Small businesses rely on contracts to establish agreements between themselves and other businesses or individuals. Contracts can help protect your business interests and provide a framework for resolving disputes, but they can also be fraught with risks if not done correctly. In this article, we will discuss some common mistakes small businesses make when drafting and signing contracts and provide tips on how to avoid them.
Failing to Read and Understand the Contract
One of the most common mistakes small business owners make is not reading and understanding the contract they are signing. Contracts are legally binding documents, and signing one without reading it thoroughly can lead to serious consequences. Always take the time to read and understand the terms of the contract before signing it.
Not Identifying the Parties Involved
Another common mistake is failing to properly identify the parties involved in the contract. Make sure to include the names, addresses, and contact information of all parties involved in the agreement. This can help prevent confusion and ensure that everyone involved is clear about their roles and responsibilities.
Unclear or Ambiguous Language
Using unclear or ambiguous language in a contract can also lead to problems. Ambiguity can lead to confusion and disagreement about the terms of the contract, which can result in legal disputes. Be sure to use clear and specific language when drafting a contract to avoid any misunderstandings.
Ignoring Applicable Laws and Regulations
It is important to be aware of the laws and regulations that apply to your industry and the type of contract you are drafting. Ignoring these laws can result in legal problems and even fines. Seek legal advice or consult industry experts to ensure that your contract complies with all applicable laws and regulations.
Overlooking Important Provisions
Small business owners may also overlook important provisions that should be included in the contract. For example, a termination clause should be included in the contract to allow either party to end the agreement if necessary. Including these provisions can help prevent problems and disputes down the road.
Failing to Include a Dispute Resolution Clause
A dispute resolution clause can help resolve conflicts that may arise during the course of the contract. This clause should outline the steps that must be taken to resolve disputes, such as mediation or arbitration. Including a dispute resolution clause can help avoid costly and time-consuming legal battles.
Not Getting the Contract in Writing
Verbal agreements are often made in small business transactions, but these can be risky as they are difficult to enforce. It is always best to get the contract in writing, even for small agreements. This can help ensure that everyone is clear about the terms of the agreement and provide a record of what was agreed upon.
Small businesses must take care when drafting and signing contracts to avoid mistakes that can result in legal and financial problems. Always take the time to read and understand the contract, use clear and specific language, and include all necessary provisions, such as termination and dispute resolution clauses. Seek legal advice when necessary, and always get the contract in writing to ensure clarity and enforceability. By following these tips, small businesses can help protect their interests and avoid common contract mistakes.
In this video, you’ll get answers to these questions:
- How to avoid common mistakes in small business contracts?
- What are some examples of common contract errors?
- What qualifies as a contract?
- Is a contract enforceable if it is not in writing?
- When do contract forms and templates cause problems?
- Are there unwritten assumptions in every contract?
- Which people are liable when a company breaches its contract?
- Does the contract cover important hypotheticals?
- Is the contract missing an important term?
How to avoid common mistakes in small business contracts? You will get the answer to that question as well as others in this video. Like, what are some examples of common contract errors? What qualifies as a contract? Is a contract enforceable if it is not in writing? When do contract forms and templates cause problems? Are there unwritten assumptions in every contract? Which people are liable when a company breaches its contract? Does the contract cover important hypotheticals? And is the contract missing important terms?
I’m Aaron Hall, an attorney for business owners and entrepreneurial companies. If you are a business owner, these videos are for you to spot issues to discuss with your attorney, not as a replacement for an attorney. I want to help you grow your company, be educated on how the law works, and enjoy success in your business and in your life. If you don’t yet have my free cheat sheet, “Seven Common Mistakes Made by New Businesses,” you can get it at aaronhall.com/free/. If you don’t have that, that is a really helpful basic guide to some common mistakes and how to avoid them. And then also, I will send you some additional videos that are not publicly available that I make available to those who are on my email list, and I am not going to spam you with a ton of emails, but I will send you some private videos educating you on some of the other common mistakes that are made by new business owners.
What Are Some Examples of Common Contract Errors?
