7 Common Contract Mistakes
7 Common Contract Mistakes
Contract interpretation is, in theory, simple but not everything in contract negotiation is what it seems. Simple is hard. Contracts are often written in a way in which simple phrases do not have a “plain meaning.”
1. Skimping on Contract Negotiation.
You’ll never know unless you ask. There are a number of things that can often be negotiated and many times they will provide mutually beneficial workarounds to what seem to be sticking points for both parties. Just as you won’t know what you can get from the other side if you don’t ask for it, you won’t know what to ask for if you don’t consult someone experienced in contract negotiation. There are plenty of intelligent people out there that can read a contract and think they have a grasp on it and end up bargaining away something they never intended. Contracts are a field full of “legal terms of art” that don’t mean what you might they mean and contract interpretation is hyper technical. It is always a good idea to have a lawyer as a member of your negotiation team for important contracts.
2. Assuming the Other Party’s Signature is Valid
As a general rule, you can only enforce a contract against the individual that signed it (or the entity on whose behalf they signed). Without getting into the agency exceptions, it is crucial that you verify that the individual signing on behalf of any other entity or person actually has the authority to bind them. Similarly, you will want to make sure that the signature is styled correctly and that they only sign in their individual capacity (as opposed to signing on behalf of a company as an officer) if that is what you intend. Otherwise, you might end up having a contract that is enforceable only against the individual that signed in their individual capacity.
3. Signing Documents Incorrectly
A close cousin of mistakenly assuming the other party’s signature is valid, business owners often make the mistake of signing in their individual capacity instead of as the representative of their business entity. If Whatever, Inc. is entering into a contract and you sign on behalf of John Doe that won’t always get the job done. The most common, and proper way, to handle such situations is Whatever, Inc. above the signature line, a signature, then by (the name of the signer), and their title to make it clear in what capacity they were signing.
4. Agreeing to Terms that are Too Vague
Contract interpretation is, in theory, simple. But simple is hard. Contracts are often written in a way in which simple phrases do not have a “plain meaning.” This could be due to conflicting provisions, poor definition of terms, or a whole host of other reasons but if you agree to vague terms you are asking for hurt feelings, disputes, and inviting litigation. The second something becomes ambiguous it becomes open to interpretation, i.e. a legal field day. Nailing down your contractual terms not only limits future legal expenses but increases the chances that both you and your customers will get precisely what they bargained for.
5. Not Really Understanding the Terms
This is another position where not having a lawyer can really hurt you, and I see it all the time. I know plenty of people – accountants, doctors, and engineers especially – that are well-educated, used to reading and learning information quickly, and familiar with highly technical processes that often fall into this trap. You can be one of the smartest people in any room but that doesn’t mean you should do your own contracts. At least not when something important is on the line. Not everything in contract negotiation is what it seems. Phrases like “time is of the essence,” “hold harmless,” “joint and several,” “joint venture,” and countless more all have specific legal meanings that may, but do not always, line up with what you might think they mean based on their common meanings. Then there are even more concepts that mean exactly what they sound like but their implications may be less clear. Don’t enter into contracts without knowing exactly what you are agreeing to, especially when it comes to all that boilerplate the seems unnecessary (trust me, someone put it there for a reason).
6. Not Complying with Contract Terms
I don’t know why people are always so willing to enter into contracts if they are so willing to break them – but contractual terms are, by their very definition, legally binding. If you don’t intend to follow through, don’t agree to it. If you can’t make a shipping date, don’t agree to it. If you can’t deliver on time, don’t agree to it. Contractual terms can usually be negotiated and overpromising and not delivering is asking for trouble. There is seldom an acceptable “oops!” or “white lie” in contracts and those who do business that way not only hurt their reputation but will often find themselves on the wrong side of a lawsuit.
7. Not Getting it in Writing
Contracts should be written. Many states, including Kentucky, apply what is known as the “four corners rule.” In other words, if it isn’t in the four corners of the document itself, it isn’t part of the contract. Contracts that cannot be performed within a year, and many others, have to be in writing to be enforceable at all. Verbal contracts can be legally binding, in some situations, but any dispute over them will almost always devolve into a mess as everyone has different versions of conversations and thinks they agree to different terms. Sorting them out is not only legally disadvantageous but expensive. Non-written contracts almost certainly require you to give up control that written contracts usually don’t. What law will apply? What forum will you sue in? Is there arbitration? How is the agreement modified? Are there extra benefits? Options? Incentives? These are all the kinds of things usually spelled in written contracts but seldom discussed, and even less frequently proven, when it comes to oral agreements. Failing to get it in writing means you failed to protect yourself.
Similarly, modifying written contracts over the phone or email is also an oft-seen error. Many contracts require changes to be in writing, so any phone changes are already out. Even if they don’t, changes over the phone have a deniability problem as well as all the same problems as verbal contracts. Changes over email at least have a record, but the capacity of those signing is seldom clear, emails are often lost, drafts may not be finalized, there may be more back and forth, and there may not even be a valid signature for the modification. Contracts are often negotiated over email and that is fine – just get the final modification written down in its own document and get it signed.