Creating Business Contracts That Won't Get You Sued

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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For most small business owners, contracts are a necessary evil. You have to have something to protect you, but getting contracts written requires legal expertise and can get expensive. Many small business owners try relying on templates, but even a template can't cover all the contingencies that different companies can face. To make sure your business is truly protected by the contracts you rely on, you need to create contracts that are specific to how your company does business.

The Problem with Templates

When a new business owner is starting out, it is very tempting to just make use of a template or a standardized contract you can purchase online. Jeff Bonds, a lawyer with Newton, O'Connor, Turner & Ketchum, PC, points out the flaws in that approach: "First, with standardized online contracts, more often times than not, you usually get less than what you paid for in terms of effectiveness and quality."

There are more potential problems than can be listed, but generally, a contract customized to the way you do business will be more effective in ensuring that you won't have a problem down the road. Bonds points out a few of the potential problems: "Generally speaking, courts enforce commitments made in contracts. While a 'standard' downloaded contract may fit one's needs in some respects or have beneficial terms for the business, there may be significant terms which do not fit or that are not beneficial. If those terms are enforced, then the business suffers. Another problem is that a 'standard' downloaded contract may have terms enforceable in one jurisdiction but not enforceable in another. If the beneficial terms of a contract are not enforceable, this can be just as harmful to the business as if harmful terms are enforced. A problem that people do not think about is that the terminology used as well as the applicable law in a jurisdiction can change over time, and therefore a 'standard' downloaded contract written 10 years ago may use language that is no longer commonly used or contain terms that are not allowed due to a change in the law. This can give the impression that your business may not be on top of things or worse, the 'dated' terms may now be unenforceable. While 'standard' downloaded contracts may appear to save a few bucks now, one may pay a lot later to cure the problems caused by one of these clumsy or outdated contracts."

Getting Your Contract in Order

Lawyers specializing in business matters can draft a contract that you can use regularly. Bonds says, "The 'right lawyer' is the one who is excellent in a given area of the law, who the owner/manager communicates easily with, and who can be trusted. With this in mind, every business owner/manager should develop a relationship with a business attorney who can give the owner/manager recommendations with regard to purchasing legal services. Before using a particular attorney or firm, a person should ask others about the reputation of the attorney or the firm. Also, the attorney that you choose to help you should be one that is skilled and experienced in the area of law to which the contract applies. For example, if you need an employment contract for a future employee, then you should seek an attorney specializing in employment law, not one specializing in mergers and acquisitions. This brings up the advantage that firms like ours have over solo practitioners in that we have attorneys working together [who] have specialties in different areas. This allows our business clients to know that regardless of the type of contract they need, they will get an attorney experienced in that area that will provide an excellent product."

The particular problems you may need to consider in your industry may make it worthwhile to seek out an attorney who has experience working in your industry in the past. It is also necessary to find someone local to your geographic area — there can be a variety of differences in laws in different states, making it important to have a local expert. One of the fastest ways to find an attorney can be to ask your network for recommendations. You may need to winnow out some of the suggestions you get, but a professional recommendation can help you narrow down the field much faster than an online search or a phone book might.

A Contract Review

Bonds notes that for any contract beyond your standard, it's worthwhile to have it reviewed by a legal expert. "Unless they have a law degree or years of experience, every small business owner, if they are planning on growing a successful business, should seek help from an attorney with any contract they intend to use. When the business owner cannot afford to have an attorney review every contract, the owner should, at a minimum, obtain a review of those contracts which involve large financial commitments or key relationships."

Down the road, you may find that a client or customer has a problem with your standard contract. Bonds recommends getting a lawyer on board immediately: "The first step is to contact an attorney for help. The attorney may be able to help find a business solution on which both parties to the contract can agree. If not, then the attorney can give the owner/manager an assessment of the situation and guidance through a dispute resolution process. One thing is certain: The problem will not go away on its own. The owner/manager must go through the expensive process to deal with the issue like they would any other obstacle to their business. With this in mind, owners/managers should recognize that they should take active measures before problems arise in order to reduce or eliminate problems in the future. The prevention is ALWAYS cheaper than the cure!"