Critical Contract Mistakes – and How to Avoid Them

By Michael J. Napoleone

Critical Contract Mistakes

When it is time to put your agreement in writing, don’t take shortcuts. The best intended plans can fail if you don’t make sure that the written document reflects what you have negotiated. Here are some frequent traps to avoid when preparing your next contract.

1. Failing to have a fully executed contract.  Sending the contract to the customer is not enough. Do not begin work, order product, or undertake any other actions set forth in the proposal until you are in possession of a signed contract. You would be surprised at how many people will start work on the assurance that the executed contract will be provided, only to discover (once a problem develops) that there is no signed agreement.

2. Failing to include all material termsA contract should be “all inclusive.” Include the exact scope of the work to be performed or the materials to be provided. Simply stated, set out what each person has agreed to do. If work is to be performed or materials provided according to a set schedule, set forth the specific schedule in the contract. Is there a key deadline that must be met? If so, make sure the contract specifies that “time is of the essence” as to that event (and not to any other deadline). Are permits required? Who is to pull them and when must they be obtained? As to materials: which are included as part of the base price and which are options added at extra cost? Is labor included? How many hours? What is the price per hour? Spell out each term of the contract clearly and precisely.

3. Be clear on payment terms When is payment due? Is a deposit required? How much and when is it due? Do not leave room for ambiguity or interpretation. Discuss the payment terms up front and make sure they are specifically written into the contract. Be clear if payment is conditioned upon a percentage of completion or a specified time schedule. Also be clear as to what actions may be taken if payment is not timely received and the remedies of each party in such an event. Consider an escrow account where the total contract price is deposited up front with a provision that allows funds to be withdrawn upon the occurrence of certain conditions or events (such as delivery of product, percentage of completion, etc.). Even if you get into a dispute later, at least you will know that the full purchase price is being safely held in the event that you need to compel payment.

4. Making assumptionsIf there is a term or provision that is important to you, make sure it is in the contract. Are there unique or specialized terms in the contact? If so, make sure they are clearly defined so that all parties know exactly what is meant by each term. Don’t assume that both parties understand what is required under the contract; spell it out. Ask questions. Before signing the contract, discuss the final written terms with the other party. Make sure you have included all key items (many of which are described above).

5. Promising what you can’t deliver It sounds simple, but don’t bind yourself to a contract that obligates you to perform on a certain time table unless you know you will be able to meet that timetable. If your performance depends upon your receipt of merchandise that is not already in your possession, try to tie your performance benchmarks to run from the date the merchandise is delivered to you.

6. Ignoring the “fine print”. Include a venue and jurisdiction provision which states where a lawsuit may be filed in the event of a breach. A jurisdiction provision is especially important with non-local parties, as you don’t want to find yourself unable to sue in your venue of choice.

In Florida, prevailing party attorney’s fees are generally only available by statute (for a limited set of claims) or by contract. Consider including a prevailing party attorney’s fees provision, but remember that it cuts both ways.

Include a merger clause that states that the written agreement reflects the entire agreement and understanding of the parties. The purpose of a merger clause is to prevent one party from later claiming that there were oral agreements that provided for additional terms or conditions not covered in the written agreement.

Include a provision that prevents and voids any oral modifications of the agreement.

7. Using a form If you have an old form contract that you have used for years, take the time and expense to have it reviewed to make sure that it is a good starting point and that it contains all the necessary provisions for the current need. If it was prepared many years ago, it is a good idea to make sure that it is still a legally enforceable document. Don’t rely on a form that someone gives you without first having it reviewed. Which takes us to ….

8. Failing to hire an attorney to review your contractHiring an attorney to assess and prepare your contract before you have a problem is more cost effective than trying to later enforce a poorly drafted contract. While few agreements are truly “air tight,” you want to know that you have done everything you can to make sure the contract terms are all spelled out and you have covered all of the important points in the event of a breach. A lawyer can help you accomplish this goal.