4 Things To Look For Before Signing A Business Contract
July 20, 2022
4 Things To Look For Before Signing A Business Contract
Whether you’re hiring a new employee, purchasing raw materials for your business, or leasing new office space, entering into a contract is generally the culmination of a lot of planning and hard work. However, it could be disastrous if you fail to thoroughly understand the contract terms.
As a preliminary matter, do make sure your contract is in writing. With several exceptions set forth at Ariz. Rev. Stats.§ 44-101, oral contracts are valid so long as they otherwise contain the three essential contract elements: an offer, an acceptance, and legal consideration. But even if a verbal contract may be valid, it may not be provable. A written contract is always a good business practice.
Although this is not an exhaustive list, here are 4 things to look for before signing a business contract
1. Use the Correct Legal Entity
A common mistake in the world of contracts is not using the correct entity name. Often, the mistake is minor, such as inserting, or failing to insert, a comma after an LLC or Inc. designation. But there can be mistakes that have more serious consequences.
As a hypothetical example, let’s say you have an ice cream shop called “Cherry on Top.” It is owned by a corporation named “The Creamery, Inc.” of which you are the only shareholder.
When a vendor sends you a contract to sign, if it says “Cherry on Top” on the signature line, rather than The Creamery, Inc., it may not be an enforceable contract. A contract can be entered into only by an individual, a corporation, a limited liability company (LLC), or a partnership. In law, these are all called “legal persons” or “legal entities.”
“Cherry on Top” is not a legal person or legal entity. It is just a trade name or a “doing business as” name, which is usually abbreviated to “DBA.” So it cannot enter into contracts. It’s best to use your corporation’s full legal name.
If you don’t make the right legal entity the party to the contract, your vendors can sue you personally for any unpaid invoices.
2. How Will Disputes Be Resolved?
Disputes under a contract can be resolved through litigation, and also by the alternative dispute resolutions known as arbitration and mediation.
Initially, you should review whether the Dispute Resolution clause specifies arbitration when one of the parties is seeking money damages of $50,000 or less for breach of contract. Under these circumstances, arbitration is mandatory in Arizona. This is so even if the contract lacks an arbitration provision. Sun Valley Ranch 308 Ltd. P’ship v. Robson, 294 P. 3rd 125 (Ariz. Ct. App. 2012). Since this is required by law, it is good contracting practice to include this in the Dispute Resolution provision of your agreement.
You should also take the time to think about how you will resolve matters in excess of $50,000.
3. Which State Law Will Govern?
Most contracts have a so-called “Choice of Law” provision which identifies the state law which will apply in actions brought under the agreement. Often this clause isn’t given a lot of attention until there is a dispute. However, the choice of law can have a big impact on how a contract is interpreted and enforced, so it’s crucial to consider carefully what law to use.
Choice of law provisions is especially important where the parties are from different states and there are significant differences between the laws of one state versus another. For example, the state of Arizona has a provision that provides for an award of attorneys’ fees to a prevailing party in a contract action if a proper Rule 54 motion is filed. Ariz. Rev. Stats. § 12-341.01, By contrast, the state of New York generally requires each party to bear responsibility for their own fees unless a contract provision provides otherwise.
4. Automatic-Renewal Clauses
Be careful to check for an “automatic renewal clause.” If you sign a contract that contains one of these clauses, you will have to provide advance notice for termination to the other party. In countless instances, small business owners, often without their knowledge, continue having payments deducted from their bank account or charged to their credit card long after they cease using the service. You should consider either negotiating these out of the agreement or otherwise carefully calendaring the date on which you need to give notice of termination.
Contact Counxel Legal Firm
There are real implications to entering into a contract. Regardless of whether it’s a personal matter or for your business, it’s important to understand what you are agreeing to and how things will unspool if there are disputes. Contact Counxel Legal Firm to have your contract reviewed by an experienced attorney.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact intake@wordpress-457010-3165254.cloudwaysapps.com or 480-536-6122 to request specific information for your situation.