Legal Horror Stories: Contracts Are Not Iron Clad, They Can and Will be Broken : Under30CEO Legal Horror Stories: Contracts Are Not Iron Clad, They Can and Will be Broken : Under30CEO
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Legal Horror Stories: Contracts Are Not Iron Clad, They Can and Will be Broken

| September 13, 2012 | 2 Comments

Legal Horror Stories: This series is brought to you by eMinutes.com to help educate and inform young business owners. See if you qualify to have your business incorporated for free today!

Today’s story comes from Creative Technologist Danii Oliver, co-founder and Chief Digital Officer of interactive agency DAMN Digital Studio. Danii co-leads DAMN Digital developing mobile apps, multi-touch interfaces, ultra screen projections, interactive walls, kiosks and, 3D and holographic interfaces for clients.

Breaking a contract is very easy for a client to do when the name of the game is who can out lawyer whom. Watch and negotiate what you are signing and don’t skip the step of hashing out all the details, reviewing with lawyers who will defend your company and being sure the contract protects the company. Sometimes you might just have to walk away from a contract if it isn’t going to benefit your firm. Sometimes you might get bitten by both your lawyer and the client even after proper precautions have been taken.

A few years ago my company accepted an out of state client. Myself and business partner thought nothing of the distance it was business. The client tried to assure us of their trustworthiness (a red flag not to trust them) but never the less I negotiated the contract for our protection within my understanding of the working relationship and had it reviewed by my lawyer at the time.

There was a major time crunch to reach deadline. Over the weeks we moved along at a pace that pleased our client. Two weeks after the second bill, the client informed us they’d pay on their payment schedule. At that time we should have ceased production until the bill was paid but we thought the contract would protect us and wanted to provide a solid product to the client, so we kept on working.

Once the product was complete the client refused to pay any of their invoices citing general dissatisfaction which the contract covered them for. However they successfully launched the product and announced the launch via their social media networks. We proceeded to have our lawyer attempt civil discussions. Then attempted arbitration and finding out we had to retained a lawyer local to the client state. The local lawyer only attempted a settlement so he could get paid and move on.

This was a great loss for the company. It cut our cash flow which stunted profits and held us up in mediation for months.

During this legal blunder I was exposed to so much new information they never taught in business school. Many of the things that happened, I never could have imagined being legally possible. I could offer advice but I know that it may still be insufficient simply because anything can be pulled if a company doesn’t answer the phone or a lawyer chooses to give up.

Things to look out for to attempt to avoid such a legal blunder:

Contracts

Indemnification is a very bad word! “The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B)”,  AVOID indemnifying for that which is NOT your responsibility. Many companies will tell you that this is part of their standard contract and require you to indemnify them indefinitely. Even my first lawyer wrongly told me it was standard procedure. I can tell you that’s NOT the case!

Imagine the idiot I felt like when I learned what this contract required months after it had been looked over by a lawyer.

You do not have to legally be responsible for anything you don’t choose to be, especially if it’s outside of your function.  Contracts are negotiable & editable & if the other business refuses to negotiate, walk away. I once had to drop a client that would have been an amazing contract for the company but, they refused to take out their indemnification clause that made my company responsible to the injury, damage and life of all other persons who were present on the work site who were employed by that firm and NOT my company.

Lawyers

When it comes to lawyers be vigilant! Before selecting a lawyer learn their background, what industries interest them and their chosen area of focus. General lawyers can and will do less for your firm being that they may be unfamiliar with the nuances of your industry. It was difficult to find a lawyer that specialized in design and development within the emerging technology industry. I can’t stress enough how important this is.

Know that all lawyers are not made alike. Lawyers are not know it alls and they don’t all care to serve their clients well. Lawyers simply do the job of looking over documents or sending out a letter to be sure that general legal terms are correct not necessarily right for you. Again be careful just because a contract is “legal” doesn’t make it right for you.

I hate to have learned this the hard way; “don’t work with a lawyer who knows nothing about your industry”. Even though the contract was awry, it hadn’t given my client the right to default on their payment. The law and what is passable is based on the industry you’re in and who can out lawyer whom. Check a lawyer’s bar reviews and report those who are dis-satisfactory. And most of all learn what’s legal and what’s arbitrary (this might be difficult without knowing what to research).

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Category: Startup Advice

  • dhkr

    It is a common mistake for a small business owner to keep working, even if the client is not paying their bills…often to not ‘rock to boat’ with a new client, etc. Big mistake. I have made this mistake before, and now in our contracts, we have a very clear clause that says if the client is late paying, we stop working until the account is brought current. If you continue to work, this simply throws away your negotiating leverage and the client will often never pay up.

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