DIY Contracts – Know What To Look For

By Hannah Singerman, - In Leadership

Picture of a person writing on a nice legal pad

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I am a litigator. I like to say that litigators are the surgeons of the lawyer world. We step in when there is a problem, take quick action, and try to fix or ameliorate the problem. By contrast, the transactional attorneys are the legal internists. As with actual internists, many people avoid transactional attorneys until it is too late for anything other than a referral to a litigator.

In my practice, I have seen a plethora of contract issues which might have been avoided if an attorney reviewed the contract at its inception. Case in point: I once had to enforce a contract that spanned three states. The contract was not custom made for the client, but one in where they simply found a form on the internet and filled in the blanks. Specifically, the contract set the location of the enforcement in one state, the law governing the main contract in a second state, and the law governing the personal guarantee in yet a third state. Thus, the judge deciding the legal issues was familiar with the law of one state, but was to enforce part of the contract under the law of a different state, with an additional piece of the contract enforced under the law of a third state. The reason for the three states was because the blanks for each state were filled in by three different non-lawyers at the company. In litigation, confusion and uncertainty costs time and money, and even the smallest issues like addressing multiple states in a single contract can become expensive.

This is not to say that every form from the internet in the hands of a non-attorney business owner is bad or leads to expensive litigation, or that having every contract drafted by a lawyer guarantees litigation protection. It is not even to say that a good litigator cannot overcome a bad contract (at times and for a price). Do-It-Yourself (DIY) legal contracts can work out just fine, but there is just more of a risk. Risk can be expensive.

The root issue with DIY contracts is that all businesses are not all the same. Paying for a lawyer is not merely buying the words in the contract; it is purchasing the advice that helps you decide what words are right for you. Is an arbitration clause a good fit for your business? How about a cognovit note? Is a personal guarantee desirable in your location and industry?

None of those questions have simple answers and each answer will be unique to each particular business (especially with respect to location). Further, if reading those last two paragraphs made your head hurt a little, then you can start to understand why a DIY cookie cutter approach to protecting your business may not be the best choice for you. Just remember, I am intentionally minimizing the legalese for this article.

Even a contract that has worked well for a business can become a problem if circumstances change. Suppose your business chooses to expand into another state. For example, let us look at a business that provides monthly services under a contract for a set period of time. The business has a contract which includes an early termination fee clause that is regularly enforced in its home state. However, the original contract does not contain a choice of law provision. If the business expands, it could find itself in a state that does not allow for early termination fees or requires different language to make the clause enforceable. Without a choice of law provision, the new state’s law could be applied in a dispute, and the contract which protected you so well in the past suddenly leaves you open for injury. At a minimum, the choice of law/contractual interpretation issue during litigation provides for a weakened settlement position and potentially costly motion practice.

As you prepare to protect your business and livelihood, the subtleties of law and language matter. As business a owner and expert in your industry, you are unfortunately not likely to be an expert at spotting legal issues. Knowing the potential issues to look for in a contract is just 75% of the battle. Hiring a good lawyer is a more substantial investment than a search engine, but it can be vital and cost effective in the long run.