Texas Business Dispute Blog

Wednesday, February 3, 2016

Risks Posed By “Do It Yourself” Legal Contracts: Just Don’t Do It

By:  Ladd Hirsch (Dallas)

Private company business owners often feel pressured to hold the line on costs, and the pressure only increases as market conditions become more challenging.  At the same time, the billing rates for lawyers continue to escalate, sample forms of contracts can be found on the web for free, colleagues have contracts they are willing to share and the business issues addressed in many contracts seem fairly straightforward.  Business owners may therefore conclude that they can forego obtaining help from outside legal counsel in drafting and negotiating contracts as an effective means to achieve substantial cost savings. 

While business owners do face significant market pressure, an approach that leaves the lawyer on the sidelines in contract negotiations often turns out badly.  The short-term savings the company obtains from foregoing legal advice may ultimately result in costs that are many times greater than the amount the company saved.  These future costs can skyrocket when key terms are missing in the contract or when poorly drafted contract terms leave the company without certain legal rights or leads to protracted, expensive litigation.  This Post focuses on four areas in which business owners should be particularly reluctant to go it alone in negotiating contracts.

Buy-Sell Agreements

When majority owners don’t adopt an exit strategy at the time the company is formed, they may later decide to enter into a buy-sell agreement with the company’s minority investors to deal with future transfers of their ownership interests.  As noted, buy-sell agreements are available for free online or can be secured from business colleagues.  Yet, there is no one-size fits all type of buy-sell agreement that works well for every private company ownership group. 

An experienced business lawyer can help business owners and investors document the terms of a buy-sell agreement that meets their specific business objectives.  The agreement will need to address the following issues, among others:

  • Who has the right to exercise the buy-sell and when
  • How is the right exercised and under what circumstances
  • What is the formula for valuing the interest to be transferred
  • How is the purchase price to be paid and when
  • What dispute resolution procedures apply

    If the buy-sell agreement does not fully and accurately address these key business issues, the business owners will likely be dissatisfied and frustrated when they or other owners attempt to exercise rights under the agreement in the future.

Larger Vendor Contracts

The company’s agreements with large vendors for the purchase of goods or services may be supplied by the vendor, and it may not seem advisable to incur substantial legal fees having these contracts reviewed and key terms addressed.  Lawyers can also be faulted for slowing down the contracting process, which is another reason the business owner may decide to simply sign the form of the contract that is presented by the vendor.  Trusting in the good faith of the vendor (and the vendor’s counsel), however, is a risky way to conduct business.

Business owners can plan and prepare for the future by relying on the company’s legal counsel to review the vendor’s contract and negotiate to include terms that protect the company.  These terms will include all of the following:  

  • Whose warranty terms apply to the goods/services purchased and what are they
  • What limits of liability apply to the goods/services purchased
  • What remedies exist if the goods or services are defective
  • Which state law applies to the contract and what is the venue and forum for disputes

    If the business owner does not have the contract reviewed by company counsel, there may be an unhappy surprise when the goods or services the company has purchased develop problems.  The business owner may learn the contract does not contain the rights and remedies he assumed would exist in the contract to deal with defective goods or deficient services.

    Confidentiality or Non-Disclosure Agreement

    Companies frequently enter into confidentiality or non-disclosure agreements (NDA’s) when they are considering entering into new business relationships.  Many non-lawyers consider these agreements to be “cookie-cutter” generic documents that require little thought.  Business owners may also believe that pulling an NDA from the internet without charge is an effective way from them to avoid legal expense.  Using a generic NDA without input from counsel who knows the business, however, may leave important gaps in the scope of the protection for the company, which come back to haunt the business.

    Confidentiality agreements need to be tailored to ensure that they cover the specific trade secrets and other confidential information the company wants to protect.  In addition, the NDA should also cover a number of other important issues that include the following:

  • How can the disclosure of the company’s confidential information be limited solely to those who have a legitimate need to see it
  • What is the nature of the information being disclosed, and how will it be protected by the receiving party to ensure that it remains confidential
  • What specific steps require the confidential information to be returned to the company or destroyed by the receiving party after a set period of time
  • Will the receiving party be prevented from competing with the company even if it does not use the confidential information to compete

    Release of Claims

    A release of claim is another common contract entered into by companies to confirm that a dispute has been resolved.  A release can apply to claims both by and against the company, and be entered into with employees, customers, suppliers, and other third parties who have contact with the company.  As with the other contracts mentioned, forms of releases are freely available on the internet and/or a proposed form of the release may be provided by the other party to the agreement (or its counsel).  The decision to forego having company counsel review the proposed release may lead to significant future problems, but retaining counsel will assure that the release will protect the company as follows:

  • Disclosures – what pre-release disclosures/representations need to be documented
  • Carefully documenting the scope of the release – broad enough to cover the claim, but without releasing the other party from any continuing obligations
  • Consideration for release – what security will apply in event of payout
  • Non-disparagement clause – to prevent future defamatory statements
  • Confidentiality provision – to maintain the release in confidence

  • Drafting a release without input from legal counsel can leave the company exposed to claims left outside the scope of the release or the document could be construed to release claims that were not intended.  For example, a supplier who receives a release from the company may have other continuing duties to the company or may owe other amounts that are not being released.  A poorly drafted release, however, may result in an unintended release of claims that the company did not intend to be included within the scope of the release.

    Conclusion

    Legal fees can mount quickly, but a business owner’s decision to forego obtaining legal advice from counsel to save costs in negotiating and drafting contracts can often lead to a much greater expense for the company.  The most cost-effective approach is for the business owner to retain experienced counsel for the company who is efficient, and whose guidance in forming and negotiating contracts will provide lasting value for the business.


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