Prevent Contract Mistakes in Your Business

Video Transcript

Today we are talking about contracts and how to avoid some common mistakes. We are not going to be able to cover everything. Contracts are covered in typically one or two semesters in law school, and that is just the fundamentals. Attorneys then learn a lot more. But what I am focusing on today is how to empower you as a business owner with some of the most important areas, the most common or frequently addressed issues, and some of the biggest mistakes that come up.

So let's start first with what is a contract. A contract is when there is an offer by one party that is accepted by another party. That essentially creates the formation of a contract. Now, the contract needs to have some basic stuff as part of that offer and acceptance. For example, there has to be an exchange of some sort, some sort of money or service, or goods.

For example, if I said, "I will give you a million dollars." And you just said, "Thank you." That is not a contract. That is a gift. A contract is where I give you a million dollars, and you say, "Alright, I will sell you this piece of real estate." Speaking of which, certain types of contracts must be in writing. This is under what is called the Statute of Frauds. The Statute of Frauds says that there will be assumed to be no contract unless it is in writing for certain types of transactions.

For example, real estate transactions follow the statute of frauds, which means they need to be in writing, contracts that take over a year to perform or to be fulfilled; that is another example of the type of contracts that are covered by the statute of frauds.

So to recap here, a contract has to have an offer, be accepted, and there needs to be some sort of exchange. Certain contracts have to be in writing.

What does that mean, though, about other contracts? They don't have to be in writing. That means most oral contracts are enforceable. That includes if you are talking to them on the phone. It includes an email. Email, technically, is a written contract because if there is an offer that is accepted by email, that is a contract.

A lot of times people wonder if it is possible to enforce an oral contract. It is not in writing, and the answer is absolutely, as long as you have evidence of it. You might say, "Well, what kind of evidence?" Well, maybe it was video-recorded or audio recorded. Maybe somebody heard you say it. Maybe you were talking about it afterward, or the other party was talking about it afterward, and somebody overheard and they can testify. All of that is providing evidence that there actually was an oral contract.

But most business contracts, they are going to be in writing. And in that case, you have the opportunity to put a lot of terms in the contract.

What are some really important terms you should know about? Well, first off, whether a party who loses in a breach of contract case has to pay attorney's fees. Here is why that is really important. I once had a client that had a contract, and they said, "We will provide services in exchange for getting paid $15,000." While the other side said, "After my client provided services." The other side said, "Thank you. We will now pay you $10,000." The client said, "Well, that doesn't make any sense. Was there a problem? Why would you only pay us 10,000?" They said, "Oh no, there was no problem. We just know that in order to get any money from us, you will have to sue and you will spend a lot more money than $5,000."

So this unethical company said, we will only pay you $10,000. Well, my client came to me and said, can we sue? And I said, "Well, do you have a written agreement?" They said, "No." They never had drafted one. They had just done this with a handshake. I said, "Well, unfortunately, the default rule in the United States is that you cannot recover attorney's fees unless a contract says you can. Since you had no contract that said you could, you can sue them for the full $15,000, but you will have to pay your own attorney's fees." And I added, "Unfortunately, to hire me to go after them is definitely going to cost more than the $5,000 that is at stake."

So let's put it this way. Let's say, hypothetically, I charge them $10,000 in legal fees to sue them. And by the way, most lawsuits are a lot more. And they sue for the full $15,000. Well, let's say they collect the $15,000; they then pay $10,000 to me, and they are left with $5,000. At the end of the day, $5,000 is less than the $10,000 being offered by this other party right now. So I said, "Unfortunately, you are left with the options of either suing without an attorney, (which often you can't do as a business), or accepting their offer."What is the takeaway here? It is very important to have an attorney's fees provision if you are trying to collect on money, and so that is something to think about.

Next, maybe an arbitration provision, which says any disputes are resolved in arbitration. Some people like it, some people don't. I have videos on the pros and cons of arbitration, but that is an important provision to have in there, or at least to think about having.

Next, a venue provision. Venue says if there is a dispute and it goes to court, which court is it going to be in? The court in another state or in your home state? You will generally want the court in your home state because it is just a lot easier for you to litigate. You don't have to fly there for depositions. You can use your local attorney to litigate that. So that: attorney's fees provision, an arbitration provision, a venue provision. Those are some of the big ones.

The other thing that I do with my clients is to ask them, "What are the risks that we should be thinking about in drafting this contract? For example, if you have had problems with people in the past with similar contracts, what do those problems look like? Let's try to avoid those problems or mitigate those problems, or let's think, hypothetically, if you were to have a problem in this contract in the future, what kind of problems might come up?"

Every contract has a different set of risks, and when you identify those risks, then you can put in the contract language around those. For example, you might say that the risk is on the opposing party, or if we do something wrong, we have some time to fix it. That is called a cure period or a period of curing the defect or the breach of contract.

There are a number of other important provisions to put in there. I have other videos on my YouTube channel about this, but at least for today, I wanted to talk with you about some of these common pitfalls related to drafting contracts so you can be thinking about what should go in your important contracts. Your important contracts are going to be the following: any high dollar amount, any frequent contract that you use with many different vendors or many customers or many clients, and then important strategic relationships. That might be if you have multiple business owners or some other type of investor. Or you have a strategic partner, and you have a contract with them, or maybe you have a manufacturer who provides parts to you, or maybe you are a manufacturer providing parts to a wholesaler or retailer.

So there are all different scenarios here, and thinking about what are the high stakes or important relationships, what are the important risks that are in those, and then how can we get all of that addressed in writing? That is typically the approach that a good attorney will use in helping you avoid problems related to your important relationships, or put another way, related to your contracts.

All right. This is an exclusive video only for subscribers. If you know friends who would benefit from this, you are welcome to encourage them to go to aaronhall.com/free. They can sign up for the newsletter, which is these regular training videos, helping you avoid expensive problems in your company.

You can also check out my YouTube channel at youtube.com/@hall. If you need to reach me, you can contact me at [email protected]. Again, I am an attorney for business owners and entrepreneurial companies. Tune in next time for the next video that you will get by email, where I will talk about the next most common problem faced by new business owners and how to educate you and empower you to prevent those problems in your company.