Contracts are an essential – and very dangerous – part of business life, and one of my critical “black holes” that can shut you down.
- They can be as simple as a handshake, or as elaborate as running into hundreds of pages (neither are recommended).
- They are the spark behind buying, selling, and all business transactions in between.
- And, that spark can set off the time bomb that blows up many a business owner.
Contract law takes precedence over tort law every day in court.
For example, you may not have directly caused an accident or injury, but if you granted a hold harmless clause to the other party, you will be responsible to pay for what happened. As a business person, you are legally expected to understand – or get help. It’s really hard – and expensive – to argue that you didn’t get it.
Recently, a consulting engineer needed help evaluating his insurance coverage for a contract from a major utility. We quickly found they wanted him to be responsible for “everything” that could cause injury or property damage on the job site – even if the utility’s employees were partially to blame. We identified the most egregious clauses that needed negotiation.
In another example, a client told me they had no contract with their IT service provider – who had access to all hardware and software! There was no non disclosure agreement (NDA), or agreement about errors that might cause data loss, release of client information, downtime, or other problems.
It was time to do a complete review of vendor agreements to look at appropriate risk transfers and insurance backstops to clean up this dangerous gap.
There are lots of contractual minefields and clauses that can hurt you:
- Is the legal “venue” (usually another state) so far away you’ll never be able to initiate a dispute?
- Will “alternative dispute resolution” (ADR) deprive you of important protections?
- “Time is of the essence” can be a killer if you don’t pay attention to the due-dates.
- “Required” insurance coverage clauses can be onerous, and are often poorly worded – which can make compliance virtually impossible!
You also need to be careful about:
- Hold harmless/indemnification clauses that have broad or vague wording.
- “Best efforts” or promises that can have special legal meaning.
- Extra responsibilities pushed your way in the fine print.
- Disguised “work for hire” wording.
My advice is to never sign a new contract without your legal counsel, and an insurance specialist, reviewing for both legal appropriateness and insurance coverage. Create an internal process that identifies who can sign contracts, and the steps to be taken before that happens.
For a more complete review and to have a handy reference guide, click here for a complimentary PDF download of Risk Management Through Contracts and Insurance: a Primer, by Robert K. Buchanan, Jr. Esq. and Charles T. Wilson. Or go to www.risksmartsolutions.com, click the Resources tab, and then White Papers.
If you have questions or more complex circumstances, don’t hesitate to click reply or give me a call – firstname.lastname@example.org | 510-685-3883. There’s never a charge for brainstorming!