Reading, writing, and protection: small-business owners need to do more than sign on the dotted line - Legal Matters - Brief Article

Black Enterprise, Dec, 2001 by Roger Barnes

We all know the saying an ounce of prevention is worth a pound of cure. This proved true when you consider the financial burden and stress placed on your company due to a dispute that has gone to court. Establishing protocols through written contracts, reviewed by a competent attorney, can help your business avoid misunderstandings, as well as the costly legal actions that come with them.

"Written contracts detail how things are to be done, what is expected, what is reciprocated, and what time frames are to be observed by the parties says Craig Owen White, a corporate attorney and partner in the Cleveland-based office of Hahn, Loeser & Parks L.L.P. "For businesses that believe they have been shortchanged in their dealings with another party and find themselves headed to court anyway, written contracts provide the ammunition needed to pound out a cure."

Whether your business is destined to land in court or not, completely understanding every contract that hits your desk is the surest way to keep your growing enterprise healthy, wealthy, and wise.

"The average small-business owner focuses on the economic terms of the transaction--the bottom line--dismissing other terms of written contracts as mere boilerplate," says White. When this happens, important details go ignored at the entrepreneur's peril.

White lists three commonly overlooked provisions:

* Limitations on indemnification (damages recoverable from your business partner).

* Deadlines that must be observed in order to protect or enforce a right.

* Affirmative obligations or duties imposed upon your company. The failure to observe them may give rise to counterclaims or offset your rights.

Ignoring these details, says White, is a bad habit. "Minority businesses tend to view contracts as boom or bust, with no expectation of relief for a bust and no thought of dealing with the myriad of situations that fall between the two." Because they are unaware of their contracts' full provisions, it is rare to find a minority business as a plaintiff in a commercial case, he says.

CONSTRUCTING A CONTRACT

As a small business leader, it is important that you familiarize yourself with the elements of a contract, leaving you more confident in discussions with your attorney. White offers this information as a quick guide to help you get started.

There are three basic elements to every contract:

* "Offer" or formal quotation with price details.

* Acceptance" by a competent party. Only what is offered can be accepted.

* "Consideration" is a legal term meaning the exchange of things of value (e.g., money for services).

Most contracts are not required to be in writing. However, it is highly recommended that contracts be broken down in writing so that there is a clear understanding of what has been agreed upon. For convenience, businesses often prepare standard contracts to use with all of their clients. These can then be tailored to specific jobs by filling in blank spaces or providing attachments. Warranties, which guarantee that products and services meet certain specifications, may also be attached to contracts.

For a more in-depth review of what makes up a contract, visit www.mycounsel.com and www.nolo.com. Both sites are designed to bring business managers up to speed and make "working with a lawyer a more satisfying experience," says White. As the Nolo site suggests, these sites should only provide an outline and not be substituted for professional legal advice tailored to your situation.

FINDING LEGAL HELP

White provides these five suggestions:

Retain experienced commercial counsel early in the process. Interview prospective candidates to ensure that they have experience dealing with commercial transactions. An experienced lawyer can tell you what is standard in the industry and whether the contract is unreasonably one-sided. Most lawyers and their resumes can be found at their firm's home page, or by visiting Websites serving the legal profession. One of the most prominent is Martindale and Hubbell (www.martindale.com). Also check www.lawyers.com.

Ask your lawyer to walk you through each of the provisions of the contract so that you understand what promises each side is making.

Ask your lawyer to explain what the contract says about resolving disputes between the parties, and breaches of the contract. In certain circumstances, you may want to provide for mediation or arbitration of certain types of disputes in an effort to limit the costs and obtain a quicker resolution of the problems.

Find out from your lawyer, before concluding negotiations, how much time and what costs will be incurred in resolving disputes according to the terms of the contract. Knowing these expenditures and weighing the risks are important elements to have when pricing the contract and reserving sufficient funds to enforce it.

Keep a file for each of your significant contracts. The file should contain an original contract signed by each of the parties, together with any significant correspondence and documents relating to the dealings between the parties. Remember: not having quick access to these documents when a dispute arises can delay seeking enforcement of your rights and add significantly to your costs.