CONTRACTS PART II: Three Contract Provisions You Need!

Operating a business can be costly. Trust me, I definitely understand. But there is one cost that should never be pushed aside and that's drafting your own agreements. When entrepreneurs and do-it-yourself business owners draft their own agreements, they inevitably will miss important provisions that should be laid out in the event the contract will enforcement in a court of law.

Although there are many provisions that you should have to ensure you have an air-tight agreement, here are three provisions that you definitely want to ensure is listed in your contract.

1. Dispute Resolution: Many business owners never think about how they want to handle any disputes that may arise as a result of their contract. There are three (3) different dispute resolution mechanisms that you can contract for: 1) Mediation, 2) Arbitration, 3) Trial.

A. Mediation: Did you know you can include in your agreement that the only way to resolve any dispute shall be through mediation? You can. You can make it a binding or non-binding mediation. Mediation occurs when both parties agree on a third-party who is neutral to the issues to help you resolve whatever your problems are. This is a very low-cost option and should be used especially if you had a friendship prior to entering into business together.

B. Arbitration: Arbitration is similar to mediation. However, with arbitration, it's like having a mini-trial hearing on the issues. In arbitration, you'll always have a third-party neutral arbitrator (the person hearing the case). Arbitration can be a little costly depending on what type of issue you have. But, it's less expensive that taking the matter to court. You can provide in your agreement that any disputes shall be handled through arbitration (binding or non-binding). If it's binding, then all parties would be agreeing to a final decision by the arbitrator.

C. Trial: For most business owners, you want to avoid going to court. Not only is it expensive, but the time involved can be daunting. However, you may want to include a provision that if the parties have not agreed to mediation or arbitration, that you will have the ability to enforce the agreement in a court of law. This will allow you to ensure that a Judge will hear your case after the filing fee has been paid to initiate the action.

2. Choice of Law: With so much business taking place virtually, you may actually employ or enter an agreement with someone who is in a different state than you. If that is the case, you will definitely want to ensure that a choice of law provision is present. This provision states that if you need to file a case in court, your own state law will govern. For example, if I entered an agreement with a business partner who lives in Oregon but I live in Illinois, my agreement would state that the choice of law will be Illinois. What this does is apply Illinois law to any enforcement issue I have regardless of where my business partner resides or regardless which state hears any disputes.

3. Damages: You'd be surprised how many agreements I see from business owners that fail to mention damages in the event of breach (failing to perform as agreed). In most states, if you do not provide for damages by agreement, you can only receive what statute gives you. For example, in Illinois, you can only receive what you should have received per the contract had not the other party breached the terms. Therefore, any other damages that you may have suffered will not be allowed. Now, do you really want that? No. Here are a few damage provisions you want to cover for in your agreement:

A. Attorney Fees. In the event you have to enforce your agreement in court, you want to provide that the other party agrees to pay attorney fees incurred for seeking damages on the contract.

B. Special Damages: These damages will cover any filing fees, costs incurred with trying to collect on the balance of the contract, any funds lost as a result of the breach, court reporting costs, parking, travel and other court expenses.

C. Compensatory Damages: these damages are what you were suppose to receive per the contract.

Do not set yourself and your business up for failure. As your Business Lawyer, we specialize in helping you review, draft and negotiate these stringent rigors of contract law and we’ll assist you in establishing a solid Business foundation for your company. Contact us today to schedule a Business Protection Evaluation Startup Session.

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This article is a service of SL DeBarros Law Firm, LLC. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a Business Protection Start-Up Session or a Business Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

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