Seven Steps Toward Staying Out of Court

This month features a conversation with Paul Lopez, COO and a director at the law firm Tripp Scott.

“Murphy’s Law” – “If anything can go wrong, it will” – originated in science but also applies to human relationships, including business dealings.

Even partners or contracting parties with the best relationships and intentions often run into misunderstandings and failures to meet expectations that lead to legal disputes, making it critical to identify, preclude and prepare for highly probable bumps – and barriers – in the road.

So here are seven steps to improve your chances of staying out of court.

1. Know thy “counterparty”

It’s good to know or have worked with a potential business partner or contractor. But even a close acquaintance you engage with all too often turns out not to be “all that.” And many a friend-“ship” has run aground on the shoals of business or contracting disappointment or underperformance.

Which means preliminary investigation is always in order. Research any potential partner’s or contractors’:

• Length of time in business

• Reputation for reliability and trustworthiness

• Previous partners and vendors and their reputations

• And very important: history of litigation or judgments, if any.

Information sources can include:

• Public resources such as the Better Business Bureau or Internet searches

• Word of mouth

• Especially, trustworthy references (yes, it’s ok to ask even a “friend” for them).

Then discuss with the potential counterparty any issues that surface in this investigation. There may be innocent explanations.

2. Determine what you want and expect – and what the other party does.

Write out a list of desired and anticipated outcomes and walk the other party through it. Expressing your vision with the greatest possible specificity will help in drawing up terms that will get you there.

3. Scope out – and agree on – the “here-to-there” details.

Once both sides have broadly agreed on objectives, focus intensely together on the “here-to-there” details. For example:

• Expected steps and milestones and who will be responsible for which and in what timeframe, including hard deadlines where appropriate. If employees are involved, understand who exactly on each side will be doing various tasks anticipated and what their qualifications are.

• How much, how, when, to whom and under what conditions money will change hands – compensation, payments, investments, investment returns, interest, etc.

• The kind, nature, quantity and quality of any materials or equipment, and whether these involve separate costs.

Again, try to put all these details down on paper in a simple but precise “term sheet” at this stage. 

4. Get it all in writing – in one clear and easy-to-understand contract.

 Never conduct business on a “handshake” – always have a precise, concise contract drawn up, in simple language understandable to both sides, that clearly sets forth all obligations and expectations by both sides in the written list of expected outcomes and more important, the term sheet.

And don’t depend on communications outside the contract unless specifically“ incorporated by reference” and appended. In one case, confusion over which “rendering” of a job would be followed – the contractor’s or a homeowner’s – resulted in unanticipated costs to a homeowner.

That warning includes emails containing loose language or perceived promises, which parties often assume create de facto agreements, not to mention verbal pledges. Recently, a business investing in a startup demanded a full share of the company that the startup’s owners believed was conditioned on a verbal promise of in-kind support that was never provided. The parties may be headed for litigation.

For safety, agreements should include clauses stating that no outside terms, expressed orally or in writing, are enforceable unless incorporated by reference and appended. Related emails and correspondence should include disclaimers that no terms are effective unless so incorporated.

5. Put on some protection

Ask contractors to warrant their work for a reasonable period and seek protections against non-or underperformance in all agreements, such as penalties, interest, disinvestment or withheld payments.

6. Communicate, communicate, communicate – and
communicate some more

Even with finely crafted agreements, circumstances change and cause alterations in behavior from obligations specified in contracts – sudden failure to complete work, deliver a product, or fulfill a financial obligation. These may constitute an unagreed-upon “modification” or change in terms.

Communication is key: if you sense that a relationship is souring, misunderstandings have arisen, or situations have changed in other ways that affect the performance of a contract or business agreement, speak up and express your concerns while there is hope of resolution. 

7. Pay an attorney (a little) now or pay her or him (a lot) later

Consulting with an attorney familiar with issues that crash business and contracting relationships – either in the course of crafting an agreement or when disputes arise – could keep you out of court or put you in the strongest possible position if litigation results.

Tripp Scott’s Business & Banking and Entrepreneurial Business practices are well-versed in crafting agreements that anticipate potential problem areas and resolving disputes short of litigation. Contact us @ trippscott.com or 954-525-7500.