A Business Owner’s Guide to Contracts

It seems as if every business owner or CEO has to know something about the law in order to keep up with the day-to-day operations of his/her business.  Unless your company has an in-house legal department or you’re a business owner who doesn’t mind sending every contract that comes your way to the lawyer you have on retainer, every once in a while you’ll be forced to read through an agreement on your own.

Deciphering legalese can be intimidating at times, especially if money is on the line.  Contracts are composed by attorneys in such a way to intentionally confuse anyone reading it who isn’t a lawyer and familiar with legal jargon.  It’s almost as if lawyers have their own language.  This article will cover a few terms that are important to understand in any contract.  Knowing them and being aware of what they mean are critical before signing your name.

One of the biggest tricks that lawyers use in contracts is counting on the laziness of the person reading or signing it.  For example, if there’s a stipulation in an agreement that states something to the effect that by signing this contract, you agree to the company’s policy and procedure manual or terms of agreement.  This is a small piece of a much larger puzzle.  By agreeing to this, you have just agreed to whatever is in this other document which may or may not be presented to you at the time you sign the contract.  The other document could be a huge book that contains a whole host of terms that you may not be particularly comfortable with.  In this type of circumstance, it is definitely recommended that you request to see a copy of the other document before agreeing to the terms of the contract.

Personal Guarantees

One of the benefits to incorporating a business is that if the company is liable for damages, they can’t come after the owner personally.  If you’re ever in the unfortunate situation where you lose your business, the last thing you want is for a creditor to come after your personal assets.  When signing an agreement that holds you liable personally or individually, if the company still owes money after it is defunct, you as the owner are still responsible for its debt.

There are some cases where avoiding a personal guarantee is impossible.  For example, almost every agreement you sign with a bank or credit card company will most likely include a personal guarantee.  If you’re acquiring a business where the seller is holding the note, he would be foolish to not require a personal guarantee.  However, there are some cases where it is acceptable to challenge the presence of this sort of guarantee, such as a lease, service or sales agreement.  Just simply tell the other party that you don’t do personal guarantees and ask to strike it from the contract.

Sometimes personal guarantees are in disguise by having the word, “individually” listed on a signature line.  Don’t be fooled by this.  Guaranteeing an agreement personally or individually is the same thing.  It’s not a bad idea to include your title next to each signature to reinforce that you are signing on the capacity as the company’s CEO or President, not an individual person.

Nondisclosure

Confidentiality may be imperative when negotiation an agreement.  Nondisclosure simply means that the parties agree not to disclose any information to a third party that pertains to the agreement and all that it encompasses.  Make sure that the nondisclosure is bilateral, meaning that it goes both ways and is applicable to both parties, not just you.  Sometimes a Nondisclosure Agreement is referred to as an NDA.

Hold Harmless

Indemnification is a clause that many people would like to add into a contract but it usually is not beneficial to the person agreeing to it.  A Hold Harmless Clause basically means that you are waiving your right to sue the other party if something were to go wrong.  Sometimes this type of indemnification doesn’t hold up in court but it shouldn’t be something to knowingly risk.  Ask to strike it out of the contract if possible.

Non-Circumvent

This is an important stipulation that means one party can’t bypass you in order to get to another party.  This is particularly important if commissions are part of the agreement.  For example, if you are a sales representative, the last thing you want is for the customer to circumvent you and deal directly with the company if you were the one who made the connection.  Then you lose your commission and the company gains a new client that you didn’t get credit for.

Jurisdiction

Many contracts have a statement that includes the location of the court where claims would have to be filed in the event of a dispute or breach of contract.  If the company you’re doing business with is in a different state and a lawsuit comes out of the relationship that the agreement is bound by, this may require you and your lawyer to go out of state to fight the battle.  This can be inconvenient and costly.

Addendum vs. Amendment

This is an easy one to remember.  An Addendum is a section that gets added to a contract after it’s agreed upon and an Amendment is a change to a contract after it’s been agreed upon.  Just remember that the plural of the word Addendum is Addenda, not addendums.