Contracts are the backbone of any business, outlining the terms of agreements and mitigating potential risks. While reviewing lengthy contracts might seem tedious, overlooking this crucial step can lead to costly disputes and legal ramifications. A poorly drafted or misunderstood contract can quickly turn into a liability nightmare. This article explores common pitfalls businesses face when contracts aren’t thoroughly reviewed and highlights the importance of seeking legal counsel.
When Contract Terms Don’t Reflect the Agreement
One of the most alarming surprises businesses encounter is discovering that the written terms of a contract deviate from what was verbally agreed upon. This often occurs due to oversight or a reliance on generic templates. Unfortunately, courts typically adhere to the “four corners” rule, meaning they primarily consider the written terms of the contract in case of a dispute. Verbal agreements or pre-contractual negotiations may hold little weight if not explicitly included in the final document.
Example: Bob’s Boomerangs Illustrates the Risk
Imagine Bob’s Boomerangs, a thriving business, secures a deal with the Tri-State School District to supply 500 boomerangs. During phone negotiations, Bob agrees to provide composite boomerangs and the District agrees to handle shipping. However, the District issues a standard purchase agreement, overlooked by Bob, stating the boomerangs should be wooden and Bob’s Boomerangs is responsible for shipping. This discrepancy leads to a significant financial loss for Bob when the court sides with the written contract terms.
This scenario underscores the importance of meticulous contract review. Engaging a legal professional to review and “redline” contracts can prevent such misunderstandings and ensure the terms accurately reflect the agreed-upon arrangements.
The Perils of Silent Terms
Another common pitfall is the use of incomplete or generic contract templates downloaded from the internet. While seemingly convenient, these templates often lack crucial terms or contain provisions that may not be applicable to the specific transaction.
Key Elements Every Contract Should Address:
- Parties: Clearly identify all parties involved in the agreement.
- Goods and Services: Specify the exact products or services being exchanged.
- Delivery: Detail how, where, and when goods or services will be delivered.
- Payment: Define payment terms, including amount, method, and schedule.
- Term and Termination: Establish the contract’s duration and conditions for termination.
- Breach of Contract: Outline the consequences of a breach and remedies available to each party.
- Governing Law and Jurisdiction: Specify the jurisdiction whose laws will govern the contract and where disputes will be resolved.
Example: The Cross-Border Deal Gone Wrong
Bob’s Boomerangs, still riding high from their success in the US, decides to expand internationally. They receive a large order from a distributor in the UK for 1,000 boomerangs. Excited about the deal, Bob quickly drafts a contract using a generic template he found online. The contract mentions payment terms and delivery dates but fails to specify which country’s laws will govern the agreement or where any disputes would be settled. When the UK distributor defaults on a payment, citing dissatisfaction with the boomerangs’ performance, Bob’s Boomerangs is left in a legal quagmire. Because the contract didn’t specify a jurisdiction, navigating the legal process to recover the lost revenue becomes incredibly complex and expensive, potentially involving lawyers in both the US and the UK.
Navigating Indemnifications and Waivers
Indemnifications and waivers are common contract clauses that can significantly impact a business’s liability. An indemnification clause requires one party to protect the other from certain liabilities or losses, potentially exposing your business to substantial financial burdens for someone else’s actions. A waiver involves relinquishing the right to make a claim, meaning you lose the ability to seek compensation for damages or losses you might incur. Failing to carefully review and understand these clauses can lead to unintended consequences and unexpected costs for your business.
Example: The Case of the Hot Boomerangs
Bob’s Boomerangs, eager to innovate, incorporates a new metal alloy called “Buzzite” into their boomerangs without carefully reviewing the supplier’s contract. The contract includes a waiver absolving the supplier of liability for any damages arising from Buzzite’s use in flying objects and an indemnification clause requiring Bob’s Boomerangs to cover any legal costs if the supplier is sued because of Buzzite’s use in boomerangs. When several customers suffer burns from Buzzite overheating during use, they sue both Bob’s Boomerangs and the supplier. Due to the indemnification clause, Bob’s Boomerangs is forced to pay not only for their legal defense but also for the supplier’s legal fees, even though the supplier was aware of Buzzite’s heat-conducting properties.
The Importance of Seeking Legal Counsel
Thoroughly reviewing contracts is essential for protecting your business interests. While the process might seem daunting, you don’t have to navigate it alone. Experienced legal professionals can provide invaluable assistance in:
- Identifying and mitigating potential risks.
- Ensuring contracts accurately reflect agreed-upon terms.
- Drafting clear and enforceable agreements.
- Negotiating favorable terms.
- Protecting your business from unforeseen liabilities.
Dugger & Key: Your Partner in Business Law
At Dugger & Key, we understand the complexities of contract law and offer decades of experience assisting businesses with a wide range of legal needs. From simple purchase orders to complex international transactions, our team provides personalized guidance and dedicated representation to protect your interests. Contact us today to discuss your contract and business law needs.