Here is one example: a business hires a company to write some software for them or create a website for them. In United States law, the default assumption is that the contractor owns the intellectual property unless, you as a business owner, make sure in the contract that intellectual property is assigned to you. So one common mistake I have seen is you pay somebody, an artist let’s say, to create a website for you. Who owns that website? Who owns the designs on the website? Who owns the text? The logos? You don’t—the web designer does by default unless the contract assigns those rates to you. So that is a common mistake.
What Qualifies as a Contract?
Let’s get into some of the other common mistakes I have seen. But first, what qualifies as a contract? Well, a contract is generally an offer, and acceptance of that offer, is communicated to the one who made the offer. Now, acceptance usually is somehow spoken or in writing, but it could be through performance. In other words, if I said, “Hey, I’ll pay you $500 if you paint my garage door on Tuesday.” And then you come over and you paint the garage door on Tuesday, it doesn’t matter whether you said yes or no to my offer. By performing under the contract, you have communicated that you accepted the offer. I can’t then go, “Hahaha, I’m not going to pay you the $500 because you never accepted the offer.” No, it doesn’t matter if you agreed orally or in writing. It was by your performance that you accepted the offer. So, a contract requires an offer and acceptance. There also has to be consideration. What that means is there has to be something given or taken, some sort of exchange of some sort. It is not enough, for example, just to have a gift. For example, if I said, “Hey, I’ll give you a thousand dollars.” And you say, “I accept.” Well, that is not a contract because I am not getting anything for that. That is a gift. So, consideration is required. Sometimes that can be enforceable; it is called promissory estoppel–if you make a promise, and somebody relies on it to their detriment. But that is beyond the scope of today. So, what qualifies as a contract? Offer, acceptance, and then there needs to be some consideration or something exchange as part of that.
Is A Contract Enforceable If It Is Not In Writing?
Absolutely. A contract can be oral, it can be implied, it can be accepted by performance, or it could be scribbles on a napkin. Now, it does have to be sufficiently specific. Here is what I mean. Let’s say I said to you, “Hey, I’d be happy to hire you at $50,000 a year.” And you say, “I accept.” Well, is that sufficiently specific? What are the hours? What are the obligations of the job and the responsibilities? Or what if I said to you, “I will buy a trampoline from you for $2,000.” Is that sufficiently specific? Well, which trampoline? When? What features does it have? There are all sorts of questions that need to be raised. Now, sometimes what the courts will do is they will say, “There was enough specificity to have an agreement. But even though some of the terms weren’t fleshed out, that’s okay. We’ll assume reasonable terms.” For example, let’s say I said to you, “I’ll buy this trampoline for $500 if you deliver it on Tuesday.” And you then say, “I accept.” Can I back out of that? Because I say, “Ha, ha, ha, I didn’t tell you.” Or, “We didn’t agree on what time on Tuesday.” Well, no, we said Tuesday. A court would look at that and go, “Okay, it didn’t have to specify the minute and the second of the delivery.” A reasonable delivery time would be assumed. Well, you might be thinking, how do I figure out how specific something needs to be? That is probably a question for an attorney because it very much depends on the circumstances. But for today, you should know that a contract needs to be reasonably specific.
But back to the original question, is a contract enforceable if it is not in writing? Sure. Oral contracts are regularly enforceable. That is, if it is spoken, emailed, sent by Slack, or sent by text message. Contracts do not need to be in some sort of written form. In fact, a contract is the agreement that you have. What you have in writing is merely evidence of a contract. So having it in written form is very helpful to prove there was a contract, but you don’t actually need it in written form. A mere scribble on a napkin or a text message can be, or a third party could testify that you guys agreed to something. That would be sufficient for a contract.
When Do Contract Forms And Templates Cause Problems?
