The Problem with On-Line Form Contracts

October 15th, 2008 by


If you are looking to start a business in Milwaukee, Wisconsin, or already own a business in the Wauwatosa or Milwaukee area, you might think, “I can save some money on using contracts and business formation services from an on-line website.” And this is true, you will certainly get a cheap alternative. Of course, as in all things in life, you get what you pay for.

Every well written contract can be broken into three main parts. These three parts I like to call Information, Action, and Insurance. You can read more about this in the three part series of posts “The Anatomy of a Contract” The information part of the Contract simply describes what the contract is about: who is involved and what they are contracting for. The on-line contracts, with your input, can usually cover the Information portion of the Contract pretty well. At the end of the day, if you fill in the proper blanks, you have at the very least an outline of what each party is looking to accomplish.

However, where the On-Line Contracts are lacking is in the Action and Insurance aspects of the Contract. This, of course, is the most valuable part, and it is the reason that you have a Contract in the first place. You want to be assured that the other person or business will do what they said they would do and pay what they said they would pay. If this were not the case, everyone would simply use a smile and a handshake to get deals done.

To effectively act as insurance however, the Contract must be well written and tailored to each individual deal. The insurance of the contract does not come just from such boilerplate provisions as “Force Majure” or “Indemnification of Parties,” but instead comes from being precisely written with appropriate forethought put into possible outcomes. It is easy to decide how a situation will be handled if you agree on it before hand, but after the fact disagreements can result in bitter disputes that often lead to law suits. I am a strong believer in the saying “an ounce of prevention is worth a pound of cure.”

So make sure that the “prevention” that you are employing is actually providing the protection you need. I will end this article with reference to an example of how many of these provisions are close, but not quite right. when you buy form contracts off of the internet. Lisa Solomon, a colleague of mine on Solosez (a list-serve for solo attorneys), pointed out this “gem” on LegalMatch:

Forum Clause:

In a contract, a forum clause is also known as a “choice of law” clause. These clauses are put in so that only certain laws will apply to any dispute of the contract. For example, a forum clause might state: “This agreement shall only be interpreted under the laws of Arizona and only be litigated in the state courts of Maricopa County, State of Arizona.”

Not only is this not technically correct, as it is actually a choice of Forum and a choice of Law clause, but it does not actually provide the protection you need. The proper choice of law clause should read something like as follows:

“This agreement shall be construed and enforced under the laws of the State of Arizona, except for its law relating to conflicts of law”

If you do not exclude that State’s Choice of Law rules or Conflict of Law statutes, you may render the clause moot. This may be quibbling, but it is just one example to illustrate how a form contract may look like it is performing its purpose, but in fact is worth little more than a handshake and a smile.