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Good Contracts Make Good Business Associates
You’ve probably all heard the phrase “good fences make good neighbors.” That is because good fences set the boundaries between neighbors. They both know where they can walk their dog, where to cut their grass or plant bushes, and when that ball has crossed over the line onto the neighbor’s property. Similarly, good contracts set the boundaries between business associates.
Good contracts set out what services are to be provided, what the time frame is, how is payment to be made, what the penalties are for either party not living up to their side of the bargain and other terms. Good contracts help settle disputes before they start. If there is a disagreement on what is to be provided, in what time frame or how payment is to be made, the parties can go back to the terms of the contract and see what they agreed to at the start.
Bad contracts only exacerbate the problems. No contract at all is an invitation to litigation – to be avoided wherever possible. As business people you do not have time or money to spend in avoidable litigation. Granted, there may be litigation even with a contract, but having one puts you in a better position than not having one.
So why can’t you just get a contract off the internet or from the office supply store? Because that is not a good contract. It’s a fence with holes in it. Those are generically written to try to be legal in all states. But contract law is state specific. The terms that are legal in other states may not be legal in Indiana. This can lead parties into a false sense of what they can and cannot do. For example, I have seen leases that give the landlord the ability to lock a tenant out for non payment of rent. That is not legal in Indiana. But a landlord using such a contract thinks that because it’s in the contract, he can do it. He is in for a rude and expensive surprise if he does.
So why can’t you just write your own contract? Well, just because you can buy a scalpel and an anatomy book from Amazon, does that mean you can remove your kids appendix? First, you don’t know what terms are legal or not. Second, even if you do your own research, you are not trained to interpret the cases and the laws.
The law does not stop at the Indiana Code. Case law interprets and modifies the statutes. Our state appeals courts issued over 2,000 decisions in 2018 alone. These decisions interpret and modify the law. Our legislature changes the laws twice a year, January and July. If you are not looking at the most current version, you might be misled. So the law is very fluid and much larger than you think. I spent four years in law school specifically learning how to find, interpret and apply the law. Don’t confuse your Google search with my law degree.
I understand you don’t want to pay for an attorney to draft your contract. But paying $200 for a contract to avoid $20,000 or more in litigation costs seems like a smart business decision to me.
No contract can cover all possible disputes or circumstances. That would require a crystal ball. But a good contract will anticipate as much as reasonably possible. That’s why they are so long. A good contract will include various standard terms – what we call boilerplate – that provide protections for the most commonly encountered disputes. Terms such a prohibitions on verbal changes to the contract, so we don’t get into a ‘he said/she said’ situation; Terms that assure that the signatories have the authority to bind their companies; Terms that set out where any lawsuits can be filed, so you are not being drug out of state; And others.
Another benefit of a good contract is the ability to recover attorney fees. In Indiana, you cannot get attorney fees on a lawsuit unless there is a specific statute or law that provides for it (there are only a few such laws) or the parties have agreed to it in a contract.
FAQ
So when do you need a contract? Anytime you are agreeing with another person on something – whether money is involved or not. If there is an exchange of promises (I agree not to disclose your invention if you share details with me, so I can decide if I want to invest in it.) you need a contract. In short if there are two people involved, you probably need a contract. You do not need a contract if you are selling a good and payment is made at the time of sale. But you might want a bill of sale.
What if you already have something going on? Can you do a contract then? Sure. You just have to convince the other party that there is a need to put the agreement in writing. Usually, saying your attorney advised you to have a contract will convince them.
Who should draft the contract? I always prefer to draft, rather than review. It’s easy to overlook something when reading someone else’s draft and I know what all my standard terms are. So, I would recommend you have your attorney draft the contract. Remember, contracts are always written to favor the person presenting it. If AT&T has a contract, you can bet it favors AT&T. You can also bet that you will not be able to negotiate the terms of that contract to remove a term you find objectionable.
What if I don’t agree to their contract? Your choice with big companies is sign it or don’t get the product. With smaller companies you may be able to negotiate better terms. It doesn’t hurt to try.