Well, the biggest problem I see with those is the form or the template is not appropriate for the deal that the two parties are entering into–the circumstances surrounding the deal, and the risks associated with the deal. Let’s face it, you can find tens or hundreds of thousands of free contracts online. And when clients hire me, I am not out there drafting from scratch a contact. What I will actually do is spend a significant amount of time understanding the deal, the circumstances around the deal, what is being exchanged, what are the terms, and what are the risks for my client. Then, I go to try to find a template or a form, that as much as possible, resembles this deal, so I have the least amount of revising. So, I don’t draft from scratch, but for every type of contract, I have hundreds, if not thousands, of templates available. So, that is one of my criticisms of these online template services like Legal Zoom or Rocket Matter or others, where you can buy some sort of form. Forms are free; you can find them by just searching on Google. The challenge is finding the right language in a form appropriate for your circumstances. Now, hey, if it is a $20 transaction, well, you can just write something up yourself or have an email. Why? Because the risk of getting a lawsuit over breach of contract is de minimis or zero because it costs more to file a lawsuit in court than what you are fighting over.
Are There Unwritten Assumptions In Every Contract?
Yes, there are. For example, one common US assumption, or assumption in the United States, is words should be given their plain meaning, not some sort of definition based on some outside source. What is the plain meaning? Another assumption to the extent words are not clear, the interpretation of those words should be in favor of the non-drafting party. In other words, if you are the one drafting a contract, the onus or responsibility is on you to make sure words are clear, and to the extent you don’t do that, there is an assumption in United States law that the words will be interpreted in favor of the non-drafting party. There are all sorts of other assumptions. For example, if your contract deals with a transaction related to goods or products, not services, but products and goods, then the Uniform Commercial Code, which is a statute in virtually all states in some form or another, comes in and applies. So if you have a transaction for goods, an entire body of law called the Uniform Commercial Code applies to your transaction, whether you have referenced it or not, and that Uniform Commercial code has many assumptions built in. It has warranties built in, which means you are making warranties or guarantees about the products, even though you have not written any of those in your contract. So, depending on the type of contract, there are actually all sorts of assumptions built into the law that will apply to your contract. If you don’t want those to apply, usually you can state in the contract that they don’t apply. I say usually, because not always. For example, certain things in the uniform commercial code are not waivable–certain obligations are not waivable. For example, the duty of good faith is assumed in all contracts. That means there is an obligation that the contracting parties have with each other to operate in good faith, to not be intentionally deceptive. So you might think, well, what if I want to reserve the right to be intentionally deceptive and not operate in good faith, can I waive that? Usually, no. Usually, you can’t put in a contract that the parties waive the obligation of good faith because the courts will usually impose that whether you try to waive it or not. There are other duties depending on the type of contract that you are talking about, where certain duties are not waivable. In other words, you cannot alter implied responsibilities or duties that the contracting parties owe each other. What are those? Well, those are beyond the scope of this video. There are probably thousands, and that is why attorneys go to law school to understand what those are. And that is why you should hire an attorney who is very used to contracts and business law, so they are aware of the implied contract provisions for every contract.
Which People Are Liable When a Company Breaches Its Contract?
What we are talking about here is, whether the parties who sign the contract, are liable. Or what about the parties who participated in breaching a contract? Well, let’s start with the general rule. The general rule is that the parties to a contract are liable. So, if you sign a contract as the CEO or president of your company, but you are signing on behalf of the company, the general rule is you are not liable just because you signed it. Now, if there is a personal guarantee built into the contract that says you are also personally liable, then, of course, you are going to be liable. But there is another scenario where you can have liability, and that is if you bring about the breach of contract, and that is under what is called tortious interference with contract. In other words, if you intentionally cause a party to breach a contract–so the party might be your company–then you can be liable for tortious interference of contract. In other words, you intentionally interfered with your company’s contract with another party, and there are some other bases for establishing liability of individuals. It might be piercing the corporate veil, it may be a breach of fiduciary duty, or just egregious or gross misconduct. There are a number of ways that you can be personally liable for your own conduct. But going back to the general rule, just by signing a contract–on behalf of a company–as a general rule, you are not liable. There needs to be something more that would establish your personal liability for the company breaching its contract.
Does the Contract Cover Important Hypotheticals?
