By Andrew W. Sohn, Esq.
In a previous article, the senior partner of our firm, Ms. Gahram Kang, wrote a practical article titled, “5 Ways to Get Sued & Lose the Lawsuit (as a Business Owner)” (read the article here). The article highlighted five common mistakes business owners made that’ll inevitably lead them to lose a full-fledged lawsuit or legal dispute. Don’t support this overly litigious state we live in by providing more ammunition for plaintiffs; let’s do our part, please!
Gahram articulated an interesting point in her article, which may seem obvious, but is nonetheless a common mistake in business practice. Point three of her article reminds the business owner that he or she MUST read the contract (or have an attorney read it), before signing it and committing to its terms. Simple enough, right? Unfortunately not for most. We hear the same following excuses over and over again:
“Who has the time to sit there and read ALL OF THE fine-print in a contract? And even if I had the time, what the heck does it all mean anyways?”
First, you MUST make the time. Everyone has the time to make wise business decisions. Reviewing the contract and its terms before fully committing to it, is good basic business practice. Once you put your signature on the contract/agreement, you have memorialized that there was a “meeting of the minds” and now you are bound to its terms. If you fail to fulfill your obligations stated within the contract, the other party has the legal right (and causes of action) to initiate a lawsuit against you. Trust me, in this legal climate, they will be motivated to do so.
Second, if you DO NOT understand what a contract’s provisions, terms, or language means or what it says, PLEASE have a business/contract attorney review your agreement thoroughly. They have the knowledge and expertise necessary to point out any red flags and ensure that you fully understand what you are signing. There are law firms and attorneys out there that specialize in contract review and negotiations (*ahem* such as the Avodah Law Group). Pay the small cost up front to avoid the potentially devastating costs and negative consequences in the future.
In order to help you understand what a typical business contract and its provisions look like and explain what they mean, I’m going to highlight three common provisions within a contract that people skim over, but that are important and usually found in most business transactional contracts. Here are three common provisions in a business contract:
1. Dispute Resolution Clause
Typically, there will be a clause here that references either “arbitration” or “mediation” as the dispute resolution method. One must become knowledgeable about what each type would mean, and understand the key difference between the two is that arbitration is binding and mediation is usually not. Arbitration, in California is typically governed by the American Arbitration Association, while mediation has its own set of rules of conduct.
Mediation, however is typically an expensive process that requires two parties to come into a mediator’s office (typically a retired judge or attorney with extensive experience in that particular area of law), and will strongly recommend settling the active lawsuit or settling the issue “pre-litigation”, meaning, before any lawsuits or papers have been filed with the court. In smaller commercial transactions where there is a dispute over the terms of a contract, we would recommend including mediation as the dispute resolution choice because it allows the parties to commit to a neutral third party dispute resolution method, but the result isn’t binding on the parties. Mediation keeps the discussions completely open as it allows for the parties to reach an informal verbal agreement, which if agreed-upon, its terms will be memorialized in a final agreement at the end of the mediation itself.
Arbitration proceedings are much more strenuous. Attorneys will bring all their evidence, documents, etc. and plead before an arbitrator, which may or may not be a good thing. Typically, arbitration has the feeling of going to a short-noticed/short-termed trial and/or legal proceeding. As a party to a binding arbitration, you must agree to waive your right to go to court for a judicial decision. Compare this to mediation, where you leave open the possibility that you can still take your adversary to court (and vice versa) if you disagree with the results of the nonbinding mediation.
2. Governing Law/Venue Provisions
It’s simple. If your principal place of business is in California and you intend to conduct your business within the state, then make sure that the governing law provision specifically states that the agreement will be governed by the laws of California.
There are often times where a California client would transact or contract with an out-of-state entity or party and have that same out-of-state party draft the contract outlining the terms of the agreement. However, in these situations, the California client would feel obligated to agree to the drafting party’s state for its “governing laws.” Don’t fall into this trap. Keep in mind that once you agree to allow the contract to be governed by some other state’s laws, if you get into a dispute over the interpretation of that contract, you will have to hire a lawyer in another state to represent you – why would you want that unanticipated additional expense (including your or their travel expenses)? Again, if you are a California entity and you intend to do most of your business within the state, then you are absolutely entitled to be governed by this state’s laws, plain and simple.
Related to Governing Law, there is typically a “Venue” provision that will indicate which local county a potential lawsuit will be filed and initiated. If your principal place of business is in a specific county within California, then that will be your venue for purposes of a lawsuit. For example, if your business is in Irvine, California then your venue will be in Orange County Superior Court (at the state level, there is different venue requirements for federal court).
3. “Entire Agreement” Provisions
You will see towards the end of many contracts/agreements, that there is almost always an “entire agreement” provision. This provision of a contract essentially screams at you to read the written contract itself thoroughly prior to signing it. This is the case because any oral communications, verbal agreements, prior written agreements will be superseded by the agreement you are about to sign off on.
I know a lot of business owners will do business through the old “hand-shake, wink-wink” model, but let me tell you, whatever you agreed upon verbally, IF it is not expressly stated within the final signed/executed agreement itself, that hand-shake agreement you may have had is not enforceable in the court of law. Furthermore, DO NOT EVER trust the other party to a transaction (whether or not they are your friends, family or even if you have an extensive history of prior dealings), to comprehensively account for or include provisions that you felt were already agreed-upon. The drafting party might accidentally (or negligently) forget to include certain terms within the contract, or he or she may intentionally leave it out, to your surprise and disappointment later on.
Only trust your own eyes and your own understanding of what was agreed upon. Then, make sure that it has been comprehensively and thoroughly expressed within the final contract/agreement. If you feel that the contract/agreement itself is overwhelming or you just don’t have the time, have the Avodah Law Group review the agreement for you to ensure it expressly states what you believed were the agreed-upon terms of the transaction. We’d be happy to help!
As an attorney at the Avodah Law Group, Andrew W. Sohn, Esq. advises, represents, and provides legal counsel to small to medium sized businesses across a variety of industries. His firm is dedicated to serving as outside general counsel for business owners across the globe (see his extended bio here). In his free time Andrew helps out with his family’s business ventures and serves as a youth director at his local church.