Contract Hygiene: Five Healthy Contracting Habits (Part 1)

by Brian Rogers on February 6, 2011

in Contract Law Basics and Tips

“As few as 50% of restaurant workers wash their hands.” I was introduced to that disturbing stat during a presentation about some sort of high-tech handwashing tracking device that could monitor which employees were washing their hands. I’m not sure whether it was mounted to the sink or the soap dispenser or exactly how it worked—I was a bit distracted by the thought that the folks who worked at my favorite restaurants might be on the wrong half of the curve.

This had an oddly familiar ring to it. A simple practice, inexpensive, effective. Yet often neglected. Just like the contracting practices of a lot of businesses.

Here are a few habits that businesses can adopt to improve their contract hygiene. Like handwashing, they’re inexpensive and effective, yet often neglected.

1. Negotiate before you sign

Many small business owners don’t realize that the contracts vendors put before them are often negotiable. They are so used to the adhesion contracts that are the lot of the consumer that they agree to onerous contract terms without pushing back. But commercial contracts are much more likely to be negotiable than consumer contracts. Vendor “company policy” notwithstanding, contract terms are usually negotiable.

2. Give important contracts special attention

Not all contracts are created equal. A copier lease isn’t as important as a supply agreement for Coke’s super-secret ingredient. If the business relationship is critical to your operations, if there is a lot of money involved, or if your business would be exposed to out-sized litigation risk if something goes wrong, you should invest more effort into ensuring that the contract terms are acceptable. You don’t necessarily have to hire a lawyer, but you should escalate contract review to higher executive levels and consider whether the risks the contract terms impose on your company are worth the benefits of the business relationship.

3. Don’t sign the other side’s boilerplate terms and conditions

A lot of business is transacted via purchase orders without a signed contract. Overall, this is good for commerce because business doesn’t have to screech to a halt every time a company needs to order a widget so the lawyers can work out the legal terms. But there is a downside: no one knows many of the terms of the contract until a court does a postmortem.

In the typical scenario, the purchaser submits a purchase order with unreasonably one-sided “boilerplate” terms printed in small print on the back (or the electronic equivalent) and the seller sends an acknowledgement with equally unreasonable vendor-friendly terms printed on the back. Through a magical black-box process, not understood by mortal man, the Uniform Commercial Code (which governs the sale of goods) slices and dices the terms and comes up with the actual contract. Generally, neither party is a winner, but neither is a loser. That is, unless you sign the other party’s boilerplate terms, in which case the contract is much more likely to be controlled by their unreasonable contract terms.

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