Contracts are the cornerstone of every relationship. Knowingly or not, and whether personally or through your business, you enter into numerous contracts every day: swiping your credit card, attending a sporting event, or having your neighbor over for a cookout. These actions can create a contractual relationship and duties owed to one another. It is these contracts that keep the world moving and help keep things in check.
Despite the fact that we enter into many contracts daily, they are usually given little thought until it is too late. If there is an issue, the first thing an attorney will ask is “Is there a contract?” and “What does the contract say?” Unfortunately, the responses the attorney typically receives are “We never got around to it.” or “I think we have one, but we are not sure where we got it or what we signed.” This is almost always followed with not knowing where a copy of the contract can be found.
A contract is your biggest asset. A properly drafted contract can be worth more than any tangible item and can save, and even make you, money. Whether you are a new business just starting out, a large business that has been around for decades, or entering into a simple agreement with your best friend to show who will pay for expenses to upkeep and store the boat you both bought together, there will likely be an issue or disagreement at some point. Let’s face it: people are quick to sue and everyone has a number. The bigger your business and the greater your worth, the bigger the target on your back.
A contract spells out what happens in instances where issues arise. It may dictate which state law applies, where or how the parties might meet to try to settle the issue, and who is responsible for legal fees. It can cap damages, ensure that the appropriate amount of insurance is held and, of gaining importance during this day in age, protect you from inflation or set forth what happens should either party be prevented from performing due to things outside of their control. A contract enables you to hedge against risk.
It is important to note that you cannot do away with all risks in a contract. Many people are often quick to sign on the dotted line because they do not think they can make any changes to the contract. However, being familiar with what is in the contract is half the battle. Awareness of what is in the contract enables you to know what you can or cannot do, or what affirmative actions you might need to take. It also allows you to shift the risk or mitigate the risk and better protect yourself elsewhere.
The next time you create a new operating agreement for your LLC, sign a new master agreement with a vendor, or sign that subcontractor agreement, be aware of the risks, pay attention to the details, and protect your assets. Sign and date the contract and store it in a location where you can keep track of it. One thing is for certain – it never hurts to know what you are signing.
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