FIVE FATAL ERRORS COMMITTED BY BUSINESSES PART III--INCOMPLETE CONTRACTS

By Albert G. Marquis, Esq.

This is the third in a series of articles dealing with five fatal errors committed by businesses: deficient employment manuals; inadequate corporate records; incomplete contracts; inadequate insurance and no buy-sell agreement. Today we deal with incomplete contracts.

The contract is a corner stone of every business. Think about it. You cannot lease space, hire employees, buy products, or sell goods or services without contracts. Many contracts, such as those with employees, are implied. If the employee works in a satisfactory manner, he or she will be paid a salary (although the employer/employee relationship should be governed by an employment manual as we previously discussed). Most contracts, such as a lease, are expressed in written terms. These are lengthy agreements with many paragraphs containing standard, boilerplate language.

When it comes to dealing with customers, however, many businesses utilize incomplete contracts. Some rationalize that a handshake is “more honorable” than a lengthy written agreement. Others use an agreement, but it is truncated in the hopes that the customer will not be intimidated. Others simply use a form they have copied from another business or from a book.

In this day and age, sooner or later, every business ends up in a lawsuit with one of its customers. That is when the attorney is hit with a series of questions: “Can I recover my attorneys fees?” Only if there is such a provision in the contract. “Can I charge interest on the unpaid balance?” Only if there is a provision in the contract. “Can my customer sue me in Chicago when my business is here in Nevada ?” Not if you have a provision in your contract designating Clark County as the exclusive forum for lawsuits. And there are many more questions--far too numerous to set forth here.

Of course, when these questions are being asked, it is too late. Once litigation is commenced, the contract cannot be modified. As if a lawsuit were not bad enough, incomplete contracts can double or triple the cost of the litigation or even result in defeat.

Worse yet, the business involved in litigation with an incomplete contract knows that all of these expensive problems were avoidable at a relatively modest cost. It is like the old Fram Oil Filter commercial: “You can pay me now or pay me later. You can pay $10 for a new oil filter now or $2,000 for an engine overhaul later.” The cost of drafting a quality, standard form contract is a tiny fraction of the cost for going into litigation with an incomplete contract.

Business attorneys deal with contracts all the time. They can quickly recognize an ambiguity or an incomplete agreement. Don't wait until it is too late. Make sure your customer contracts (and any other contracts in which you are involved) are reviewed by a qualified business attorney.