Making Contracts Work in the Real World
Signing a contract doesn’t always mean your business is protected. What really matters is what happens when something goes wrong—like a supplier missing deadlines or a partner backing out. Having a solid contract is a good start, but enforcing it can be time-consuming, expensive, and at times, ineffective.
Many business owners assume that if they have a legal agreement, they’re covered. But a lawsuit can be costly, and if the other party has no assets or resources, even a court win may not lead to compensation.
What Is a Judgment-Proof Party?
A judgment-proof party is someone who, even after losing a lawsuit, doesn’t have enough money or assets to pay what they owe. In these situations, a court ruling may not bring any real benefit to the winning side.
Before entering into any agreement, consider whether the other party could actually fulfill a legal judgment if needed. If the answer is no, that agreement could carry more risk than reward.
Use Escrow for Larger Transactions
If you’re working with a new vendor or manufacturer, especially overseas, escrow services can help. Instead of sending payment directly, the money goes to a third-party escrow company. The supplier sends their goods to that same third party. Once both sides confirm everything is in order, the escrow company releases the money and the product.
This adds a layer of protection, particularly when trust hasn’t been built yet.
Structure Payments Gradually
Rather than paying a large lump sum upfront, break payments into smaller installments. This way, each side delivers on their part before receiving the next portion. It lowers the risk of non-performance or outright fraud.
Installment structures are especially useful in ongoing projects or long-term agreements, such as software development, marketing retainers, or manufacturing contracts.
Ask for a Personal Guarantee
When dealing with smaller companies or startups, consider asking the business owner to personally guarantee the contract. This means they’re on the hook even if the company has no assets. It gives your business added leverage if things go wrong.
Before You Sign Anything
Always think ahead. Ask yourself:
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Can this party afford to pay if something goes wrong?
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Is there a way to make the transaction safer, like using escrow or milestone payments?
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Would a personal guarantee make sense in this situation?
By focusing not just on the contract terms but also on how they play out in practice, you’ll protect your business from potential losses and reduce the risk of getting stuck with an unenforceable deal.
Video Transcript
Real Risk in Business Deals
Aaron Hall: When you’re making a big deal, whether it’s with a manufacturer overseas or a partner across town, the real risk isn’t just in the terms of the contract, it’s in what happens if things go wrong. In this video, we’ll walk through real world strategies to protect yourself from getting burned, even if the other side breaches the deal.
How Escrow Works in Business Contracts
From using escrow services to identifying judgment proof parties, we’re talking about how smart business leaders make sure contracts aren’t just strong, they’re enforceable. Sometimes you might even use something like an escrow service because if both sides don’t trust the other side, an escrow service is a third party where you can put the money and they can put the products, and then the third party releases both to the other party.
A Manufacturing Scenario Example
For example, let’s say you hire a manufacturer in another country. And you decide you’re gonna pay them a half million dollars to manufacture some products, but you don’t trust that company. You wanna make sure before they get the half million you get the product because it’s too expensive and painful to sue them.
Role of Escrow in Risk Reduction
So what do you do? You might consider using an escrow service where the manufacturer ships the products to the escrow company. You send the money to the escrow company, and once both are received and both parties can confirm everything looks good, then the escrow company releases everything and it goes off to the parties.
It’s Not Just About Having a Strong Contract
So that’s another option in making sure these contracts get enforced. Practically speaking, it’s not enough to have a great contract. You also want to think about how do we enforce this and are there practical ways to avoid getting burned, getting ripped off, or suffering as a victim from breach of contract?
Questions to Ask Before Signing
So when you’re doing a contract with any other party, think about if you got a judgment against them, if you sued them for breach of contract. Would they have enough money to pay you? If yes, great. You at least have that possible recourse. If no, that party is called a judgment proof party. What that basically means is even if you got a judgment against them, it’s worthless.
Ways to Protect Against This Risk
It’s meaningless. So. When thinking about contracts, it’s not enough to have a great contract. You wanna make sure you have a party on the other side that is not judgment proof. Maybe you do that with a personal guarantee, and then also think about practical options like payments over time or some other gradual exchange of what each party is contributing to the deal rather than a lump sum or all at once.
Legal Help for Entrepreneurs
Now, if you’d like to know more about how to avoid trouble like this, I have a free resource at AaronHall.com/free. I provide information for business owners of small to mid-size companies on how to avoid common legal problems. That includes a PDF. It includes videos, talking about important issues.
Where to Find More Content
I’m Aaron Hall. I’m an attorney for business owners and entrepreneurial companies. If you’d like, subscribe to this channel so you can get more educational content like this.