Five Tips to Avoid Contract Disputes
My wife and I have what’s called a “mixed marriage” in Minnesota; I’m a Minnesota Vikings fan and my wife, being a Wisconsin native, is a fan of the archrival Green Bay Packers. In fact, her parents even live in Green Bay, Wisconsin.
I have to admit that, although I love my Vikings, every football fan cannot help but be impressed with the Packers’ storied history that reaches back into the 1920s. My in-laws oftentimes will send me things of historical significance to the Packers knowing that even though I cheer for “the other side”, I can appreciate the history of this very unique franchise.
Case in point: last week my father-in-law emailed me a copy of a 1944 Green Bay Packer player contract for a player named Ed McGroraty and signed by none other than the team’s founder, E.L. “Curley” Lambeau. While my initial interest in the document was related to my love of pro football, the business lawyer in me found the contract interesting for a whole other set of reasons.
This one page contract pales in comparison to the multi-million dollar player contracts signed by today’s players. Nonetheless, it contains the basic terms of the parties’ agreement: salary, term, grounds for termination, what happens if the player does not play for whatever reason (he doesn’t get paid), and remedies for a default. Even in 1944, these deals weren’t being done on a handshake.
Contract law is one of the most basic areas of business law, and one of the most overlooked by business owners. Far too many business owners prefer the “do-it-yourself” approach to contracts. That approach often leads to costly disputes down the road. Why do business owners draft their own contracts? Because they believe that a lawyer is going to kill the deal by overdrafting or focusing too much on being a risk manager than a transaction facilitator. Others avoid using a lawyer simply because they believe that the lawyer costs too much.
Whether you hire an attorney (which, of course, I prefer) or draft your own agreements, be aware of the following guidelines when entering into an agreement:
1. Put It in Writing. Too many deals are done on handshakes or pursuant to verbal agreements. Most states, like Minnesota, however, have a statute called the Statute of Frauds that requires certain contracts to be in writing to be enforceable. Without a written contract, we lawyers have to find novel legal theories to remedy what could have been called a breach of contract had there been a written contract.
2. Clearly Specify the Terms of the Agreement. Many contract disputes arise from differing interpretations of the terms of the parties’ agreement. When it comes to drafting business contracts, clarity is the best policy. Be sure to specify each party’s obligations and the consideration to be provided by each party.
3. Provide for Conditions of Termination. Sometimes, one or both parties may need to terminate an agreement. For example, if a company enters into an agreement with an outside consulting to provide certain services, the company may later decide that the engagement is not working and thus a clause in the consulting agreement that allows for termination for certain reasons or for any or no reason, would be helpful. Likewise for the consultant: if the company fails to pay him, he’ll want to terminate the agreement and seek other projects.
4. Specify the Remedies for a Breach. Will a party’s only means of relief be seeking money damages from the other party in a lawsuit, or will alternative dispute resolution be undertaken by the parties? If a party has access to another party’s confidential information, what happens if that party uses and/or discloses this confidential information to a third party without consent? In that case, the party who has been victimized by the disclosure will want to seek injunctive relief to stop further use and/or disclosure, and the parties’ agreement will need to specify that this remedy is available for such a breach.
Another commonly overlooked contract term relates to attorney fees. Many people believe that they can recover their attorney fees no matter what in a lawsuit for a breach of contract. Not the case. In fact, absent a contractual provision or a statute that provides otherwise, each party is responsible for paying their own attorney fees. This can have a profound impact on whether to pursue a matter if the estimated attorney fees exceed the likely recovery. With a contract provision stating that the non-breaching party can recover attorney fees incurred in enforcing the contract, the fees are added to the judgment awarded to such party.
5. Have the Proper Parties Sign the Agreement. I’ve seen many cases where a party spends the time and money to set up a business entity, only to turn around and sign an important business agreement in their individual name. By doing so, they have just personally obligated themselves to perform under the agreement and thereby negated the purpose of their entity. If a business owner is signing an agreement on behalf of their entity, they should specify that fact; this can be done by listing the entity’s name in the signature block to the agreement and identifying the owner’s title with the entity (i.e., President).