What if the other side has a contract? Can there be two? No, you cannot have two contracts. That would create a mess. There would be different terms, so who’s terms would trump? That is an invitation to litigation.
Just as good fences make good neighbors, good contracts make good business associates.
Good contracts set out what services are to be provided, what the time frame is, how is payment to be made, what the penalties are for either party not living up to their side of the bargain and other terms. Good contracts help settle disputes before they start. If there is a disagreement on what is to be provided, in what time frame or how payment is to be made, the parties can go back to the terms of the contract and see what they agreed to at the start.
Bad contracts only exacerbate the problems. No contract at all is an invitation to litigation – to be avoided wherever possible. As business people you do not have time or money to spend in avoidable litigation. Granted, there may be litigation even with a contract, but having one puts you in a better position than not having one.
So why can’t you just get a contract off the internet or from the office supply store? Because that is not a good contract. It’s a fence with holes in it. Those are generically written to try to be legal in all states. But contract law is state specific. The terms that are legal in other states may not be legal in Indiana. This can lead parties into a false sense of what they can and cannot do. For example, I have seen leases that give the landlord the ability to lock a tenant out for non payment of rent. That is not legal in Indiana. But a landlord using such a contract thinks that because it’s in the contract, he can do it. He is in for a rude and expensive surprise if he does.
So why can’t you just write your own contract? Well, just because you can buy a scalpel and an anatomy book from Amazon, does that mean you can remove your kids appendix? First, you don’t know what terms are legal or not. Second, even if you do your own research, you are not trained to interpret the cases and the laws.
The law does not stop at the Indiana Code. Case law interprets and modifies the statutes. Our state appeals courts issued over 2,000 decisions in 2018 alone. These decisions interpret and modify the law. Our legislature changes the laws twice a year, January and July. If you are not looking at the most current version, you might be misled. So the law is very fluid and much larger than you think. I spent four years in law school specifically learning how to find, interpret and apply the law. Don’t confuse your Google search with my law degree.
I understand you don’t want to pay for an attorney to draft your contract. But paying $200 for a contract to avoid $20,000 or more in litigation costs seems like a smart business decision to me.
No contract can cover all possible disputes or circumstances. That would require a crystal ball. But a good contract will anticipate as much as reasonably possible. That’s why they are so long. A good contract will include various standard terms – what we call boilerplate – that provide protections for the most commonly encountered disputes. Terms such a prohibitions on verbal changes to the contract, so we don’t get into a ‘he said/she said’ situation; Terms that assure that the signatories have the authority to bind their companies; Terms that set out where any lawsuits can be filed, so you are not being drug out of state; And others.
Another benefit of a good contract is the ability to recover attorney fees. In Indiana, you cannot get attorney fees on a lawsuit unless there is a specific statute or law that provides for it (there are only a few such laws) or the parties have agreed to it in a contract.
FAQ
So when do you need a contract? Anytime you are agreeing with another person on something – whether money is involved or not. If there is an exchange of promises (I agree not to disclose your invention if you share details with me, so I can decide if I want to invest in it.) you need a contract. In short if there are two people involved, you probably need a contract. You do not need a contract if you are selling a good and payment is made at the time of sale. But you might want a bill of sale.
What if you already have something going on? Can you do a contract then? Sure. You just have to convince the other party that there is a need to put the agreement in writing. Usually, saying your attorney advised you to have a contract will convince them.
Who should draft the contract? I always prefer to draft, rather than review. It’s easy to overlook something when reading someone else’s draft and I know what all my standard terms are. So, I would recommend you have your attorney draft the contract. Remember, contracts are always written to favor the person presenting it. If AT&T has a contract, you can bet it favors AT&T. You can also bet that you will not be able to negotiate the terms of that contract to remove a term you find objectionable.
What if I don’t agree to their contract? Your choice with big companies is sign it or don’t get the product. With smaller companies you may be able to negotiate better terms. It doesn’t hurt to try.
What if the other side has a contract? Can there be two? No, you cannot have two contracts. That would create a mess. There would be different terms, so who’s terms would trump? That is an invitation to litigation.
Just as good fences make good neighbors, good contracts make good business associates.