In practicing “dispute avoidance;” i.e., drafting significant contracts that do NOT end up in litigation, lawyers play a critical role. But often your input is the most important factor to avoiding disputes. You need to carefully read and understand the terms to avoid disagreements.
The Terms of the Written Agreement Control
It seems pedantic to stress this, but be certain to have a written agreement. Parties usually enter into business agreements after having discussed the material terms for weeks or even months. You may believe that assurances you received from the other party are as binding as the agreement’s actual terms. But if you seek to enforce oral promises or representations outside the written contract, you face a difficult uphill climb under Michigan law.
You probably skim over “boilerplate” contract terms, including the (i) “merger/integration clause,” and (ii) “anti-reliance provision.” These clauses, though, expressly state that offers and representations that either party made during their discussions are not valid unless they are expressly set forth in the contract. Courts have repeatedly held that a contract’s actual terms control. They reject claims based on a party’s statements outside the contract.
Michigan cases set a high bar for you to establish fraud based on statements not found in the contract. It is never wise to rely on statements/promises that are not in your written contract.
Agreements to Agree in the Future are not Enforceable
During contract negotiations, the parties often cannot reach an agreement on a critical issue. To save their agreement on other issues, though, they may include a clause that requires them to subsequently bargain in good faith to resolve the open issue. This sure sounds like a solution that enables you to move forward with the balance of the contract. But it can make things far worse. Contractual provisions that require parties to negotiate and agree to material terms at some later day are generally unenforceable. A court may hold the entire contract invalid or just disregard a single, key provision of the contract, but this is an outcome neither party expected and it may be particularly harsh on one of them.
I have seen numerous contracts that company owners and investors entered that are missing critical provisions. For example, in the last few years I’ve been involved with contracts that:
- were designed to transfer an ownership interest in a company, but the specific percentage of units (it was an LLC) to be transferred was not included; and
- included no mechanism for determining the exact price that the seller was going to receive for their shares (a corporation this time); and
- did not include when a stock transfer would take place.
In each situation, the signed agreement may not be enforceable. When you are entering into an important agreement, use common sense while practicing dispute avoidance. If you cannot reach agreement on all material terms, run away. If your contract provides that you will negotiate some missing term in the future, it is probably legally unenforceable (even if it requires good faith).
Use Plain Language to ensure that Terms are Understandable
As a refresher, to be binding, a contract must include the:
- parties’ identity,
- agreement’s specific subject matter, and
- the consideration that the parties are exchanging.
If the contract includes all three, the parties have reached a “meeting of the minds,” and the contract is enforceable. But for the parties’ agreement to be carried out as they intended, they must use terms that they – and a judge and jury – can understand.
Here are some helpful drafting tips to use when preparing business agreements:
Include Formulas and Words – contracts often includes a “formula” to compute, for example, (i) working-capital adjustments, (ii) earn-out calculations, or (iii) bonus projections. Make sure that you include the actual equation and an example of how to use it. Including just words is not nearly as clear as including an actual formula that enables the parties to verify how it will work in practice.
Avoid Business Jargon – use plain English. Industry-specific words are dangerous, because these terms may be later misinterpreted by in court proceedings. If you feel compelled to use the industry term, explain it in more-common language. I have seen litigation over all of the following phrases: (i) patentability, (ii) critical mass, (iii) market acceptance, and (iv) cash-flow positive.
Require Reporting – if your contract does not require that you receive regular financial or other reports, you have no contractual right to require them. When you’re negotiating the agreement, address how often reporting is required, whether it be monthly, quarterly, annually, etc.
Direct Notices to Parties and Counsel – contracts usually include who to contact if it is being breached. In addition to counsel, the contract should also require that notice be sent to you. If you party change counsel, or counsel changes firms, you may not timely receive notice.
Require Amendments to be Written and Signed – contracts can be agreed to through email, which is prompt and cost-effective. Problems arise, though, if a party attempts to unilaterally amend the agreement through email and the other party does not want to amend it. To avoid this, your contract should expressly state that (i) it cannot be modified through email, and (ii) no amendment is valid without the parties’ actual signatures.
When you enter into a contract, take the time to carefully read and understand it. You put yourself at risk if you rely solely on counsel to negotiate and draft your agreements. Ensure that the business deal you think you have is actually set forth in your written agreement. If you don’t, you may not learn that your contract does not mean what it is supposed to mean until after a lawsuit has been threatened or filed.