Note: This is the second of three parts about common mistakes businesses make with contracts and agreements.
In the first part of this series, we discussed of the dangers of businesses avoiding contracts altogether. Today we are going to move on to another common mistake that can cost you time and money in your business dealings.
Mistake #2: Using Cut-Rate Form Contracts
I understand that businesses need to be smart about spending money. The idea of going to a website and paying a modest amount for a form contract or agreement can seem very attractive, especially for startups. It’s fast, easy, and you don’t even need to talk to anyone. Even more tempting may be places online where you can find free agreements and contract samples.
However, there are better options for businesses. Although using free or cut-rate agreements might turn out fine in some cases, they carry very real dangers. First, you really aren’t cutting that much of a corner. Most good business attorneys have sample agreements and a basic contract will probably cost between $500 -$2,000, depending on complexity (this amount will be higher for more complicated agreements). For that money you get experienced legal advice about terms you should include in your agreement, adding significant value for your business. For example, without an attorney, you may not know how or why to include a fee shifting provision, what forum to select for disputes, and whether to include an arbitration clause. Each of these, if done correctly, can significantly reduce your costs if you ever have a dispute about your agreement.
Second, when you search for free or cheap contract form, you don’t know who wrote the agreement and whether it will hold up in court. Frankly, the person who wrote it might just not be that good at writing contracts, and even if they are they might be unaware of some particular condition or term unique to your business or your location that requires special care. Few things are worse than believing you have a written contract, only to get involved in a dispute and realize that the contract does not provide the protection you thought it did. Laws are constantly changing and court decisions can alter the way contract language is interpreted. Each state may interpret contracts slightly differently. You need to work with an attorney who understands the laws and the court decisions to make sure you are protected.
Third, the idea that free or low-cost form contracts are money savers goes out the window the instant anything goes wrong. An experienced attorney can help make sure your company has adequate protection to avoid most litigation and problems that might arise from a contract. The point of a contract is to memorialize an agreement with precise written language that accurately describes the agreement with appropriate legal language. Saving a few bucks now might seem great, but if it means you later have to take a generic contract to an attorney to help you fix all the things that went wrong with it, that short-term savings will not be worth it. That cost-cutting measure could actually end up costing you tens of thousands of dollars or more in litigation fees. All of which you might have avoided by spending a few dollars to have a good contract drafted by an experienced attorney.
So, cheap or free contracts are often an exercise in “you get what you pay for” and “it only costs a bit extra to go first class” (not always true, but true in this case). If they work out fine, that’s great and we congratulate you on your good fortune. But it is often largely a product of fortune, not preparation. Because if there are problems, cheap contracts can cost you dearly.
Now all that said, we aren’t claiming free or cheap websites and services for agreements are useless. They might provide a good model to prep you about what you’re looking for before you go talk to an attorney. In some rare cases where you simply can’t wait to see a lawyer, like needing an emergency power of attorney, they can be a real boon. But for lasting, important contracts relating to your business? They are a substandard option and can really hurt you if things go badly.