Carefully prepared contracts are an important risk management strategy for preventing financial losses, but too many companies enter into business transactions contractually unprepared. Poorly prepared business contracts can mean potential liabilities for your business.

An old cliché states that "verbal contracts are not worth the paper they are not written on." To some degree this is true. Any disagreements over a verbal contract will depend on your memory and your client’s memory as to what was in the agreement. This presents a problem, considering most people can’t even remember what they had for dinner last night. However, the courts do uphold verbal agreements as a recent case in Philadelphia illustrates. The rock group, Metallica, had a verbal agreement with the CoreStates Center* (the arena where the Philadelphia Flyers and the Philadelphia 76ers play) to hold an outdoor concert in the arena’s parking lot. The surrounding neighbors, citing the noise and the anticipated unruly crowd of over 40,000, pressured the CoreStates Center and the City of Philadelphia to cancel the concert. However, a judge ruled that there was a valid, verbal agreement between the CoreStates Center and Metallica, and that it would be a breach of contract if the band was not permitted to play. So the concert went on as scheduled.

Without the benefit of a solid contract, business disputes are sent to the courts to be handled and that ties up your company’s time and financial resources. Not only does your firm have to assure that a contract has all the appropriate clauses, you must take precautions regarding the language used so you are not held liable for something you did not intend to provide or a quality of service you could not possibly deliver. You can prevent potential liabilities by being contractually prepared from the very initiation of business deals with customers. This preparation should include contract review training as part of your company’s overall risk management program. Your training should include the following topics, among others.

Written Contracts Are Best

In general, written contracts are preferable to verbal contracts. Ideally, you should develop your own standard contract or terms and conditions and attempt to use them for each project. If you don’t already have a standard agreement form, there are several sources of sample contracts and contract language such as ASFE, AIA and EJCDC.

Beware Of Clauses And Standard Language

Even if you have your own form, you may have clients who will require the use of their own contract form. Client-generated contracts need to be examined closely because they sometimes contain clauses that can cause more problems than a verbal agreement. For example, many client-generated contracts contain a broad-form indemnification clause that requires you to indemnify the client for their own negligence. A typical professional liability insurance policy only insures your negligence -- not your client’s. Therefore, you could be taking on liability that your insurance may not cover.

Another example is the standard of practice language that some client-generated contracts may contain. Beware of standard of practice language that includes the words "warranty" or "guarantee," or phrases such as "highest standard of practice." As a provider of technical services you want to avoid offering warranties. Your work should be judged by the acceptable standard of practice that exists at the time the services are offered. Accepting phrases such as "highest standard of practice" increases your liability.

The Importance Of Contract Review

Because of the increased risks of signing client-generated contracts, a company should have specific review requirements. Most project managers have had little or no contract review training. They are typically more worried about the technical scope of work and how to complete the project than the contract language. The contracts should be reviewed by company personnel who have had some basic contract training. Any unfamiliar language should be reviewed by legal counsel.

*The name of the arena is now the Wachovia Center.