Top 10 Mistakes Companies Make when Contracting
Messy company contracts are common. Trust us when we say that you do not want to be in our competition for the worst contract we have ever seen and had to markup. Just when we think they can’t get any worse, we will find one that takes the cake.
Here are 10 common contracting mistakes made by companies that you can be mindful of in an effort to minimize your risk and maximize your contractual reward.
- Failure to look at the big picture. When negotiating contracts, businesses sometimes hone in on one specific issue. This laser focus can cause companies to miss the forest for the trees. Making sure you have the whole picture is crucial to the crafting of any contract.
- Misunderstood terms. Most contracts begin their life cycle in the hands of a lawyer. Whether that was your lawyer or someone else’s lawyer, or you have co-opted a form contract, often businesses do not understand the legal nuances and implications of certain language within contracts. If legal language is changed, the meaning of, and protections within, contracts can be fundamentally altered without businesses realizing the implications or even realizing that there are implications that could be materially harmful to the business or could allocate an inordinate amount of risk to it.
- Failure to renew or terminate. Contracts often include provisions that require notice for renewal or notice to terminate. Businesses tend to assume that once the contract is in place the business is set. Some tracking system needs to be implemented within companies, even if it is as simple as a spreadsheet, to monitor when contracts will expire and determine whether they should be renewed and under what circumstances.
- Failure to increase prices in the case of automatic renewal. Especially with service companies, prices of contracts often change as service prices increase. The current sharp increase in gas prices is one thing that sometimes changes service pricing. If flexibility is not maintained to be able to implement such changes, changing industry or economic conditions can make a previously profitable contract a loser. Similarly, sometimes companies change prices and those price changes do not get incorporated into contracts with automatic renewals. Price escalation within contracts is one potential solution for contracts with automatic renewals.
- The dangers of indemnification. Indemnification clauses are great if you are on the right side of the indemnification. Find yourself on the wrong side of an indemnification provision and a requirement to indemnify can bankrupt a small business. Contracting with a larger entity? Pay close attention to the liability language to ensure that general negligence has not been excluded from the indemnification provision that benefits you and that indemnification is proportional to each party’s fault.
- Failure to consult operations. With CEO experience in our firm, we have seen both the legal side and the operational side of contracts. Most lawyers drafting contracts do not have operational experience and often fail to consider the implications to those managing company operations. Consulting with operations personnel at the time of drafting can ensure that the contract meets the company’s functional needs when the contract is actually used and will help to address the realities and the needs of the business.
- The Frankenstein. We often see contracts that represent a monster-like creation – like Frankenstein. They have either been pieced together from multiple contracts which do not use the same defined terms or include improper cross references, or they have been changed so many times over time that original meanings have been lost. If multiple revisions have been made to your contract over a period of time, it may be the time for a holistic review to get you back on track.
- Failure to follow your own terms. Often contracts can contain legal terms that require companies to provide notice, to cancel in advance, or to engage in reporting or administration. Before including these provisions and contracts, consideration should be given as to whether the company has the capacity to follow the terms being included and a tracking system must be put in place to ensure that happens.
- Failure to identify inconsistent provisions. Competent corporate counsel will be well-versed in watching for nuances created by the interplay of different provisions within contracts. Does your limitation of liability eviscerate your right to indemnification? Does your right to indemnification survive the termination of the contract? Does your contract termination language prohibit you from getting paid in the event of termination? Often one provision within a contract can have significant impact on another contractual provision. We often see contracts where this interplay has been missed creating ambiguity or eliminating contractual benefits which should be owed to the company.
- Failing to provide the right to assign to affiliates and successor entities. Often when contracting people do not think about the fact that they may sell their business at some point or even be planning to do so. At the time of sale many businesses find themselves in a place where contracts can’t be assigned to a successor entity and every contract that company needs to be redone. To avoid this malady it is important to retain the right to assign a contract to an affiliate or successor entity.
By keeping these common mistakes in mind, and by ensuring qualified corporate counsel has reviewed your contracts, you can best position yourself for contractual success.
Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek, and Seema Mir is Of Counsel to the firm. Jacquelyn and Michael focus their practice on mergers and acquisitions, and corporate structuring and restructuring, as well as contract advice and assistance. Seema focuses her practice on labor and employment representation and employment contracts. All three of them are available to assist businesses of all sizes with general counsel services, meeting their day-to-day legal needs. To contact them please contact Jacquelyn directly at Jacquelyn@JordonVoytek.com, or by phone at 304.777.0790, contact Michael directly at Michael@JordonVoytek.com, or by phone at 203.360.6232, or contact Seema directly at Seema@JordonVoytek.com, or by phone at 832.247.1193.