My presentation at “The Entrepreneurial Series” sponsored by Lone Star College has three parts: (I) Starting the Business; (II) Being Smart about Contracts; (III) Avoiding Litigation or Lawsuits. This article focuses on contracts.
My tips aren’t intended to be exhaustive; they are to be used as a tool to discuss issues further with your attorney.
[B>[U>Part II: Being Smart About Contracts[/U>[/B>
Generally, an entrepreneur can be smart about contracts by doing this:
• Use them.
• Read them.
• Make key business terms crystal clear.
• Delete “red flag” provisions.
Regardless of the enticement… “you can trust me,” “we’re friends,” “let’s shake on it” … make your contracts written contracts. When you and someone else agree to something and “shake on it,” you have just made a contract, a verbal contract. The challenge comes when the other person starts forgetting or starts changing the terms of the verbal deal. Then it’s your word vs. his word. That’s not a pleasant position to be in, and it can get costly. And this does happen often with people that trust each other – long-time business associates, friends, and family. I will say this: If you care whether the other person keeps his end of the bargain, do a written contract.
A written contract doesn’t have to be long. Sometimes when people come to me to review their contract, and I see that it’s a one-page deal with all the key terms, I tell them they don’t need me. (See below: business terms).
We’ve all done it – sign our name without reading the fine print, or sometimes, any of the print. If someone else gives you a “pre-printed” or what we often call a “form” contract, you should read it. In most instances, contracts are not forced on us. You have the right to edit language or mark out language. If the party won’t agree to make some adjustments, then you may wish to look for someone else to do business with.
There are many different types of contracts when you are starting your own business. Here are just a few, with some pointers some of my clients have experienced:
• [U>Real estate purchase or lease[/U>: Unless you are starting a home-based business, this may be the first contract you do. A lease agreement will be provided by the landlord, but their provisions can be changed. Regardless of whether you hire an attorney, you must scrutinize the provisions that impact your time, money, and use of the property (such as, term, holdover or renewal rights, easy assignment, restrictions on use, use of common areas, expansion options, repairs, improvements, and RENT!). Remember, rent is not just what you owe each month. Look for the hidden rents – costs for repairs to AC, parking lot repaving, roof repairs, salary of administrators, advertising, etc. I always try to eliminate some of these things, and also include a ceiling or cap on these expenses, and a narrowly defined share of what the tenant could pay. Take a look at this article, [URL="http://www.texasbarcle.com/Materials/Events/5619/28236.htm">The Flexible Tenant Lease[/URL>.
• [U>Vendors (services and products[/U>): I hate to sound jaded, but some of them are notorious for including a ton of fine print that makes it impossible for you to get out of the contract easily. One big challenge I see – a small business owner will come in and they need to hire me to get them out of a contract (which states that the contract is “non-cancelable”). Another one is – a trusting person will pay up front for a service, and then the service is never performed to their satisfaction. So, don’t sign a non-cancelable contract. And don’t pay everything up front.
• [U>Employment[/U>: Generally, you don’t need them. However, you want to protect something, like client lists or other business knowledge, then an agreement is needed. From my experience, the best thing is to have the agreement, on the issue of termination, fairly equal so that either the employee or employer can leave with or without cause. Beyond that, most of the terms will cover what happens after that (notice, salary, non-compete, benefits, etc.), and that usually depends on who terminates and whether it was with or without cause.
• [U>Customers[/U>: You need a contract to protect yourself and to manage your customer’s expectations. I heard a story of a mid-level administrator that is hired by a mid-sized college. At his first administration meeting, all he hears are complaints. At his second meeting, he stands up and rather arrogantly-sounding says: “I’ve figured out how to solve all of the college’s problems.” As the critical eyes stare at him, he goes on: “Get rid of all of the students and faculty.” I guess he carried it off well, because the room erupts in laughter. The same is true of business customers: You will have problems, but you need (and want!) your customers. So, a contract should be clear, concise, and flexible. Being clear means it needs to be in customer verbiage, not legalese. Being concise means it should list expectations, such as exactly what you will do and exactly what the customer will do. And being flexible means that you and your customer should be able to easily change your agreement, but in writing, whether that’s fax, e-mail, Facebook, or whatever, just so long as you have a record of the new expectations.
