There is always risk involved when entering into a business agreement. But if you know what to look for and mitigate that risk, you can save your company the time and money needed to fix the problem when the risk becomes a reality.
Here are some of the top contract risks in-house legal teams face and what you can do to avoid them.
Recognize Risky Boilerplate
Price and term are arguably two of the most important contract clauses. A business needs to know what good or service it is providing or receiving and how much it is paying or collecting for that good or service. It also needs to know when the parties’ obligations end. However, many contracts contain boilerplate with hidden risks, which can get overlooked by sales teams eager to close the deal.
Attorney’s fees, venue, and indemnification clauses are often included in contract boilerplate and can create hidden traps for a fast-moving business. A Wisconsin-based manufacturer that agrees to sell $25,000 worth of custom-designed water bottles to a tech startup in California could end up paying more than the contract price in just attorney’s fees after going to trial in a San Jose court. If the manufacturer had paid closer attention to the boilerplate, they could have negotiated that clause and agreed to solve any disputes in a more cost-effective manner.
Educating your frontline staff about these common clauses before the contract is even sent to Legal will save time and reduce the risk of inadvertently agreeing to contracts containing them. Even if the company deals with a variety of contracts, developing templates or a database of commonly used clauses that address issues like attorney’s fees, venue, and indemnification can reduce risk and serve as a solid foundation for further negotiation.
Organize After Execution
Given the number of contracts a business handles every year, it is vital to ensure contracts are correctly stored and organized after execution. As the Small Business Administration advises, an easy-to-use, effective record system is vital to the success of any business, regardless of the size or type of business. Contracts are one of the most important business records, whether they involve employment, financing, or procurement. Despite their importance, many companies fail to give enough attention to how they handle contracts after execution. In fact, a recent ContractWorks survey found that over 70% of in-house legal teams said their organization doesn’t pay enough attention to managing contracts after they’ve been signed.
In-house legal teams may be intimately involved in negotiating a favorable contract for their company, only to have their efforts all be for naught if the contract is misplaced or overlooked. Storing contracts in a secure, online repository allows key stakeholders to access them and prevents them from being misplaced or even stolen. Implementing a standard naming convention for contracts also saves time and confusion when looking up agreements down the road.
Don’t Neglect the Basics
In the haste of closing a deal, certain basic information may be overlooked. As fundamental as it seems, many contracts do not contain the correct legal names of the parties involved. For example, the name “Innovative Faucets” may be a DBA name of the company Plumbing Ventures, Inc. This information should be reflected in the contract and updated if the company changes names. Using the correct legal name helps a company perform due diligence prior to contract execution and can save time and frustration if the relationship breaks down and litigation becomes necessary.
A similar situation can occur when the wrong people sign a contract. Frontline sales staff may assume that the individual with whom they are negotiating has the contractual authority to bind the other party. That is not always the case, though.
Ensuring the correct employees of a company are signatories to the contract removes one issue from the table if a dispute later arises. In some states, like California, if a contract is signed by two separate kinds of corporate officers, it is prima facie evidence of consent by that corporation to enter into the contract. A board resolution from the other party can also provide evidence of the signatory’s contractual capacity.
Understanding not only who needs to sign the contract, but who will oversee its implementation, reduces the risk of something going wrong. If certain obligations in a contract are conditioned on the timely performance by the other party, someone should be monitoring when those milestones occur. A different person may also be listed as the contact for providing notices of breach or termination under the contract. A summary of the key players and their roles in execution and implementation, along with the key terms of the contract, reduces confusion and the risk of oversight during the life of the contract.
Templates can be great tools to reduce negotiation time and ensure important clauses are included in contracts. However, they are only effective if they are up-to-date. For example, if your business contracts with government entities, those entities may require certain clauses to be included in agreements with your subcontractors. These requirements can change from year to year based on new legislation or regulations. An annual review ensures your templates contain all required language based on the current applicable law, along with any relevant information about the company that may have changed since the template was created.
Many in-house legal teams wait until a problem arises before taking control of their company’s agreements. A proactive legal team does more than negotiate and draft agreements. It adds additional value by reducing risk through tools and strategies like those discussed above throughout the contract management process.