Legal eagles

Relationships with everyone you do business with, including your suppliers, customers, advertisers – and even your lawyer — are governed by a contract of some kind.

It's simply the nature of business. However, if it's true what they say about the Devil being in the details, then it's never more true than when you're dealing with contracts.

From how you signed your name to that small blue print on the back of the page, there's virtually no end to the sorts of things that can be important when it comes to the details of contracts. Let's take a look at some of these Devils.

Does it have to be in writing?

Well, maybe. In most states, the "Statute of Frauds" requires only certain kinds of contracts to be in writing. While the particular listing varies from state to state, most places require that contracts for the sale of land or other real property be in writing, as well as contracts which would necessarily take more than one year to complete and contracts for the sale of goods worth over $500.00. Outside of the specific categories of contracts set out in the statute, there's no requirement that contracts be written down.

Of course, even if a written contract may not be required for a particular situation, all unwritten contracts have an obvious problem. If there's a dispute over an unwritten contract, there may be no conclusive way to know what the terms are. What you're left with is a swearing match between the two sides which might easily have been avoided if all of the important terms had put in a written contract.

Even with well–meaning and honest people on both sides of a contract, people tend to remember things differently and also recall different things as being important. I've had several clients come to me after a "handshake deal" had gone wrong. In those situations, the challenge is not just to prove that a contract was broken, but also to prove what the contract said in the first place. No legitimate businessperson should ever be insulted if you ask them to put it in writing and I don't hesitate to encourage my clients to put just about everything in writing.

Who signed this?

By and large, your business is responsible on a contract when one of your "agents" has agreed to it. In short, your agents or employees can bind the business to a contract if they have either "actual" or "apparent" authority from your business to do so. "Actual" authority is exactly what the name implies — that the business has specifically authorized this person to make these types of contracts. That's the easy one. "Apparent" authority is more concerned with what power a reasonable person might think that employee has — even if they haven't been given that authority. The fact that an employee is a store manager, for example, might lead a reasonable supplier to believe that the manager has the power to make a deal for local advertising. Sometimes the two areas overlap but arguments over what was "apparent" and what wasn't has fueled many contract lawsuits.

For this reason, it's important for the people you do business with to specifically know who — and who doesn't — have the power to speak for your business. It's also a good idea to let others know when important employees leave your company and no longer have the power to bind the company to a contract, particularly when the former employee is leaving under less than happy circumstances.

Employee Contracts

Speaking of former employees, let's not forget that you have employment contracts with all of your employees. It's common in small businesses to not have a signed employment contract for employees. If you do have your employees sign an agreement, there are a number of provisions that can be added to protect the business, including confidentiality clauses to keep your trade secrets secret and non–competition agreements to keep your former managers from working for your competition right across the street. Also, with a written employment contract, you should make clear whether the employee remains an "at will" employee or has a specified term for their employment.

He promised . . .

During contract negotiations, both sides may say lots of different things and make lots of different promises. Once a written contract is signed though, that document is what governs the agreement and if a term is left out, it's not part of the contract. Put another way, the written contract speaks for itself, and you can't prove that it has additional terms by using other evidence. Except in some very narrow categories like fraud or a mistake made by both sides to the agreement, this "parole evidence rule" dictates that the contents of the written contract can't be changed by verbal testimony. Before signing, it's your responsibility to make sure everything's in the contract.

What if I didn't understand that section?

We've all heard the phrase that "ignorance of the law is no excuse." If you sign a contract, ignorance of what's in the contract isn't much of an excuse, either. By signing a contract, the law of most states will require a judge and jury to presume that you not only read every section of the agreement but that you understood it, as well. Here again, there are always exceptions, but if there's something in the contract that you didn't see, read or understand, you're most likely going to be bound by it. It may sound obvious, but make sure you read everything before you sign it, and make sure you understand what all the provisions mean.

Fine Print

Buried in the text of many form contracts are a wide variety of provisions that, not surprisingly, are helpful to the person who actually wrote the contract. Your supplier in New Jersey, for example, may put in his contract that all disputes between the two of you have to be resolved by New Jersey law and in a New Jersey court, despite the fact that you're in Ohio. There may be a provision requiring you to pay his attorney's fees if you lose a later lawsuit over the contract, but no provision for him to pay for your attorney if you win. As we just learned, signing a contract can bind you to all of its provisions, including the ones you've never even read.

Arbitration Clauses

Crowded court dockets all over the country have increased the popularity of arbitration, and the courts themselves have given great deference to arbitration clauses. By agreeing to submit any disputes to arbitration, the parties to a contract forfeit their right to have a jury decide their problems and instead submit the dispute to a private arbitrator who decides all issues in an informal proceeding. On the positive side, this cuts legal fees and expenses dramatically and usually obtains results very quickly compared to the traditional legal system. On the downside, they have been unpopular with consumer groups because it is argued that favorable awards in arbitration are typically smaller than that given by juries. Moreover, the arbitrator has a tremendous amount of discretion to decide the case as they see fit. While it is possible to get an arbitration award overturned in the formal court system, it is also notoriously difficult to do if you have lost in front of the arbitrator. Nevertheless, arbitration clauses are very popular in today's business and are not likely to go away anytime soon.

Breaking a contract is not a sin

Breaking your agreements and contracts with other people can be bad for your business, can hurt your reputation with other people in the business and can make you legally liable for breaking the contract. But, despite all this, there's nothing immoral about it. You might find yourself in a situation where the best option for your business is breaking a contract. Once you've satisfied yourself of all of the good and bad consequences of taking action, you can make a decision about a contract just like you make any other business decision.

At the end of the day, what you want is a contract that clearly and concisely explains what everyone is required to do, what they will get in return, and it should contain all of the agreements between the parties. It should be clear, concise and complete. Any person walking off the street should be able to read the contract and fully understand what each side is required to do. While you might not always have full control over the contracts that you take part in, you can certainly keep your eye out for problems.

As with any potential legal problem, you should always consider getting an attorney of your choosing involved to help protect your interests. Of course, not every contract requires an attorney. Properly used, however, preventative legal advice on contract matters can save you not only money, but a substantial amount of time that you'd rather spend on your business.

While we've only scratched the surface of contracts, I hope that I've given you something to think about. If you have a topic that you would like to see discussed in my next installment, please email Tom Boyles at tom@pmq.com or fax (662) 234–0665 and put "Legal Eagles" in the subject line.