I had originally planned this article as a sort of tongue-in-cheek look at ways that small businesses could ensure that they would find themselves on the wrong end of a business lawsuit. In other words, I was hoping to illustrate some useful points about avoiding business lawsuits by stating the exact opposite of what you should do as a smart business owner. However, the more that I thought about it, the more I came to believe that this topic is too important for levity.
As business owners, you have every incentive to avoid suing others, or suits filed by others against you. You are in business to make money, not to pay lawyers to argue with each other in courtrooms. As I often tell my clients, it is almost always cheaper and easier to prevent a problem than it is to solve one, especially when the solution requires expensive and time-consuming litigation. In that spirit, this is the first in a series of articles intended to help you avoid litigation by committing your business agreements to writing, and the expenses that accompany that process.
The first tip will seem self-evident, but you would be surprised how often it is overlooked. Whenever possible, you should always reduce business agreements to writing. Unfortunately, the days of the “handshake” agreement are long gone, and you need to make sure that you are taking all reasonable steps to document your business agreements. A well-drafted contract should spell out the parties’ obligations under their agreement so that misunderstandings and disagreements, and the business lawsuits they generate, can be avoided.
In the absence of a written contract detailing each party’s obligations, the parties may find themselves disagreeing about essential terms like pricing, quality, and deadlines. If you take ten people and tell them the same story, chances are that a week later, you will get ten different versions of that same story. The same is often also true with oral negotiations, as people may misunderstand what they hear or agree to, or hear what they wish to hear. Written business agreements can held to avoid such misunderstandings or memory lapses by binding the parties to the essential terms of the agreement in writing.
Basic contract law states that contracts are only enforceable if there is an offer, acceptance, and consideration. The case law also discusses a “meeting of the minds” between the parties as to essential terms. In essence, the parties must agree (“offer” and “acceptance”) on what they are exchanging (the “consideration”, i.e. goods, services, and/or money), and upon the essential terms of that exchange.
Contracts should be as clear and concise as possible. Few things are more likely to lead to a business lawsuit faster than a vague and ambiguous contract which fails to properly memorialize the terms of the agreement. When a contract is being drafted, the parties have control over how the terms, and their intent, are expressed. If essential terms are absent, or are not spelled out clearly, the parties will likely find themselves in court, where a judge or jury, and not the parties themselves, will ultimately determine their intent and how the contract should be interpreted.
Of course, these are just the basics of contract drafting. Contracts for the purchase or leasing of commercial real estate, manufacturing and distribution agreements, master service agreements, licensing agreements, and other types of commercial agreements can become very complicated. When in doubt, consult an attorney who has experience negotiating and drafting contracts. An attorney’s fees for negotiating and preparing a well-drafted contract are almost certainly going to be less than another attorney’s fees for seeking to enforce a poorly drafted contract in court.
Most businesses will find themselves in litigation at some point, and frankly, there are times when disputes need to be resolved by the court system. However, your resources are valuable, and if you employ the tips that I will discuss over the next several months, you will be going a long way toward avoiding business lawsuits and spending your time and money in court, rather than operating your business.