The Dangers of Using Free Contract Forms
Attorneys Discuss Dangers in Using Boilerplate Forms
The Internet is full of websites listing free contract or agreement forms you can download and use in your business. One website, for example, lists over 300 different types of forms, from articles of incorporation in various states and board resolutions, to work for hire agreements and waivers of notice. It sounds great to save money by using these boilerplate forms instead of paying expensive legal fees. But what might be the downside of using these free forms?
Reasons Not to Use a Free Contract Form
Some attorneys responded to my request for opinions on the dangers of using these free contract or agreement forms. While some attorneys' qualms with free contract forms can easily be written off as self-interest, others are based upon the disastrous results they've seen their clients experience before seeking their advice. Below are seven reasons why you should think twice before using a free legal form document in place of a licensed attorney.
1. Selecting the Wrong Form
According to David Reischer, many business people fail to appreciate how nuanced the law truly is. Often laypeople will select forms to memorialize a transaction or agreement based on the name or title of the form. But selecting the wrong form may result in a completely different legal consequence than the one intended by the parties. For example, business owners may sign boilerplate forms titled "Partnership Agreement" when a "Joint Venture" was actually intended, or a License form when a Lease would have clearly been more appropriate or vice versa.
David Reischer is a New York attorney and the co-founder of LegalAdvice.com a website that assists clients looking for a licensed legal professional.
2. Overlooking the Opportunity for Arbitration
According to Stephen Gregory, before turning to free boilerplate contract forms, business owners should consider their potential remedies if an agreement goes sour. Most business owners prefer the simplicity and cost-effectiveness of arbitration instead of expensive and time-consuming litigation in court. Paying an attorney to draft a contract incorporating an arbitration clause which follows relevant state and federal law means that the contract’s arbitration clause will be more likely held enforceable and allows the business the option of resolving disputes outside of court.
Steven P. Gregory has practiced law since 1991 and is a member of the panel of arbitrators for the Financial Regulatory Authority (“FINRA”) (formerly the National Association of Securities Dealers, Inc. (“NASD”).
3. Not Knowing Your Rights
According to Emily Oveissi, contract forms fail to advise the contract users of the law and their rights. For instance, a popular website offers the creation of an LLC for a reasonable flat fee. The process is user-friendly; however, the website insists that the client uses one of three entities as the registered agent of the LLC. In most cases, the client can serve as his or her own registered agent and save the ridiculously expensive and unnecessary annual fees charged by these entities.
Emily R. Oveissi is the owner of Oveissi Law LLCthat offers estate planning, estate administration, and real estate law assistance to clients in Virginia, Maryland, and DC.
4. Not Knowing What You Don't Know
Felicite Moorman explains that using a boilerplate contract is dangerous because you don't know what you don't know. Whether you're leaving money or opportunity on the table, obligating yourself to something unnecessarily, or missing important clauses pertinent to your industry, you will find that legal expertise, even if just in the form of review, almost always pays for itself. Additionally, ambiguity in contracts is read against the creator of the agreement in courts of law and ignorance is no defense.
Felicite Moorman is CEO of BuLogics & Stratis EMS. She is a member of MD, DC, and OK bars. You can reach her at felicitemoorman.com
5. Omitting Crucial Language
Erik Gunderson points out that many of the most commonly used boilerplate (stock one-size-fits-all legal forms omit crucial language. In his real estate practice, Gunderson sees amateur landlords using three-day notices that they copy from free sources on the internet all the time. When he prosecutes evictions based on those three-day notices, he finds that many of the notices a) omit information required by the law to be in the notice, b) fail to include required language about debt collection, c) include an ambiguous or confusing statement of how much back rent is due, which later gets used against the lessee, or worst of all d) all of the above.
Gunderson notes that it would have been better in almost every case where he has seen a free-off-the-internet form used had these clients hired a lawyer to make sure that their paperwork was done correctly, right from the very beginning. The cost of the delay caused by the bad paperwork has always exceeded the cost of hiring a lawyer to do it right the first time.
Erik Gunderson practices employment and real estate law at Charlton Weeks LLP in northern Los Angeles County, California and consults with businesses to reduce risk and expenses.
6. Not Tailoring the Contract to Your Specific Situation
Richard Chapo notes that the problem with using free contact forms is these agreements fail to address legal issues unique to the particular transaction in question. For example, a contract to design a website should detail whether the customer or website designer owns the work - the code and scripts created specifically for the project. The answer is negotiated between the parties and then included in great detail as a clause of the contract for the project. Free contract forms are not sufficiently specific to address this issue, which can force the parties into court for a resolution should a dispute arise.
Richard A. Chapo, Esq. is an internet lawyer located in San Diego, California. Mr. Chapo provides legal services to online business through SoCalInternetLawyer.com
7. Not Accounting for How State Laws and Regulations Differ
In my own experience, I have found that some states have laws requiring specific language in business forms and leaving out this language can result in unintended consequences for a business. Here's an example for Iowa: Rush Nigut, an Iowa attorney, says Iowa LLC filings are certificates of organization, not articles of organization, as in most other states. Also, the language must include a "perpetual organization" phrase.
Failing to check your state's specific language requirements for documents can cause them to be rejected, or have you accept requirements that you could have avoided by writing specific language.
The Bottom Line
Quite simply, a pre-printed free form will not be tailored to your specific situation, says Glenn Meier. There may be a provision that you need that is missing. Worse, there may be a provision that requires you to do something you did not want or intend to do. At a minimum, if you are going to use forms, have a lawyer review the form and talk about the impacts on your specific needs before you sign the agreement.
Glenn F. Meier, Esq., is a founding partner of Meier & Fine, LLC, Las Vegas, Nevada. He practices in the areas of litigation and dispute resolution.
Disclaimer: Nothing in this article or on this site is intended to be tax or legal advice. The attorneys quoted here are not providing tax or legal advice. Every business situation is different and laws and regulations are constantly changing. Having an attorney in your state review any contract or agreement form can help you avoid additional legal fees, litigation expenses, and other unintended consequences.