A new contract certainly is cause for celebration. But when making a new business deal, don't put your company at risk through blunders such as unsigned contracts or misleading language. Carefully preparing contracts is a good risk management strategy that can prevent financial losses.
All too often, companies enter into transactions contractually unprepared. Without solid contracts, disputes are sent to court, which can tie up a firm's time and financial resources.
It's cliché but true — verbal contracts are not worth the paper they are written on. The outcome of any verbal contract or agreement dispute will depend on your and your client's memory. So while the courts have upheld verbal agreements in rare instances, it's advisable to have arrangements in writing.
Another way these documents can be botched is through client-generated contracts. Even if a business has its own form, some clients may require their standard contract.
Client-generated contracts need to be examined closely for clauses that can cause more problems than a verbal agreement. For example, many client-generated contracts contain a broad-form indemnification clause covering the client's negligence. Typically, a liability insurance policy only insures your negligence — not your client's. Therefore, a person could assume liability that insurance might not cover. Additionally, a firm has to ensure that the contractual language protects the business from being liable for services that it did not intend to provide or service quality that it could not deliver.
Also, in client generated contracts beware of the words “warranty,” “guarantee,” or phrases like “highest standard of practice.” All of these potentially can increase your liability. As a technical services provider, a business may want to avoid offering warranties. Work should be judged on an acceptable standard of practice that exists when services are offered.
Ideally, companies may consider a standard contract or terms and conditions and attempt to use them for each project or client.
Whether a company decides to develop its own contract form or use a standard contract, it must meet the following five criteria to be considered binding, regardless of whether it's a verbal or written agreement.
- Agreement. The parties to the contract must come to a “meeting of the minds” where one party provides goods or services and the other party accepts them for a fee or consideration.
- Fee or Consideration. Something of value must be exchanged between the two parties. The fee could be a dollar amount, or the services could be paid with goods, such as property or other valuables.
- Legally Enforceable. The conditions of the contract must be legally enforceable in the jurisdiction where the contract is applicable. For example, in some states indemnification language is not enforceable due to anti-indemnity statutes.
- Competent Parties. The contract's signors must be mentally competent and not impaired in any way. The signatories also must be authorized to sign contracts by their respective companies. Typically, company officers or other specifically authorized personnel can sign contracts.
- Legal Purpose. The contract must be for a legal purpose. A contract is not legally binding if a person who is not a licensed professional engineer signs a contract providing professional engineering services.
In addition to retaining a lawyer, companies may consider contract review training, which could be a part of a risk management program for employees. Because contracts are complicated, it's a good idea for a company to have specific review requirements.
Personnel with basic contract training should review contracts. Unfamiliar language needs to be reviewed by a legal counsel.
In the end, the same amount of effort should go into preparing your contracts that went into getting the business in the first place.