You’ve slugged it out for weeks in negotiations, gone back-and-forth with advisors, and you finally have a contract you’re ready to sign so you can get on with your plans. But is it thorough? Don’t let your eagerness to move past the legal process overshadow your business intelligence. Double-check to make sure you are avoiding these common contract drafting mistakes:
1. The “Wrong Party” Mistake: Make sure the correct legal entity or person is identified as the party you are actually doing business with.
Example #1: You enter into business with Large Corporation, which has several different legal entities under its umbrella. You want to sell hot dogs, and you contract with “Large Corporation, Inc.” without realizing that you should be contracting with its separate legal entity, “Large Corporation Hotdogs Division, Inc.”, or worse yet, you contract with “Large Corporation Tires Division, Inc”. Make sure you have the right entity identified.
Example #2: John Doe owns a business, My Biz, LLC. The contract identifies John Doe as a
party, instead of identifying John Doe in his capacity as Owner and authorized signatory of My
Biz, LLC. John Doe is personally responsible for the contract.
2. The “Less is More” Mistake: While it may be tempting to make your contract as concise as possible, vaguely or poorly defined terms will leave too much ambiguity as to the true intention of the parties.When a disagreement arises, you’ll be back at the negotiations table trying to work out a solution everyone can live with.
Example: In the interest of moving things along without “too much legalese”, Vendor and Supplier sign an agreement that states that Supplier will ship 100 widgets to Vendor each month. The first month, Supplier ships the widgets 10 at a time, causing chaos at Vendor’s warehouse. The next month, Supplier changes its specification for the widgets and starts making widgets that melt, and ships 100 of them to Vendor all at once. Vendor is not prepared to accept widgets that melt and all of the widgets are ruined. Supplier still expects payment, as it followed the terms of the agreement.
3. The “We’ll Always Get Along” Mistake: Not anticipating and specifying what happens when the relationship ends, such as due to breach or termination, can leave you stuck in a bad relationship, or with a big mess to clean up.
Example #1: Vendor and Supplier have been happily doing business for 20 years. Vendor is purchased by Big Company, LLC and the contract is assigned. Big Company, LLC runs a tighter ship, and does not allow Supplier to be as flexible. Supplier is miserable and wants to end the contract. However, the contract does not allow for early termination upon notice to the other party, and it automatically renewed last week for another 1-year term. Supplier will have to tough it out for the remainder of the year.
Example #2: Vendor purchased $1MM in TVs from Supplier. Vendor realized it would make more money selling ice cream, so per the terms of its contract, Vendor issued Supplier 30 days’ notice to terminate the contract, and shipped the TVs back to Supplier. Supplier refused to accept the TVs, as there was no post-termination returns clause in the contract and Supplier is under no obligation to take back the TVs. Vendor is stuck with $1MM worth of TVs.
Even once you are confident that your contract is satisfactory, asking a seasoned attorney to perform a quick review before you sign will provide you with excellent insurance against future meltdowns, wasted time, and expense.
Andrea A. Tarshus, Esq. began Tarshus Law Firm @Tarshuslaw.com in 2015 to fill a void in the legal ecosystem: efficient, accessible, and fair in-house and General Counsel legal services for business owners. Her engagements regularly include business legal startup paperwork, negotiating and executing contracts, administering internal legal and operational controls, and creating legal documents that protect the company's best interests.
This article is intended to be informational in nature, should not be relied upon by the reader without consultation with an attorney, and does not create an attorney-client relationship between the author and reader.