[B>MAKE BUSINES TERMS CRYSTAL CLEAR[/B>
I’ve hit on this issue a bit above, but in your contracts, the most important terms are the “business terms” – who, what, when, where, how much, and for how long. Answer these questions with relative precisions, and you will eliminate a lot of problems.
Beyond the business terms, try to plan for “contingencies” or “the worst case scenario.” OK, I admit, lawyers are good at seeing the worst case scenario. When you and a friend come into meet with a lawyer, and you are all excited about starting a new partnership, invariable, the lawyer will say: “So what if you two just end up hating each other after a month?” Pessimists? We’ve been accused of that. Objective realists? Maybe that is a better way of looking at it. The point is that you need to think through: “What are all of the things that could go wrong with my customers, business, me, etc.” Nobody can or should plan for all contingencies, but look at the biggest and most likely road blocks, and think about whether those issues should be covered in the contract. Chances are, covering your “business terms” very well will take care of 99% of the potential problems.
[B>DELETE “RED FLAG” PROVISIONS[/B>
I always trust my own clients to spell out the bulk of the terms of their own contracts. They put the good stuff in, and they generally leave out the crazy stuff. But, when the other side comes with a form contract or one drafted by an attorney, then proceed with caution on what I call “red flag” provisions:
• [U>Indemnity[/U>: This is basically where you agree to indemnify someone else, meaning that you agree to pay for the problems they cause or the conflicts they have. In some instances, this is normal and automatic. For instance, if you have an employee that accidentally drops a box on a customer’s head, you’ll end up indemnifying that employee and paying for the problems he caused. This is because of the employer-employee relationship. But when you are signing a contract with someone, don’t agree to indemnify someone else, or make sure that the indemnity provision is very narrowly written.
• [U>Consequential damages[/U>: This is where you would agree to pay someone’s consequential damages, which are damages not directly related to the incident but are caused more by a chain reaction. For instance, if you rent floor buffers, and your customer, Tom, rents one over the weekend so he can get paid $50,000 to buff the floors of the Toyota Center. The buffer breaks, jerks, and smashes a hole in the wall (which will cost $5,000 to fix). You may have to pay the $5,000 and give Tom his rental fees back, but you don’t want to agree up front that you’ll be on the hook for the $50,000.
• [U>Warranties[/U>: There are warranties under the law, meaning that the services and products you provide should be at a standard level. Be careful about adding in that you warrant to do or to sell something else or that you set yourself up to a higher standard. Marketing people always want to make claims of “we’re the best” or “we’re #1” or “we guarantee xyz.” Stick with what you are willing to stand behind and back up in court.
• [U>Binding arbitration[/U>: Don’t give up your right to file a lawsuit entirely. Binding arbitration can be just as expensive as filing a lawsuit and negotiating a settlement. In binding arbitration, you still usually have to hire an attorney, and it can still be expensive. Mediation or non-binding arbitration can produce positive results, but I’m always leery about a client giving up his right to enforce his rights by having his day in court.
Remember, contracts rule! It’s not a sign of distrust or disrespect to memorialize an agreement into a written contract. It’s a sign that you value the relationship, and you want to have lasting mutual benefit for all sides involved. It’s the smart thing to do.
...stay tuned. Part III still to come, here on this blog.
Taunya Painter is an attorney and member of Painter Law Firm.
Opinions expressed on Painter Law Firm are those of the author only and do not necessarily reflect those of Painter Law Firm. Opinions and comments do not establish an attorney-client relationship.
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About Taunya Painter
Taunya Painter is an attorney and member of Painter Law Firm.
business litigation, business planning, contracts, business formation, nonprofit entities, business transactions, supplier relationships
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