contracts

I’ve seen an increasing number of “DIY” contracts come across my desk lately. I don’t know if it’s because of the increasing regulations surrounding small businesses, or if folks are finally starting to realize the importance of contractual agreements. And while having some form of written agreement in place is usually better than having nothing (note: use of the term “usually”), Franken-contracts pieced together over the years can create a huge headache. Here are a few reasons I always recommend clients don’t use “found-it-on-the-internet” or “got-it-from-a-friend” contracts:

When you need review, DIY contracts are more expensive

Often, people want to “send me a contract” they found so I don’t have to draft one “from scratch.” However, this often takes longer than starting fresh.  When you send us a piecemeal agreement you’ve gotten off the internet/ from a colleague/ edited bit by bit as issues arise, we have no idea what is in that document.  It might be a great contract! However, we still have to go through, clause by clause, and dissect it. It’s not just proofreading; we have to make sure clauses “play well together.” I tend to visually map out the sections to make sure clauses don’t conflict or cancel each other out (discussed below).

It is almost guaranteed that any practicing attorney has a stash of shell agreements that we’ve drafted and redrafted to cover our client’s needs.  We know exactly what is in that agreement, how the sections work together, and where we need to edit and add in clauses to protect your business to the fullest extent possible.  I can practically recite my photographer’s agreement by heart at this point.  I’ll be able to get in, change a few things, and get out in much less time than with a document requiring a total overhaul.

Your state’s rules might not be considered

In addition to our Federal laws, each state has its own set of laws and judicial interpretations applicable within its borders. This means that what is contractually enforceable in one state may not be enforceable in another.  Some states recognize certain judicial interpretations, others may ignore them entirely.  And guess what?  State laws are always changing!  

In fact, the inclusion of certain clauses can completely invalidate an agreement in certain states that refuse to “blue pencil” (a term that means “go through and modify the document comply with the laws”)—Virginia being one of them.  Which brings me to….

Your agreement might invalidate itself

That’s right folks.  Your agreement might cancel itself out.  

It can do this in one of two ways:

1. First, and in a continuation of the thought above, a state in which a court refuses to blue pencil contracts, inclusion of clauses that aren’t enforceable can cause the entire document to be thrown out. In those situations, a court refuses redraft your poorly-drawn contract, and instead tosses it completely. We see this quite frequently in independent contractor agreements and non-competition agreements.  If these agreements are included as part of an entire employment agreement, guess what?  The whole agreement can be invalid.
   
2. A second way an agreement might invalidate itself occurs when two clauses contradict each other.  If clause A states, “The widgets will be red” and clause B states, “All widgets will be a mix of green and blue,” you’ve got a problem. What color are the widgets supposed to be?  This causes confusion.  And if there is confusion in a document, it is construed against the “drafter”—which, as a business, is probably you.  While this is a simplified example, consider a contract that includes an arbitration provision, which is followed by a mediation provision, which is followed by a jurisdiction and venue provision.  Are you supposed to arbitrate? Mediate? Or can you sue to enforce the agreement?  The answer: no one knows, because this agreement is all kinds of messy.

You just might not know what you’re agreeing to

You know how you sometimes sign things that you really don’t understand?  For example, the waiver at the trampoline park, the fine print on a credit card application, or a lease for an apartment?  That can’t happen when you run a business.  You MUST know what you’re signing, and what you’re asking clients to sign.  Not knowing is like throwing a bunch of ingredients together, cooking them for an unspecified amount of time, and forcing people to eat the mess that comes out of the oven.  It’s a bad idea!

You may be agreeing to terms that aren’t a good fit for your business  

For example, if you’re a service-based business providing a long-term deliverable, (shout out to all my wedding planners, photographers, and designers) you may have a payment structure that doesn’t ensure you get paid in the event of a cancellation.  We would draft your contracts to provide for incremental liquidated damages to compensate you for all the time you spend over a period of months or years, instead of an 50/50 payment structure.  Another example is an arbitration clause.  For small businesses, arbitration can be even more expensive than just filing a warrant in debt in court.   Arbitration, with its rules and procedures, can be even more expensive than simple litigation!  Unless you’re in a place where arbitration makes sense, we’re going to draft alternative methods to deal with conflict.

Starting up takes a lot.  A lot of time. A lot of energy. Perhaps a lot of money.  And definitely a lot of planning.  At the very beginning, a business owner is looking for revenue, low costs, and maximum upside, in an understandable effort to build a foundation for an economically sustainable enterprise. Having an economically sustainable enterprise–especially one that may eventually be sold–requires sufficient planning to document the assets of the firm and to ensure the firm legally owns those assets.  With assets often come certain liabilities, completing the picture and value proposition of the business for owners, investors, and potential purchasers.  As tempting as it can be to pass on early legal planning for a business in light of other demands that feel more immediate, that planning will show its value for a business of any size or type when avoiding headaches, heading off informal disputes and even full-on litigation.  Learn the core legal considerations for a business in its inception stages, along with the pitfalls you can plan around as you build your business.

Continue reading “What Makes Up Your Business?” »

Business competition is the name of the game.  One industry in particular, however, is taking the term “friendly competition” to heart.

Collaborative brewing, in which two or more breweries join forces to create a [new] product, has rapidly swept through the craft brewing industry. While brewery rivalries certainly exist, many brewers have discovered the benefits of teaming up.  It allows brewers to expand their horizons, creating beers outside of brewers’ comfort zones.  Breweries gain exposure to new markets and gain credibility.  Consumers, on the other hand, relish the typically unconventional brews resulting from the pairing. Sometimes it even helps avoid legal battles, such as the case of Avery Brewery and Russian River Brewery’s “Collaboration Not Litigation” ale. Continue reading “Think Before You Brew” »

Flickr: Rikki’s Refuge (modified)

If you go into business for profit with someone, and if you don’t create a company like a corporation or an LLC, then your business automatically will be a partnership. However, a partnership does not give you any asset protection — you are 100% liable for the debts of the business — and it also gives each other partner the power to sign a contract that legally binds the business, even without your permission or knowledge.

Please visit the latest issue of Valley Business Front March [PDF link] for Keith Finch’s latest legal perspective on business pitfalls.

And if you’re interested in learning more about how to choose the right type of entity for your business, join us at our next round of Shark Bites this month.