Dumb Legal Mistakes to Avoid: Business Agreements

I’ve seen my share of dumb legal mistakes made by any type of business owner.  New and experienced business owners alike, remind yourself every once in a while of these common dumb legal mistakes when dealing with business agreements.

Not Getting It in Writing

Get it in writing. No exceptions. All terms should be expressly stated in the agreement, in detail.

Insist on simple, easy to understand language. If someone with no knowledge of your particular situation does not understand the meaning of the provisions of the agreement, chances are, there will be ambiguities and conflicts later on in the life of the agreement. If necessary, have a person review the agreement who has no knowledge of law or the particular subject of the agreement.

Often overlooked crucial elements in an agreement:  When do you or the other side have to do things?  By next Tuesday, in a year, on September 2?  How much money has to be paid to whom and at what time?  Spell it all out.

Review the agreement for consistency and completeness. Think of possible scenarios that could take place in the course of your relationship with the other party and investigate the outcomes under the agreement. This process often unveils gaps or inconsistencies that should be fixed.

Review the agreement for mutuality. If a provision offers some benefit or remedy to the other party, consider whether it would be fair to include the same benefit or remedy for you.

Make sure all definitions used in an agreement are used consistently and correctly.

Granted, agreements can get complex and everything might sound like legal mumbo jumbo to you.  If that is the case, get a lawyer, see point below.

Not Including a Governing Law Clause

Unless all the parties to the agreement are in one state and the subject matter of the transaction takes place exclusively in the same state, agree on a law to govern the agreement, for example: “This Agreement shall be governed and construed in accordance with the laws of the State of New York.”

Agreeing to Arbitration

Arbitration is very expensive and limits your rights to full discovery (the right to ask the other side for documents).  Just one example:  Bringing a lawsuit in New York Supreme Court costs $210 no matter what the amount of  your claim is.  Bringing a claim in arbitration under the American Arbitration Association rules will cost a minimum of $775 for any claim up to $10,000.   It goes up from there.  And the filing fees aren’t the worst.  You have to pay the fees of an arbitrator.  In New York, you would be hard pressed to find an arbitrator who charges less than $300 per hour.   There is no guarantee that you will get any of the fees back, even if you win.   I just can’t think of any situation where Arbitration would actually benefit the typical small business or small business owner.

So if you see the below clause, don’t agree to it.

“Any dispute, controversy or claim arising out of or relating to this Agreement shall be finally settled by arbitration in New York, New York, by a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon any award rendered in such arbitration may be entered in any court having jurisdiction.”

Not Getting a Fully and Properly Executed Copy of the Agreement

I often see clients who have a copy of the agreement, but only with their signature on it.  At some point, they were asked to sign the agreement and send it somewhere, but nobody ever provided them with a fully signed copy, i.e. a copy of the agreement that has all signatures on it.  If you can’t produce a fully signed copy of the agreement, it is very difficult to claim that a fully executed copy of the agreement exists and you’re opening the door for your opponent to claim that he or she never signed the agreement.

Make sure the agreement is properly executed. Your signature and the signature of a person who is authorized to sign on behalf of the other party must be on the signature line of the agreement. If the agreement contains language such as this:
“the parties may execute this Agreement in counterparts, each of which is deemed an original and all of which constitute only one agreement, “
it is ok if you sign one copy of the agreement and the other party signs another copy of the agreement. Both copies together will constitute the binding agreement. Faxed copies are ok initially, but you should insist on receiving executed originals shortly after execution by facsimile.

Not Getting the Full Agreement with All Attachments and Exhibits

Many agreements refer to exhibits or annexes or attachments.  For example, an agreement might state “the parties agree to sell the equipment listed in exhibit A to this agreement.”   Make sure that all such exhibits, attachments or annexes are actually attached to the agreement when you sign it and when you get the other party’s signature back.   Make sure that the exhibits say what you want them to say.  Then you have to have a full set of the entire agreement with all attachments, no ifs and buts.   Try going to court enforcing the sale of the equipment under the agreement but not having the exhibit that actually lists the equipment.

Not Noticing Last Minute Changes to the Agreement

It’s easy to slip in changes to an agreement prior to the parties signing it.  This could be by accident or with intent to defraud you.   Make sure that the agreement you are signing has the exact wording you agreed to.  In microsoft word, tools -track changes – compare documents, is your friend.  Then be in control of printing the final version.

Not Having the Right People Execute the Agreement

Make sure the parties to the agreement are properly identified. You can save yourself a lot of trouble by checking the proper name of the other party and making sure it gets cited correctly in the agreement. If the party’s name is “Dry Cleaner, Inc.”, just “Dry Cleaner” won’t do it. You can check the names of New York entities in the searchable database of the Department of State, Division of Corporations.

Not Getting a Lawyer to Review the Agreement

Last but not least, if the agreement is complex or a lot is at stake, get a competent lawyer to review it for you.

 

 

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

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