews automatically. If you agree to the automatic renewal, then calendar the date on which you are required to provide notice if you do not want the contract to renew.

Dispute Resolution. At the end of the day, it doesn’t make much difference if you are right if you can’t afford to prove it. That may be the case where the other party has particularly deep pockets. As seasoned business owners know, litigation can be extremely costly. Because of this, you should carefully consider how you want to resolve any dispute that occurs. For example, you may want to consider a mandatory mediation provision or arbitration clause. If not, understand that jury trials are more expensive than trials before only a judge so you may want to include a contract provision to prohibit a trial before a jury. You may want to include a choice of law provision that allows parties to contract for where a case will be filed and what jurisdiction’s law will apply. If you are in Kansas and the choice of law provision requires an action to be filed in New York, then your cost of litigation will increase exponentially.

Who are the Contracting Parties? Here’s one - you spend money incorporating as an LLC, you have your operating agreement and have conducted your business correctly as an LLC, but when you sign the contract, you unwittingly agree to be personally responsible. A primary purpose for establishing your business as an LLC or other corporate entity is to limit your liability and protect your personal assets. Because of this, it is imperative that you are sure your business is the party to the contract and that the contract does not include a personal guarantee. When executing or signing a contract, you need to sign as your business entity

As an example, these signature lines do not mean the same thing.

__________________ _______________________

Jane Doe By: Jane Doe

Jane’s Pet Store, LLC Title: Principal

I am here to provide out-sourced general counsel services to small businesses.

Contact me to learn more.

[1] Your Deceptive Mind: A Scientific Guide to Critical Thinking Skills, by Professor Steven Novella


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