How Not To Get Sued Part One: Simple Steps In Contracting

Posted on January 19, 2012


In small business, relationships are personal. If you forget to pay AT&T, for example, no one is going to miss their next paycheck. However, if you forget to pay the graphic designer of a small, local firm, they may not be able to pay AT&T that month. If you forget to pay a small business and they have done substantial work, the consequences can become personal. When people are in jeopardy of losing their jobs, having a bad month, or going out of business, tensions can rise quickly. With tensions high, reasonable business decisions are not always made.

As discussed in last week’s article, careful management of your relationships is critical in business. In my experience, the single biggest sources of litigation are frayed relationships, mismanaged expectations, and failure to live up to expectations.

Here are examples I have seen in the real world that have cost companies a lot of money:

– When terminating a relationship, one party told another party that he was getting compensating through Date X; the other party heard Date Y. Parties became involved in litigation to determine which date was correct.

– A company had engaged a professional to help handle licensing and qualification issues. The professional said that “it will be handled”; it was not handled. Company incurs damages when it is not handled. Company seeks reimbursement from the professional for the damage.

– Company installs software, without an agreement, onto a worksite. Software does not perform to expectations. Salesperson who sells the service made promises and commitments that could not be met. Software company is sued.

– Company presents a contract for signature. Contract is not signed, but party begins to perform under the contract. Court enforces the contract.[1]

A couple of easy steps exist that help prevent litigation:

– Pay people reasonable amounts at the front end so that the relationship can develop without the economics getting in the way.

– Engage a party as a consultant before hiring that party.

– Have a good deal of experience (probably over a year) before granting or selling equity to a person.[2]

– Enter into Letter of Intents – non-binding term sheets – in order to sort out the business before formalizing the relationship.

All that said (documents/no documents/ oral/ formal contract/whatever), failure to pay or failure to perform is the leading cause of disputes amongst parties that lead to litigation. Maintaining good, clearly-understood relationships is the primary key to not getting sued or having to sue.

In Summary:

– Do what you say you are going to do. If you hired them, pay. If you were hired, do your

– Be careful about oral contracts and smoking gun Email contracts.

– Be careful to not let business become personal.

Mike Goodrich
Goodrich Firm, LLC

[2] Employee equity is one of the trickiest business challenges that exist.  We will have articles that focus on this topic in the second half of the year.

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