One of the common problems that I see in contracts is that they cover assumed scenarios but not unassumed scenarios. For example, the parties may assume everything will go well. Let’s say you have a contract between two parties, and one says, “I will manufacture a product for you.” And the other says, “I will buy that product only from you at the prices that are set.” Well, what happens if a pandemic breaks out, and now the manufacturer legally can’t have the workers come to work? Or what happens if the cost of materials required to produce those products skyrockets, and now the manufacturer is losing money every time the manufacturer sells the product to the company that is buying them? Those are unanticipated, or perhaps even unlikely scenarios, but when they arise, they can be very costly. So, a significant part of an attorney’s role in representing a company in a contract is thinking about worst-case scenarios. Sometimes, I tell my clients my job is to worry so you don’t have to. I want to worry about all the potential problems, and maybe the problem is the other side doing something to sabotage the contract using a loophole. I need to make sure I eliminate any loopholes like that, so the contract cannot be sabotaged. So, the terms of the contract cannot be gamed. The other party cannot take advantage of my client, and the other party cannot get some sort of unfair leverage or opportunity against my client. My job as the attorney is to worry about that, that is what you are paying for. And so the problem with a lot of forms and templates is they may not take into account the specific risk of your scenario.
Now, do I think forms and templates have a place for small businesses? Absolutely. For example, if you are a small business, you might say, “I can’t afford an attorney,” or “It’s a really small transaction,” or maybe, “It’s a nondisclosure agreement for just a simple concept that you are explaining.” Those are oftentimes when it just makes sense to use a form or a template that you get off the internet. But when the stakes are higher, that is when it makes sense to have an attorney.
Is the Contract Missing Important Terms?
This is a common mistake in contracts. I will give you an example. One time, my client made a contract without my knowledge or involvement that did not require, or not entitle, my client to recover attorney’s fees if there was a breach of contract. So here is what happened. My client had this simple contract that they drafted themselves. They entered into a contract where they promised to deliver services in exchange for a significant amount of money–let’s just say $20,000. My client delivered the services, and then the other side said, “We are not going to pay you the $20,000 unless you give us a substantial discount. We’ll pay you $10,000.” My client said, “Oh, was there a problem with our services? We thought you were happy.” The other company said, “Oh no, we are happy, but if you don’t agree to get paid $10,000, you are going to have to take us to court. And even if you win in court, you will spend thousands of dollars in attorney’s fees.” My client came to me and said, “What do we do?” Well, I looked at the contract, and it did not have a provision that entitled my client to recover attorney’s fees. What did that mean? It meant that my client would have to sue for the $20,000, and could not recover any attorney’s fees or collection costs spent trying to get the $20,000. And let’s face it, it could cost more than $10,000 trying to collect that money from the other side. So pretty dirty that the other side would do that, that they would say, “Oh, we are not going to pay you the amount we agreed to.” But it was a very costly mistake not to have an attorney’s fees provision in the contract for my client.
From that moment forward, my client made sure they involved me in any significant contracts, and we made sure they had a right to recover attorney’s fees if they have provided proper services in accordance with the contract. So, important terms that may apply, often are missing in templates or forms or just contracts that are written up by two non-attorneys and emailed back to each other. So that is another common mistake. And let’s face it, small business owners, they often work without an attorney for a while, and I usually find they come to me at one of two points. Either they are about to enter into a larger transaction where it really justifies getting an attorney involved and paying attorney’s fees, or they get burned. And in the scenario I just gave, they may lose $10,000, or they have a hundred thousand or a half million dollar error because a contract was not written right, it was not clear, or a term was missing. So usually, those are the two triggering events that prompt a small business to involve an attorney. Either the business is getting big enough where it makes sense to pay for a business attorney to set things up right, including contract language, or the small business owner has a very expensive legal problem, and they say, we cannot afford to ever let that happen again.
Here are some great resources for you as a business owner if you are trying to become better at contracts and avoiding common mistakes. First, make sure you download the “Seven Common Mistakes Made by New Businesses,” which you can get at aaronhall.com/free/. I will also send you some subsequent emails with links to some private or non-public videos where you can get education on some of those areas.
If you want more educational videos like this, you can subscribe to this channel. If you like or dislike this video, that will tell YouTube, “I don’t want more videos like this,” or “I want more videos like this.” And I will put in the description below some other free resources. If you have questions, feel free to place them in the comment section below. I look at those and use those as ideas for future video topics.