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’s 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’s a really helpful basic guide to some common mistakes, and how to avoid them. And then also, I’ll send you some additional videos that are not publicly available that I make available to those who are on my email list, and I’m not gonna 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’s 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’ve 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’s a common mistake.
Let’s get into some of the other common mistakes I’ve seen. But first, what qualifies as a contract? Well, a contract is generally an offer, and acceptance of that offer 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 gonna 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’s 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’s not a contract because I’m not getting anything for that. That’s a gift. So, consideration is required. Sometimes that can be enforceable; it’s called promissory estoppel. If you make a promise, and somebody relies on it to their detriment, but that’s 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’s not in writing? Absolutely. A contract can be oral; it can be implied; it can be accepted by performance; it could be scribbles on a napkin. Now, it does have to be sufficiently specific. Here’s 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 saying, how do I figure out how specific something needs to be? That’s 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’s not in writing? Sure. Oral contracts are regularly enforceable, that is, if it’s spoken, if it’s emailed, if it’s sent by Slack, if it’s 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’m not out there drafting from scratch a contact. What I’ll actually do is spend a significant amount of time understanding the deal, the circumstances around the deal, what’s 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’s 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’s 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’s 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’ve referenced it or not, and that Uniform Commercial code has many assumptions built in. It has warranties built, that means you are making warranties or guarantees about the products, even though you haven’t 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’s why attorneys go to law school to understand what those are, and that’s why you should hire an attorney who is very used to contracts and business law, so they’re aware of the implied contract provisions for every contract.
Which people are liable when a company breaches its contract? What we’re talking about here is, the parties who sign the contract are they 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’s 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’s another scenario where you can have liability, and that’s if you bring about the breach of contract, and that’s under what’s 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 who’s 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 wanna 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’s 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 forums 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’s when it makes sense to have an attorney.
Is the contract missing important terms? This is a common mistake in contracts. I’ll give you an example. One time, my client did 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’s 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’re not gonna 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 gonna 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 didn’t 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’re not gonna 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’s 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 wasn’t written right, it wasn’t 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’ll 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 then I’ll 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.