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CONTRACTING PITFALLS

When it comes to starting and operating a successful business, one-size does not fit all. Although entrepreneurs usually “get” the uniqueness of the product or service they are bringing to market, they often lose sight of that uniqueness when they put together the infrastructure that supports their business idea.

One of the most common issues I see in my practice is business owners who use off-the-shelf contracts (frequently found on the Internet or borrowed from their past employer or a friend) to govern their business relationships. Although the typical motivation for doing so is to save money, all too often those cut corners come back to bite a business owner down the road and the sought-after savings end up being a down payment on a failed business deal … or worse.

While some legal documents may be so full of legalese that they appear to be nothing more than some sort of mumbo-jumbo incantation designed to ward off evil spirits, if properly drafted, a contract should: (1) identify the parties to the agreement; (2) identify the subject matter of the agreement; (3) fully delineate each party’s rights and obligations under the agreement; (4) spell out when and how the parties’ obligations to each other are to be performed; and (5) address what happens if a party fails to uphold its end of the bargain.  Pretty simple when you get down to it.  Unfortunately, too often parties to an agreement lose sight of these basic contractual signposts in their rush to seal the deal.

Although pre-existing agreements are often a great resource when a business owner is trying to get his or her arms around reducing a proposed deal to a written document, the danger of resorting to such documents as your only resource lies in not knowing where the generalities of an off-the-shelf “Airplane Lease” leave off and the unique aspects of your high-performance aircraft lease for flight-training and manufacturer promotions begin.  Just because an agreement was good enough for Boeing doesn’t mean it has any application for your considerably smaller, albeit successful, one-aircraft start-up.

The danger of using such documents may not manifest itself right away, and sometimes the vulnerabilities of a one-size-fits-all legal document may remain masked forever. So, it can be easy to be lulled into a false sense of security. But, when those sleeping dogs finally do sound the alert, it is not a pretty picture. It’s like a variation on that well-known credit card commercial: Price of an off-the-shelf legal document? $25.99.  Price of a lawsuit because the document failed to adequately define who was to do what for whom and when?  Your business’s bottom line.

The flip side of the danger of using a document that doesn’t specifically address the details of your deal, is the danger that lurks in including terms that the business owner doesn’t fully understand but assumes are necessary legalese boilerplate (you know, more of that mumbo-jumbo legal voodoo stuff).  Indemnification clauses are a good example.  While getting the other party to agree to indemnify and hold you harmless from certain risks related to their performance of the contract may be good, agreeing to likewise indemnify them or, worse, agreeing to indemnify them without any reciprocity, may not make any sense under the circumstances and may be a risk that your company is not properly insured to assume.

Another example is the use of an integration clause.  An “integration clause” is essentially a clause that means: This document is the deal, the whole deal, and nothing but the deal, so help us, God.  Such a clause is usually a good idea to include in any written agreement. But, is it accurate in your particular case? If not, why not? Should it be? (In other words, should you make sure that all of those little side deals that you’ve had with the other party over time are synthesized into this one, comprehensive agreement?)

The bottom line in all of this is your business’s bottom line.  Remember that words have meaning and, unless you understand their meaning in the context in which they are being used in a legal document, you may regret agreeing to be legally bound by them.  A penny saved is not a penny earned if that penny should have been invested in protecting all of those other pennies you’ve worked so hard to earn and save over the years.

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Molly O’Leary represents business and telecommunications clients throughout Idaho, and is the Managing Principal of BizCounselor@Law, PLLC.  In addition, she is a Past President of the Idaho State Bar and a current member of the Statewide Advisory Counsel for the Idaho Small Business Development Center. You may follow her on Twitter: @BizCounselor.

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