DAILY BUSINESS REVIEW

Questions to Consider Before Entering Into Your Next Business Contract

By Kelly A. Schulz

“Failing to plan is planning to fail.”

The familiar adage is often attributed to Benjamin Franklin and likely elicits images of a teacher or parent scolding a wayward child. The lesson, however, transcends any childhood lecture and finds its application in present day contract law. It seems axiomatic that one must plan ahead when entering into a business contract, but too often contracting parties overlook the basics which could become the focus of a future contract dispute. As business litigation attorneys, we are rarely consulted at the time of a contract’s drafting and instead make our appearance once a situation has escalated. Despite the

unfortunate realty that contracts meant to ensure a seamless business transaction frequently end up in our hands, this provides us with a unique perspective as to the pitfalls to which even the most seemingly ironclad contracts can ultimately fall victim. The following are just a few questions to consider before entering into your next business contract—while at first glance they may seem basic, they can make the difference between a successful contract and one susceptible to dispute.

Are the correct parties named? While seemingly basic, when this simple question is overlooked a contracting party can find itself with little recourse in the event of a breach. Take, for example, a contract for purchase of a condominium or real property still in its pre-construction phase. While this arrangement has its benefits, a contracting buyer that fails to do his or her due diligence may realize too late that the contracting developer-seller has no means to satisfy damages related to a failure to perform on the contract. This could be the case whether the developer failed to purchase the subject property at the time the contract was entered, or the developer entered into the contract through the use of a “shell” entity that does not have any assets to its name. In either scenario, even a cursory review of the deed to the property or the structure of the corporate entity could answer the basic question as to the appropriate party to be named—and in turn it could save the contracting buyer a lot of time and frustration in the event of litigation.

• Have the key terms been properly defined? Too often, parties rely on “handshake agreements” and fail to carefully define the necessary terms of a contract before signing on the dotted line. Ask yourself: is there a date by which performance must occur? Who is responsible for paying for additional necessary services? Who must carry insurance and who or what must it cover? Failure to define such terms can result in a dispute as to


• the intent of each party when the contract was formed. Similarly, it is easy to be tempted to gloss over lengthy paragraphs defining, usually ad nauseam, remedies available in the event of a breach. The remedies terms, however, can make a substantial difference in the outcome of a lawsuit. Consider a contract that limits each party’s remedies to the money the party initially contributed—essentially seeking to put each party in the same position in which it started. Seems fair, right? To the contrary, this does not cover the true extent of the damages incurred years into a contract. Parties commonly take out loans, enter into additional agreements, or forego alternative opportunities in reliance on the first contract. Should that contract fall through, what initially seemed like fair remedies may become a huge blow to one’s business or personal livelihood.

Does alternative dispute resolution make sense for you or your business? Frequently, contracts contain arbitration clauses—ones that essentially eliminate each party’s right to have the dispute decided by a judge or jury. At times, arbitrations clauses are the desirable alternative to leaving the matter up to a jury of six strangers. Submitting to arbitration, however, can end up being a complete foreclosure of one’s right to file a lawsuit and seek entitlement to damages. Of course, you will rarely hear anyone describe litigation as cost effective, but the reality is that arbitration can be just as expensive, if not more so, than traditional litigation. If not properly considered prior to execution of a contract, an arbitration clause can prove fatal to a claim by a small business or individual against a large corporate entity.

Do not let a failure to plan expose you or your business to unnecessary litigation. While the law is nuanced and provides various avenues to litigate nearly all aspects of a contract, the fact is that courts defer to the terms included in the contract to interpret the intent of the drafters, making those terms the main tools courts (or arbitrators) use in resolving disputes. A careful consideration of the “basics” can mean the difference between a satisfactory resolution and a devastating adverse judgment.

Kelly A. Schulz is an attorney at Reid Burman Lebedeker Xenick in West Palm Beach. She practices complex commercial, labor & employment, land use, and personal injury litigation.