Avoid These 6 Common Mistakes in Your Legal Agreements
Few business owners are legal experts. Yet many act like they are veteran attorneys when it comes to their legal agreements by thinking they can simply wing it and create their own contracts or rely on cheap, fill-in-the-blank legal forms they purchase for cheap online.
However, this is playing with fire. In fact, you could end up paying tens of thousands of dollars in attorney’s fees and court costs—or even end up going out of business entirely—just because of one poorly constructed legal agreement. Unless you have a law degree, far too many things can go wrong with your agreements when you take the do-it-yourself route. To show just how complex legal agreements can be and demonstrate how ill-prepared you are to manage the creation of your own agreements, here are a few of the most common mistakes you are likely to encounter if you try to go it alone. 1. Deal terms that don’t actually make sense:
We see it all the time… a business owner comes to us after the breakdown of a partnership, a joint-venture relationship, or a client relationship, and when we try to understand the actual terms of the deal, the terms didn’t make sense to begin with. One of the best ways you can use a lawyer is to have him or her review every deal for terms that make sense, and then ensure the deal terms are being documented clearly enough that anyone could understand them. 2. Failure to establish a clear performance standard:
It’s a no-brainer to enforce an agreement with a vendor who doesn't deliver or a contractor who misses a deadline—the facts are clear in these situations. However, things can get much trickier when it comes to areas of an agreement that are more subjective, such as poor performance.
In your agreements, you must be extremely specific about the goals, objectives, and deliverables of the other party to ensure they meet the duties outlined within the agreement. If not, you are likely to get stuck with a shoddy product or a poorly performing team member, with no way to remedy the situation. If you are hiring a new employee, for example, you should establish clear, measurable outcomes for the role, with specific metrics for success, along with time frames for specific goals and objectives to be achieved. Then, include this information in the employment agreement, so it’s abundantly clear what the expectations for the position are for the team member and for you. 3. Not defining what constitutes a breach:
Along with establishing clear expectations for performance, it’s also vital to consider all of the things that can go wrong in a business relationship before work starts. From there, you need to establish a clear process for addressing each issue in the agreement.
For example, in the above scenario where you are hiring a new team member, you need to think about how you would deal with the team member if things didn’t work out as expected. What would happen if the team member needs to leave, can’t perform, or isn’t performing for some reason? What is each of you entitled to in the event the relationship needs to end? All of these scenarios need to be thought through and addressed in the agreement. 4. Failure to give yourself an out:
In addition to terminating an agreement due to a breach, you need to consider how the relationship might end due to less acrimonious circumstances, as well. By giving yourself a clear exit strategy, rather than being caught off-guard or surprised when things change, the relationship can successfully adapt to the transition with ease.
When entering into an agreement with a new business partner, for instance, you should think about and plan for all of the ways each of you might potentially exit the business. What would happen in the event you decide to sell the business? What would happen if the business failed and you had to shut your doors? What will happen when one (or both) of you dies or if one of you becomes incapacitated? You need to get clear about all of these eventualities, and then document them in your operating agreement or corporate bylaws and/or a buy-sell agreement. 5. Failure to address conflict resolution:
Along with having an exit strategy, your agreements should also address how to resolve any disputes that may arise—preferably without resorting to costly litigation, which should always be a last resort. To this end, consider adding terms to your agreements that require alternative dispute resolution processes, such as mediation and arbitration, before either party can file a lawsuit.
By including a clause requiring mandatory mediation or arbitration in your agreements, you can have better control of potential disputes before they occur and help ensure contractual conflicts are handled in the most productive way possible, without getting stuck battling one another in court. 6. Not protecting your intellectual property:
Your intellectual property is among your company’s most valuable assets, and as such, it needs to be fully protected in your legal agreements. This is especially important when working with independent contractors.
Unlike employees, with whom you generally own automatic copyrights to everything they produce while working for you, contractors typically retain full rights to their work—unless they’ve signed a written agreement stating otherwise. To this end,if you don’t have a properly drafted agreement in place, you may not even own the work you pay someone to produce for you. To secure ownership of your intellectual property, you need to include work-for-hire and copyright assignment clauses in every contractor’s agreement to ensure you actually own the work you are paying for. And yes, this means every single person, even those you may have worked with for years without a single problem. Treat Your Agreements With The Respect They Deserve
Just as you would never try to wire your office’s electrical systems yourself if you weren’t an experienced electrician, you shouldn’t try to do the same with your company’s legal agreements by pretending you're an attorney. When it comes to implementing such a critically important element of your operation, you should always consult with a licensed and experienced business lawyer.
Whether you need new agreements created or want us to review agreements you already have—even those drafted by another lawyer—meet with us, your Family Business Lawyer™. We will support you to not only create clear concise agreements, but also implement an agreement process that will allow you to more effectively navigate the inevitable changes that take place in every relationship, while dealing with conflict in a way that’s both healthy and productive. Contact us today to get started.
This article is a service of Hanson Legal and Milan Hanson, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us at 541-776-3405 today to schedule!