Avoiding Common Mistakes with Commercial Agreements
The following is a list of common legal agreement mistakes that I see in my practice. My experience with clients, suggests that many people are not aware of these potential pitfalls or do not recognize them until it is too late. The potential catastrophe may not materialize, but when it does it is invariably costly and time consuming and even more painful when you realize that a little bit of extra effort on the front end could have avoided the problem.
Don't sign anything you have not read. Nothing is more depressing than talking to a client who did not carefully read a contract and is now asking you how to avoid a contract provision that "should not be in the agreement" because "that is not what we agreed to" and/or "I did not know it was in the contract." There are a lot of court decisions stating that if you sign a written agreement, you are legally deemed to have read it, even if you did not. Ignorance is no defense. Most agreements also include specific language stating that the written agreement supersedes prior verbal or written communications, so it is usually difficult or impossible to rely on prior conversations, emails, etc. to contradict the terms of the agreement.
Make sure the deal described on paper is the same deal that you approved. A specific variation of the first problem is the failure to ensure that the written agreement actually describes the same deal that the parties previously discussed. I have seen clients spend weeks working out a deal, only to find myself pulling teeth to get them to spend a few hours to make sure that the written agreement accurately reflects the terms that they so carefully negotiated. A careful review of the written document can avoid critical errors. In the worst cases, the other party drafts the agreement and deliberately puts in terms different from the approved terms or adds terms that were not discussed that significantly change the deal. Even innocent mistakes can be catastrophic. I once reviewed an agreement where the other side mistakenly flipped the numerator and denominator on a fraction – an error that would have cost them millions of dollars had it not been caught.
Always read the "boilerplate." You can change a few words in agreement "boilerplate" and completely change the commercial benefits and risks under an agreement. Sophisticated clients negotiating commercial contracts often spend as much or more time negotiating limitation of liability and indemnification clauses than any other terms because the potential dollars and risks at stake in those provisions are equal to those in any other part of the contract, including pricing and warranties.
Beware of business people writing agreement schedules. In theory, there is no reason why business people should not write schedules. Schedules usually describe things such as product and service specifications and pricing about which business people know far more than lawyers. The problem is that most business people do not spend their time writing documents with detail and clarity sufficient for a judge or jury that knows nothing about the business to determine what the deal was if there is a dispute. The most interesting case that I have heard of involved a software development contract. A year or so after the contract was signed, the parties had a disagreement about the work performed. They reviewed the contract schedule describing the work to be performed, and the schedule was sufficiently unclear that no one could determine what they had agreed to, including the owner of the software company who had written the schedule. There certainly are business people who need no assistance from a lawyer in writing schedules, but this is an issue that should be thoughtfully considered.
Get it in writing. Most business contracts do not have to be in writing to be enforceable in court. But some contracts must be in writing. Even if it doesn't have to be in writing, get it in writing. If it isn't in writing, it's open to dispute.
Make it clear. Business documents are often written by attorneys, who love to use language like "party of the first part" and ... Read the contract, and if you aren't sure what something means, get the attorney to change it.
Answer all "what if" questions. Consider all the possibilities. What if one party dies? What if one party goes bankrupt? What if the contract is a loan on a building and the building is destroyed? Attorneys are good at helping you think of all the possibilities.
When the contract ends. Most contracts end when both parties have "performed" what they said they would do, including payment. But what does that mean? Make sure the contract describes specifically what each party must do and what happens if it isn't done by a specific date.
What happens if the contract is breached. Most contracts are fulfilled by both parties and never go to court. The ones that do are usually because one party believes the other has breached the contract. So what are the penalties? What happens now? Spell this out to give the court some guidance.
Yes, you must have a lawyer helping you with any contract or legal document, but don't rely on your lawyer. Read the contract yourself. Ask questions. Think about the "what if's." In the end, it's your responsibility to make sure the contract will hold up in court.