Overcoming Pitfalls of Contract Implementation

Posted by Jeffrey N. Berman on

Even a well-drafted sales or services contract can wreak havoc on your business if your employees who use it don’t fully understand the key terms. Often, companies create master agreements that their sales staff can use to bring in new business. The goal is to have a form contract that can be simply completed by filling in a few details, such as the customer name and the products or services to be provided.

Unfortunately, such a contract is not always so simple. Without proper precautions, your company may not have the benefit of the protections that have been so carefully incorporated into the contract. Two common pitfalls must be addressed through careful training of staff using the contracts.

The Problem
1. Failure to Address Amendments from Customers.
Regardless of the form of your contract, a customer may cross out certain provisions before signing it. If your company then provides the contracted services to the customer, the company has accepted the agreement as amended. This acceptance may be intentional if company management has reviewed and approved the amendments. But if management is unaware of the amendments, the company may have inadvertently accepted undesirable terms.

This can happen all too easily. Often a company’s sales staff is more concerned with getting new business than the terms of that business. They have little, if any, understanding of the contract terms. The less understanding that staff have of the terms and why they are important, the less likely they are to flag a contract for management review when a customer has made an amendment.

2. Failure to Correctly Complete Contract
Without the proper training, it is easy for staff to inadvertently complete a form agreement incorrectly. Common mistakes include an incorrect customer name, an incomplete entity name, or execution by a person without authority to bind the customer.
Customer name: This issue is most likely to arise when the products or services have a beneficiary that is not the customer. If the customer name is incorrect, then the proper party is not bound to the agreement. This means that any restrictive covenants, confidentiality obligations, venue or choice of law provisions, or arbitration provisions may not apply. For example, a client’s contract was signed by a beneficiary rather than the customer. Because the client was located in Georgia, the contract required that all disputes be decided by Georgia courts under Georgia law. When the customer was unhappy with services, it sued the client outside of Georgia. The customer argued that it did not sign the agreement and was not bound by it.
Incorrect business name: Businesses often operate under a trade name that is different from their registered business name. If sales staff does not know to search for the registered business name, the contract may include an incorrect business name for the customer. This allows the customer to argue that it is not bound by the contract.
Authority to bind the customer: To ensure that the customer is bound by the contract, employees should understand the role of the person who is executing the contract on behalf of the customer. It should be a person of sufficient management authority.

The Solution
A brief training program can be used to give employees a basic understanding of the most critical terms of a form agreement. Ideally, this training should be conducted by, or at least developed by, the attorney who has drafted your Company’s agreements. Company management also should attend the training to provide insight to, and answer questions of, staff. This training should be provided to all employees upon hire, but initially should be provided to all sales staff regardless of their experience with your company.

With a better understanding of red flags and key terms, employees will be better able to communicate to management any concerns or issues they may come across. They are also more likely to complete the agreement correctly.

In addition to the above benefits, questions from staff should be encouraged at such a training, and can help identify areas for further improvement—either in the contracts themselves or in the Company’s internal operations.