Contracts — not a particularly exciting or sexy concept — are fundamental to doing business. Contracts are all around us in business: whether selling or buying goods or services, we enter into contracts all the time.
Sometimes we create contracts without knowing we did. In a sale of goods, much of the terms of the contract beyond the name and price of the product may be supplied by the Uniform Commercial Code and never discussed by the parties involved. Disputes can be resolved by going back to legal rules that no one may have looked at or discussed at the time the contract was made or performed.
But in many other cases, we can shape contracts to reflect the vision of a specific company and define the terms on which the company is willing to do business with the world. Time and money do not allow us to make each contract perfect, but we can aspire to do a better job of aligning our contracts with our business interests.
At the most basic level, we enter into contracts to reflect the agreement of the parties. Many business people therefore go straight to the basic business terms and feel the rest is useless boilerplate to be ignored or reviewed by legal counsel. The strongest business people I have known (and the most successful) have also been able to read a contract and quickly see the risks and benefits hidden in those boilerplate terms. Specific terminology may be dictated by legal rules and cases, but the choice of terms is most often a business judgment about allocation of risks.
Today’s food for thought centers on guiding you to think about the contracts in your business. I invite you to read your own contracts and the contracts of some of your vendors and think about whether they fit your expectations. Consider these questions to guide you along the way:
- Before you dive too deeply, think about the contract as a whole. Do you know which terms are really important in your business and why? If something is going to go wrong, what is it likely to be? Defective product or negligence in providing service that results in harm or need for replacement? Early termination? Unexpected costs? Nonpayment? Data breach? Loss of trade secrets or intellectual property rights? Are key issues in your industry covered in the contract?
- Do you understand the contract, or is it a form agreement pulled from the Internet that never really made sense to you? Forms are great (lawyers usually start with forms), but they are not the end of the story.
- Look at the basic business terms. Do they clearly spell out the service or product to be delivered, the cost, and the time period? Is the language specific enough to avoid surprises to either party? Precise and readable language is important in business agreements.
- Is the allocation of risks better or worse than generally found within the applicable industry? Does the contract jive with interrelated obligations to other customers or vendors, or does someone get left with a disproportionate share of risk in the gaps? How does the risk allocation reflect the strength or weakness of the company? Sometimes the weakest companies will promise the moon in a contract because they have nothing to lose. Is there something to back up the promises?
- Are intellectual property rights (copyright, trademarks, patents) affected by the contract? Does the contract spell out ownership and licensing or usage of the intellectual property? Is everyone actually getting what they bargained for?
- Is the contract transferable or assignable? What happens if you sell the company? Do you still get the benefit of the bargain contained in the contract? Do you want the other party to be able to assign the contract?
- Does the contract provide appropriate protection of confidential information and data security? (And can the company deliver what it promises?)
- Does the contract have a description of where and how disputes will be resolved? Have you considered response times? Steps such as mediation prior to arbitration or litigation?
- Do you have the right name and/or entity signing the contract? If you have a corporation or LLC, is the contract in the name of the company, with you signing in your official capacity on behalf of the company? Even if you need to provide a personal guarantee, signing in the name of the company may help down the road when selling or financing the business or when demonstrating that you conducted business through the entity.
Contracts are not only useful in litigation. They also provide a useful road map that will guide parties acting in good faith to honor the terms that have been struck. When contracts are carefully woven together in a business, the results can be impressive.
Here is an example. A year after I moved from litigating cases at a large firm to an in-house legal position in a satellite communications company we suffered a satellite launch failure. I braced for litigation over insurance coverage, manufacturer liability and customer contracts. The cost of the rocket and satellite was in the neighborhood of $200 million and the contract values were even higher. I was fairly new to the business, so I was surprised when the insurance paid without questioning the cause, the manufacturing contract had the backup satellite parts on order, and the customer agreements addressed delays due to launch failures.
The stars also may have been aligned that time, but it was not merely an accident. The terms had been carefully planned and negotiated in each contract, taking into account industry standards and expectations. That launch failure did not result in a single lawsuit, and the business was delayed but not lost. Isn’t that something to which we can aspire?
Rebecca Westerlund Coletta, Esq.
Coletta Law Office
620 County Road
Hanson, MA 02341
Becky Coletta is the principal of Coletta Law Office and has provided representation to a variety of large and small companies since graduating from NYU School of Law in 1990. She is a member of the Massachusetts, New York and Connecticut bars. She is also a member of the SSWBN Board of Directors, the South Shore Chamber, the Massachusetts Bar Association, the Pembroke Chamber of Commerce and the Kiwanis Club of Hanson.
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