Legal contracts can be daunting at times – especially for a new or small business. Contracts can be short or long; complicated or easy; fairly balance or one-sided. Often times, small business owners wonder if they even need a contract. I personally know many entrepreneurs who would prefer to run their businesses on a handshake (and have been very successful doing so to a point). But, yes, every business should have a contract. Contracts are like insurance policies; they protect you in case things go really badly in a deal. Hopefully, you never need to pull your contract out to review your rights and obligations, but in the instance you do, make sure you have these provisions at a minimum.
- Venue, Jurisdiction, Choice of Law, Jury Waiver. Venue and Jurisdiction provisions make clear where, if necessary, a dispute will be resolved. Will you be in your home state and county, or will you have to travel to litigate to where your customer is. Always have your venue and jurisdiction state that disputes will be resolved in the State or Federal courts within your home county and state. As a service provider providing services in numerous states, you don’t want to have to worry about unnecessary travel expenses to multiple locations. You also want the “home-court” advantage in any court setting you might find yourself in. You also want to spell out that in the instance of a dispute the parties agree to apply the law of your state to the dispute. You don’t want to have to worry about complying with various state laws (although sometimes that can’t be avoided). The more laws you have to educate yourself and your business on, the more difficult it become to scale. Lastly, include a jury waiver. Everyone is entitled to a jury trial, unless it is waived. Jury trials are more expensive, taker longer, and have more uncertain outcomes. Usually, business disputes are factually, not very complicated and a judge can ascertain the facts better than a jury. Jurors can also tend to favor the individual over a company (no matter how small you are). Special COVID note: many courts are not doing jury trials yet, but are doing judge (bench trials) via zoom.
- Prevailing Party Clause. Litigation, although hopefully never an issue, can be very expensive. More often than not your attorney’s fees will be more expensive than the value of the case. A prevailing party clause states that whichever side prevails in a dispute shall be entitled to reasonable attorney’s fees which it incurred as a result of the litigation. This significantly increases the potential downside of a losing party and will therefore force both sides to really look hard at the merits of their case and whether they want to litigate or find an alternative resolution to a dispute.
- Indemnification. Indemnification means that one party will come to the defense of the other (and in doing so incur all the costs). Typically, indemnification provisions state that Party 1 will indemnify (or defend) the Party 2 for litigation started by a third party which was a result of actions made by Party 1. Indemnification is important because plaintiffs often look to join (or bring into litigation) as many party’s as possible, especially if it means a company with either deep(er) pockets or with insurance coverage. Indemnification can also cover not only suits from third parties, but from breaches of the contract itself. This is another slick way to get your defense costs covered if the other party breached the contract and you have to enforce a provision.
Contracts often have many more legal and operational provisions. Depending on the type and size of your business, those legal provisions will have varying degrees of importance. Naturally, you should always understand the operational aspects of your contract (what you have to do and what they have to do), but don’t gloss over the legalese. If you need a free consult on one of your contracts, please give me a call.