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7 Common Contract Traps

Every word in every contract can have legal implications. Many business people are very smart. But, as I remind business clients: (1) you don't know what you don't know; and (2) the question whether something is a legal question is itself a legal question. Business people should get legal advice before signing or negotiating contracts. Contact an experienced contract lawyer before negotiating, preparing or signing a business contract. Schedule an appointment now for a free consultation.

There are too many traps for the unwary to cover in a single post. This short article addresses seven common pitfalls:

1.     What is Missing?

2.     Did You Choose the Right Governing Law?

3.     How Should Disputes Be Resolved?

4.     Is Your Intellectual Property Protected?

5.     Are Payment Terms Legally Clear?

6.     Does the Contract Have Proper Remedies for a Breach?

7.     Should you Limit Liability?

If you want to know what the law requires for an agreement to be a legally enforceable contract, read this post: What Is A Contract?

What is Missing?

Many experienced business owners and managers have read numerous contracts. Some are able to pick up a contract and comprehend the β€œlegalese” they read. But, the language within the four corners of the document is not the end of the story. Even a seasoned business person who understands what is there will likely not know what is not there that should be.

Says Who?

Every contract should have a β€œgoverning law” clause. This specifies which State's law will be used to enforce the contract. If the parties are not in the same state, or the contract will not be performed in a single state, one state's laws may be more or less desirable. If the contract is silent and multiple states are involved, it will be more time consuming and costly to resolve a dispute. If governing law is recited, it is important to consider excluding the β€œconflicts-of-laws” principles of that law.

Who's To Judge?

If there is a dispute, a dispute resolution clause says how it must be resolved. If the contract is silent, either party can sue in court. However, a contract can require confidential arbitration instead. Arbitration is sometimes less expensive and time consuming than a lawsuit. Sometimes not. There are many issues to be considered in an arbitration provision. On the other hand, parties that do not want arbitration should have a detailed lawsuit provision. In either case, thought should be given to which courts are permissible, where arbitration would occur, whether the loser pays, whether to exclude procedural defenses, and whether remote participation is allowed (among other questions).

Did You Just Give Away Your I.P.?

In certain contracts, it is critical to include language clarifying who owns what intellectual property, and specifying how ownership will transfer or revert and how licensed properties may be used, among other things. Carefully written ownership provisions are important in many contracts, including (among others): work-for-hire contracts; consulting agreements; assignment agreements for startup founders; term sheets and letters of intent that call for sharing information in due diligence review; technology license agreements; website terms of use; joint venture agreements; and co-manufacturing agreements.

Who Pays What When, and How?

Contracts secure revenue. But, countless contracts have been the subject of lawsuits because payment provisions are poorly drafted. Legal specificity and clarity are vital. Imagine a contract that says: β€œDenny will pay Penny $10,000 for the widgets described on Schedule A.”  When? Before delivery? After? In installments? Where? In what currency? Is Bitcoin OK? Bags of dimes and quarters? What is late? If late, is there interest? Can Penny repossess the widgets? What if Denny is to share with Penny revenue from sales promoted by Denny of Penny's NFT's? Does Penny have the right to audit Denny to make sure she is getting her due?

Someone Breached. Now What?

Remedies are the cure for a breach of contract. One party breaches; the other is β€œinjured.” What can the injured party collect? Money only (β€œdamages”); or court ordered action (β€œequitable remedies”)? Can the injured party require the breaching party to perform services, or to sell the thing the contract calls for? If Denny, a machine manufacturer, breaches, and Penny's shop is damaged by Denny's machine and she has to close temporarily and loses sales, should she recover lost sales, or just the costs of repair? There are countless possibilities; a carefully considered remedies provision is critical.

Can You (Should You) Limit Liability?

A contract can place a dollar limit on damages that are awarded to an injured party. In some cases, no limit is appropriate (e.g., a breach that is in bad faith, or intentional, as opposed to simple negligence). In other cases, it is common to limit damages to a multiple of the contract value. The nature of some businesses or contracts may justify using a pre-determined amount if calculation of actual damages would be difficult or impossible. The tension in making the choice is between the benefit of certainty versus the downside that the injured party may not be β€œmade whole.” The parties' relative bargaining power, industry custom, and the nature of the breach, among other things, will be factors.


DO IT RIGHT

The above just scratches the surface. Consult an experienced contract lawyer or other business law attorney before negotiating or signing a business contract – be it a promissory note, security agreement or personal guaranty; executive employment or consulting agreement; operating or shareholders agreement; launching a startup; venture capital or angel financing agreement; sales order or purchase order form; website terms of use; agreement for a plan of merger or acquisition or for selling a business; licensing agreement; or any other business contract. Every kind of contract, and each specific contract, includes its own potential pitfalls. Make an appointment now for a free consultation.


This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read our Legal Notices.

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