Potential Landmines in "Simple" Business Contracts
Post by: Lesley Hempfling
You have just gotten a call from a big client you have been trying to land for months. They are finally interested in your services, but they are tentative about the relationship and aren't sure they want to commit for the long term just yet. They propose that you all enter into an agreement for the short term to govern your relationship until you can figure out all of the details. They send over a "simple" Letter of Intent for you to sign. You are a small, lean company and do not have a budget for unnecessary legal expenses. Plus, you know if you get an attorney involved it will hold up the process and the deal. So, you take a cursory glance at the Letter of Intent, sign it and forge ahead with business.
It is so tempting to take this route. As a business owner, you are more focused on the client and the deal rather than looking down the road at some of the issues that may come back to bite you. It's a big client you have been courting for months and they have finally come around. What if you offend them by trying to negotiate what appears to be a simple contract? What if they think you are "too much trouble?" What if they don't want to wait on your counsel to review and negotiate the Letter of Intent? And anyway, what are the odds that something will go wrong? Slim right? The better question really is - what will it cost you if something does goes wrong? Chances are, it will cost you significantly more than it would have cost you to have an attorney guide you through the drafting and negotiation process from the start.
More times than not, a Letter of Intent is going to be the basis for a more formal, long term contract, or at least the starting point. Due to this fact, it is important to negotiate key terms up front and to begin to operate under those terms from the start. This gives all of the parties a clear understanding of what a future relationship should look like. For instance, if you want to be paid within thirty (30) days of receipt of an invoice, but you allow the client sixty (60) days under your Letter of Intent, it's difficult to argue later on that you are unable to adapt to the longer payment terms when negotiating the formal contract. What about the scope of work? Are you agreeing to a broader scope of work in the Letter of Intent, but have no intention of extending that provision to the formal contract? Have you agreed to apply other state's laws to the interpretation and enforcement of the Letter of Intent? If so, your new client will argue that provision must be carried over into the formal contract. This could be a significant cost to you later on if you have to hire counsel located in another state to defend or bring a lawsuit under the agreement. Have you agreed to indemnify the new client in a way that is inconsistent with your other contracts? What about exit terms? How can you get out of the agreement if you are not satisfied? Are there any notice requirements? What about your obligations and warranties under the agreement? Did you agree somewhere in the Letter of Intent that it would basically "turn into" a more formal agreement after so many days? Finally, do you really think that the other party did not have professional advice on the terms of the agreement before they presented it to you?
These are just a few of the questions that should be discussed before signing off on even the "simplest" of Letters of Intent. It is very rare (maybe impossible) to find a contract that will protect both sides equally. That is why having your own advocate from the start is crucial. So, before you grab your finest pen to sign that next big deal, make sure you have taken some steps to protect yourself and your business. Call a qualified business attorney to review your contract. It could actually save you money and time down the road.