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Contract Signers Beware: Put the Pen Down If You Don’t Know What It Means

September 25, 2014

Posted in Business Litigation, Corporate Law, Litigation Strategies

photo - contract signers by Dan MoyleAn easy way to get sued is to violate a contract. That can be very easy if you sign a contract without reading or understanding it, making it that much more likely you won’t comply with its terms. If you agree to a contract you don’t understand, you could commit your company to spending all kinds of resources in ways you never imagined.

In a piece on LinkedIn Maryland author and real estate attorney Jack Garson described a meeting he had with one of his clients, one who is normally confident but that day appeared to be near tears and panic stricken. He brought with him a copy of a contract and a copy of a lawsuit, one in which he was the defendant. Garson read the lawsuit.

Next, I reviewed the contract. Now I understood my client’s new emotional state — especially the panic part.

“Did you read this contract?” I asked, ever so gently, as my Humpty-Dumpty client teetered in front of me.

“No,” he replied.

“I’m just curious. Why didn’t you read the contract?”

“The other side said it was standard. Plus, I was in a hurry.”

You may be a very successful business owner, one who is intelligent, ambitious and very busy. To others (and maybe to yourself) it appears that you have a “Midas touch” when it comes to turning businesses into gold. That won’t prevent people giving you bad contracts to sign (it may actually encourage it because it appears you have money to spend) or shield you from the dangers of making a legally binding commitment that costs you more than you could gain from it.

You may know the other business owner very well. Your businesses may have long standing relationships. Maybe you’re drinking buddies and golf partners a couple times a month. That may not stop your friend from offering you a deal with a contract laden with legal land mines. When business is at issue and money may be gained or lost, friendships and relationships often take a distant back seat.

Also be wary of a “standard contract” because, as Garson points out, there is no such thing.

There are parties with the foresight and bargaining power to create and insist upon use of their own contract form, which they deign to call “standard.” These companies simply do business in one or more areas on a regular basis. They see the need for a contract written in their favor that they will have ready to provide to the other side of the deal. Further and most significantly, they have the bargaining power to insist that you use that contract, presumably with few or no changes.

Lurking in the contract could be disclaimers of liability (the other party has no liability even if it breaches the contract) and only the other party is entitled to legal fees in the event of breach (even if your lawsuit is successful). The contract could be structured such that the other party could take you to the cleaners but it still wouldn’t make economic sense to sue them.

If the contract’s terms don’t at least offer the reasonable chance of a good return with provisions that protect your interests in case things go sour, don’t sign it. A “take it or leave it” approach by the other party should be a large, neon red flag waiving before your eyes. Not only will the contract include provisions not in your interests, but if a party is that inflexible before a deal is signed, how flexible do you think they’ll be during a business relationship?

If you are offered a contract, read it. Take your time. Don’t allow yourself to be rushed. If you don’t understand something, ask the other party to explain. Then call me, send me a copy, we’ll both go over it. More information may be needed but you should have a firm handle on what it means, whether it’s in your interests to sign it and whether any terms should be changed.  Rushing to sign a contract that only sounds good but isn’t actually good could create far more problems that it could prevent or solve.