Posted: December 10, 2012
Top 11 ways to avoid that day in court
Think about these when negotiating a contractDana Eismeier
Finalizing a business contract provides a sense of achievement combined with the anticipation of accomplishing important goals. Unfortunately, even the best-laid plans can fail and place companies and/or interests at odds and result in a day (or days) in court. Nobody wants to face the expensive consequences of a legal battle over a business agreement, especially if it seemed to be airtight and in everyone’s best interests at the time terms were agreed to.
Here are some things to keep in mind when you’re negotiating a contract and want to limit your chances of ending up in court:
1. Avoid Oral Contracts – oral contracts are enforceable. The trick is proving the terms of an oral contract after the fact. Handshake deals were once the standard but no more – get it in writing.
2. Email is a Mixed Blessing – Everyone uses email today, and people frequently negotiate contractual arrangements electronically. The problem is one party may believe that negotiations are subject to execution of the final written agreement, whereas the other party may believe that (and may later argue in Court) the email exchange includes all material terms and should be considered a contract. In fact, these email exchanges can constitute a contract, so be careful before you hit “send.”
3. God is in the Details. Although you may agree on major contractual terms, and the contract may even be enforceable, disagreements about what may appear to be relatively insignificant details have frequently thrust parties into expensive litigation.
4. Friends Need Contracts. Doing business with friends makes proper contractual negotiations even more important. The better defined, the more thought out the terms of the contract between friends, the less the possibility of a disagreement later. This is especially important when dealing with friends or even family members.
5. Read the Fine Print. When working from a form contract, it is often tempting to focus on the main terms (price, quantity, etc.) and ignore the fine print. Read it. Many lawsuits start because one party simply did not read the fine print.
6. Due Diligence is key. If you are buying food, taste it. If you are buying land, test it. If you are buying rental property, tour it. There’s no substitute for understanding what you’re buying inside and out. Even if your contract contains remedies in the event of a breach, it’s a lot easier (and cheaper) to avoid the problem upfront than deal with it in court later on.
7. Don’t Use a Letter of Intent Instead of a Formal Contract. Letters of intent generally set forth some of the main terms of parties to a contract (price, quantity, duration, etc.). Frequently, however, letters of intent also indicate that the parties will “agree to agree” regarding these and other issues and will execute a formal contract later. If the contract is not executed, the letter of intent may be unenforceable. The reason? “Agreements to agree” in the future have been held unenforceable by Colorado courts. Other times, letters of intent, although thought by at least one party to be non-binding, can be binding. Either way, finalize the contract.
8. Don’t use a Form Contract From Another Deal. Most contract negotiations involve deal-specific terms. Printing off a previously-used contract can lead to trouble because it does not necessarily reflect the parties’ intent with respect to this transaction (lack of “as is” clause and “bill of sale,” for example).
9. Even If the use of a Form Makes Sense, be Wary. Sometimes form contracts, such as real estate contracts, UCC filings and the like, are fine. For example, the Colorado Real Estate Commission approves form real estate contracts for use by brokers in Colorado for commercial, residential and vacant land transactions and other circumstances. The forms are generally reviewed to comply with Colorado law and are fairly clear on their face. Because the forms have been reviewed, they generally result in less litigation because the contractual terms are generally considered comprehensive. Parties frequently attach “addenda” to the form contract. Even though the addendum may only be a single page or less, the addendum may provide that it supersedes conflicting terms in the form. Therefore, be wary of form contracts modified with addenda, as inconsistencies between the two are a breeding ground for lawsuits.
10. Don’t Start Work While you are Still Negotiating. This should be self-explanatory. If you don’t have a contract done, you don’t have contractual protection. You may have a claim for “unjust enrichment” if the other side reneges, but your litigation position is often not as strong.
11. Anticipate Problems. When negotiating a contract, try to assume what problems could arise in the future. Will the other party be purchased and succeeded by another corporation? Will the key person you have dealt with retire or take another position? Will the business climate chill again, changing a once friendly business relationship? No one can ever assess the future with certainty; however, it pays to be a pessimist when negotiating a contract and account for unforeseen and unwelcome future circumstances.
If you follow these steps, you will improve the opportunity for successful outcomes, and reduce the chances for a legal fight.
Dana Eismeier is chair of the litigation department at Burns, Figa & Will, P.C.. He specializes in commercial, employment and environmental litigation. He also handles intellectual property matters and whistleblower/qui tam litigation. His clients range from large, national corporations to small, local business entities. Mr. Eismeier has substantial trial and appellate experience in Colorado and other states throughout the Rocky Mountain region. He has also argued several times before the Judicial Panel on Multidistrict Litigation.