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Insights Legal Affairs
Ten bad business contract decisions
How to strengthen business contracts Interviewed by Arthur G. Sharp
usiness owners’ contracts often fail to whole. They will not have the proper legal
B include specific terms that provide
basic, fair protection to all parties
involved in a specific transaction. As a
protections, and they will end up fighting
over things that should have been easy and
preventable, which is often the case, even
result, they expose themselves to unwant- if they are totally in the right.
ed and unnecessary disputes, which, even Inserting the omitted provisions into con-
if they win, might make them less than tracts minimizes business owners’ down-
whole. Including overlooked protections sides and gives them better opportunities
might help all parties avoid or shorten liti- to recover the amounts that will make
gation should their differences require
them whole in transactions. It alleviates
alternate dispute resolutions or, as a last
their needs to spend large portions of the
resort, costly court trials.
funds involved in transactions on attor-
Smart Business spoke with Neil Kenton
neys’ fees to defend them against breach of
“Ken” Alexander, a partner of Porter
contract allegations or to pursue additional
Hedges LLP, to identify the often-omitted
litigation costs. The key is that well-drafted
inclusions in business contracts that, when
contracts lower litigation risks and create
included, can save business owners time
contracts that make all parties happier.
and money that might otherwise be spent
pursuing remedies to disputes and help Neil Kenton Alexander
Partner How can business owners make sure that the
them get off on the right foot in business
Porter Hedges LLP needed protections are included in their con-
relationships.
tracts?
What are some of the provisions that are
One way is to make sure that the protec-
most often omitted? are not printed on. Even though, in most
tions are in writing, specific and fair to all
cases, they are as binding as written con-
contracting parties. Another is to work
The list is lengthy. It includes 10 signifi- tracts, juries are sometimes justifiably
with qualified attorneys who specialize in
cant omissions: no default interest rate; a skeptical of oral constraints. That can be
business matters to make sure that the pro-
lack of provisions for attorneys’ fees and detrimental to business owners if disputes
tections included in a contract are reason-
litigation expenses; failure to put provi- reach a court for resolution. So, some writ-
able and sustainable in court. For example,
sions in writing; missing claim provisions; a ing is better than nothing.
if there is no default interest rate included
lack of dispute resolution provisions; non- A third reason is complacency.
in a contract, then the rate might be set by
specified insurance and indemnity obliga- Sometimes business owners focus on the
state law. That rate might be substantially
tions that are underinclusive, overinclu- good things that can come out of a trans-
below what most business people regard
sive, unenforceable, downright incompre- action, but they do not think of the bad
as sufficient to cover the cost and risk of
hensible or confuse indemnities from third things. Business owners may be lulled to
delayed payment. Similarly, it is important
parties with indemnities for parties to the sleep by repeat business with some parties
to include a choice of law clause for that
contract; no warranties that the business and assume that a contract that worked in
and other reasons. If a company borrows
owner wants the other contracting parties one situation might work in another. That
money at the prime rate, the contract
to make with respect to performance; spe- is not always the case.
ought to at least provide for an interest rate
cific damages sought; a lack of risk assess- Business owners have to recognize that
that approximates the prime rate just to
ment; and no qualification of the parties each job or sale is different, and contracts
keep the business whole, which is the pri-
with which an owner is doing business. should reflect those differences. This is
mary reason these protections are written
especially true in cases in which services
into contracts in the first place.
Why do business owners overlook these pro- are going to be provided over extended
visions? periods; the timely insertion of claims into
contracts in these transactions is essential.
There are several reasons. For example,
they might rely on standard business con- What is the practical impact of leaving out
tracts provided by a trade association or some of these provisions?
industry group that cover general situa-
tions, rather than specific or unique situa- If business owners do end up in disputes,
tions involved in a particular job or sale. Or and they do not have the proper protec- NEIL KENTON ALEXANDER is a partner with Porter Hedges
they might rely on oral contracts, which in tions in the contract, they are likely going LLP. Reach him at (713) 226-6614 or kalexander@porter-
some cases are not worth the paper they to be in positions that make them less than hedges.com.
Insights Legal Affairs is brought to you by Porter & Hedges LLP
18 SmartBusiness Houston September 2007
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