Step Nine Preparing Written Agreements Is Critical To Business Success

10 Steps to Start A New Business

“Put It In Writing”

Every business has relationships with customers, vendors and employees, and if the business has more than one owner between the partners or shareholders. Depending on the nature of your business it maybe necessary to have written agreements to define some or all of your relationships. A convenience store doesn’t need a contract with its customers. Receipts are fine. But a consultant or service provider such as an accountant or architect must have strong, clear agreements that at a minimum describe the services to be performed, the compensation to be exchanged, and what the parties will do in the event of a dispute.

Like most things in life you can probably do a fair job of preparing agreements, if you are willing to put in the time to educate yourself on what to do and how to do it. Beware of internet form contracts. They rarely provide the level of detail necessary. I once represented a client in a partnership dispute. The partners had obtained a partnership agreement on the internet. When they fell out, I was retained and discovered that their agreement allowed each partner to compete against the partnership! Normally partners owe a fiduciary duty to act in the best interests of a partnership and doing so rarely includes competing against the partnership. But here since the writing specifically allowed competition the parties were bound by their agreement.

An experienced attorney would never have drafted a partnership agreement that allowed the partners to compete unless that is what the partners desired. And, a good business lawyer would have suggested an internal dispute resolution process in the event that the partners reached an impasse that would have allowed the parties to avoid expensive litigation.

Vendors often have form agreements. Read them carefully. Consider obtaining a lawyer’s advice. Common problems in vendor agreements relate to choice of law, choice of venue and choice of arbitration instead of trial.

Recently, I reviewed a contract for a business owner. The problem with the contract was that it stated any disputes would be resolved under the laws of Illinois in Cook County Illinois. Not good. We explained the choice of law and location (venue) were deal breakers and that if the vendor wanted the business it would have to modify the contract.

Relationships with employees and independent contractors also require careful consideration. It is good practice to specify in a writing acknowledged by your employees that they are employed at will which means you can terminate them (and they can quit) without cause at anytime.

Non-competition agreements are all over the internet and most of them are not enforceable in California. Generally, unless a person has an interest in a business, i.e. the person is a shareholder or partner, she cannot be bound not to compete in the state of California.

While non-competition agreements are not enforceable against former employees in California, a properly drafted agreement not to disclose or use a company’s trade secrets is enforceable. This agreement can often be critical to the continued success of a business. For example, a company recently had one of its best salesman leave. He took the customer database with him and then began to solicit the customers. He used the prices listed in the company’s customer database to entice the customers away by offering the same services for less.

California law does not allow non-competition agreement; however, the salesman had signed an agreement not to disclose or use the company’s data to unfairly compete against it. The company was able to obtain a court order stopping the salesman, making him return the data, and the company successfully sued for damages. All this was possible because it had a cogent, fair non-disclosure agreement in place.

Clear, concise agreements are critical to business success. Internet form contracts rarely suffice. Review contracts from potential vendors carefully. Make sure that your employment relationships are clear. Make sure that partners or shareholders rights and obligations are spelled out in agreements. If you are going to do it yourself, put in the time to learn what needs doing and how to do it. The website www.nolo.com  has great books and materials for closely held business owners and managers. If you don’t want to do it, then delegate it. The money spent on lawyers on the front end will be peanuts compared to the money spent on avoidable litigation.


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