Three Ways To Ensure That Your Contracts Are Solid

by William Dickerman, Esq

     In a previous article [Three Crucial Reasons You Need A Business Written Contract] we discussed why it is wise to commit your contracts to writing: Written agreements are preferable to oral contracts because they clarify rights and obligations, are more thorough, and the parties are more likely to abide by them. In this issue we explore why your contracting experience is more likely to be successful if prepared by an experienced lawyer than if you try the do-it-yourself approach; we also suggest how to get the most out of your lawyer’s efforts.

Some clients believe they can avoid legal fees by drafting their own contracts. Indeed, sometimes clients can draft effective contracts. After all, most contracts, regardless of who authored them, do not result in disputes. The reasons for employing a lawyer to draft the contract are to ensure that your intentions are set down, to reduce the odds of a dispute arising, and to improve the chances that, if one does arise, you will prevail.  Here are some tips on how the right lawyer can protect your interests, and how best to deal with that lawyer.

 

1. Acknowledge that you don’t know what you don’t know.

     Most people, especially those experienced in business, know that many lawyers are trained in contract drafting that involves expertise in a particular field of law.  Too often, clients discover that while they thought their inexpert contract provisions would suffice, a well-drafted contract must contain many provisions that never occurred to them.  For example, if you have ever perused a movie studio’s contract setting forth how “profits” are defined, regarding money due to an actor, you know that such an apparently straightforward term can require dozens of pages to define. That density is largely the result of many lawsuits over the distribution of “profits” from blockbuster movies.  Now, if you were to write your own contract, using only your common-sense-derived understanding of “profits,” you would likely find yourself receiving none, even if the movie made a fortune. The non-expert will overlook many basic points that belong in most contracts. He (includes “she”) will fail to include certain provisions needed for protection in case the other party contests the meaning of a word or phrase, or, for whatever reason, decides not to honor the contract.

     What happens if a payment is missed? May the payer cure a default? If he doesn’t cure, how do you ensure recovery of the debt? Should there be a personal guaranty? A security interest? A non-compete clause? What remedies do you want to include? Liquidated damages? Should any terms be confidential? Should mediation be required? Arbitration? Will you waive your right to a jury trial in favor of a more expeditious arbitration? How will the arbitrator be chosen? To what extent will discovery be allowed? What state law will govern? Who will bear the fees incurred in a dispute?

     Two examples will demonstrate the risk of preparing a “do-it-yourself” contract. In the first, our corporate client ordered the design, manufacture, and installment of equipment for its dazzling showroom. The provider was a small company without a proven track record, selected by the client based on a sales pitch. He accepted their various order forms and paperwork as the “contract,” and paid the entire price before any work was done. Six months after the deadline it was clear that none would be. The “contract” contained clauses describing only the work, the price, and the deadline. A competently drafted contract would have contained many provisions to aid in recovering the damages in the event of a breach.

     The result was a lawsuit that lasted several years, capped by a trial in which we obtained a judgment for all of the client’s damages, which are being paid slowly due to the provider’s bankruptcy. This very expensive and time-consuming drama could have been prevented if, for example, the client had demanded a personal guaranty and security interests in the defendant’s real property. The client, although an experienced businessman and no stranger to being bilked, should have known better and had a proper contract drafted.

     Another illustration of poor drafting by a businessman who didn’t know what he didn’t know, was a case in which I was called to serve as an arbitrator, between a small-time record producer and a famous jazz percussionist. The latter was unknown at the time the producer heard him in a nightclub and was eager to sign him to a recording contract. The producer jotted down on the back of a napkin what he thought was a valid contract—consisting of only two lines. The producer convinced the musician to sign away much of his recording future. If the jazzman became a star and wanted to be released from the contract, it was guaranteed to result in a major dispute. And that’s just what happened: When he hit it big and his recorded music was in great demand, he demanded return of the rights he had thoughtlessly granted to the producer. The ensuing costly litigation threatened to bankrupt the producer; the musician risked losing the ability to capitalize on his stardom.

2. Choose the right attorney.

     Contract-drafting is a mainstay of many lawyers’ practices. Experience teaches that the most effective, air-tight, and enforceable contracts are generally those that are drafted by a lawyer who is also experienced in litigation. That is because litigators deal daily with the consequences of poor draftsmanship.  Business litigators are intimately familiar with what it takes to draft an ironclad agreement; conversely, they are in the best position to attack an even seemingly invincible contract.

     The consequences of hiring the wrong attorney were painfully illustrated when a small- businessman retained me to rescue him from a lawsuit that his previous counsel had caused by virtue of giving horribly mistaken advice. That lawyer, experienced in real estate deals, not employment matters or litigation, had cavalierly advised the client to reject a $2,500 demand by an aggressive former employee whom the client had terminated. The lawyer was unaware that a common result of such a rebuff is a lawsuit for wrongful termination and sexual discrimination. I was retained to defend against that easily predictable suit. Although I was able to resolve it quickly and quietly, the settlement cost my client many times more than the demanded sum, not to mention lost productivity and stress. The right lawyer would have recommended negotiating and, if necessary, paying the demand. (Ironically, the opposing lawyer, inexperienced in contract drafting, composed such a poor settlement agreement that it cost a great deal to enforce it.)

3. Prepare for your initial meeting with your attorney.

     Ideally, the contract drafting should be a joint effort. While the competent lawyer will put the right words to paper, you’ll get the best result by paying close attention, before meeting with your lawyer, to what you want to accomplish and to anticipated bumps along the way. Jotting down notes can be beneficial in that (1) writing tends to clarify your goals and concerns; (2) as you concretize your thoughts, other ideas are bound to emerge; (3) you will save time and legal fees by not having to think through every point from the beginning with your lawyer.

     You should also organize and bring to your meeting all pertinent documents. As life becomes more complex, so does the need for careful and creative drafting. The right lawyer, experienced in the field of law to which your contract pertains, will anticipate problems and provide for their resolution. Entrusting your contracts to that attorney will also enable you profitably to devote your time to your field of expertise.

     Consider your contract lawyer as “contract insurance”: Paying hundreds or even thousands of dollars for him to negotiate, draft, review, and revise your contracts can save you from suffering liability in the tens or even hundreds of thousands of dollars. Perhaps most valuable will be your peace of mind from knowing that you did your best to create an agreement that will effectuate your goals and withstand any challenge. 

 

William Dickerman, the principal attorney of Dickerman & Associates, has been litigating business, real estate, and other commercial and personal lawsuits for over 30 years in and around Los Angeles. For more information, go to www.dickermanlaw.com. This article is not meant to constitute legal advice; please consult and rely only on competent counsel after a thorough review of your individual circumstances.

© William Dickerman 2015 - All Rights Reserved