Contracts Redux-Read to Get What You Need

Posted on 09/08/2010

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Written agreements are so important to avoiding lawsuits and containing litigation costs, that I’ve decided to cover them in more detail.

So we have established that you shouldn’t enter into any transaction of significance without a written agreement. Additionally, you shouldn’t enter into any transaction without actually reading the agreement. The only thing worse than no written agreement is a bad one!

You should read every agreement: sales invoices, purchase orders (especially the back!), insurance policies, prospectuses, credit card agreements, leases (real estate, auto and equipment), loan documents, software licenses, website click agreements, employment contracts and employee handbooks, to name a few. With complex agreements, you should consider consulting with an attorney, as well.

Many of these documents will be long, printed in small type and use archane language that makes Dante’s Inferno in Old English seem like  an Archie comic (I still can’t believe he married Veronica). While you should struggle through and read these documents in their mind-numbing entirety, there are some highlights to which you should pay particular attention:

1.  The Basic Deal–what does the contract say you are buying, selling or leasing? What is the scope of services you will be providing? If you are buying 123 Main Street, make sure the contract doesn’t say 12 Main Street.  If you are selling 200 transistors, the purchase order shouldn’t say 2000.  If you are borrowing $100,000, the promissory note shouldn’t state $1,000,000. Typos happen even in the digital age. Look at the product or service specifications, the quantity and the price. This information should be in the first few paragraphs of any agreement. Get the basic facts down correctly and you will make sure your path to a successful transaction doesn’t have a detour toward the courthouse.

2. The Timing.  Arguably the second most important  provisions in an agreement, the “time to perform”, the “term”, or the “closing date”, are  all among the most litigated details of any transaction. What is the deadline for the service to be performed or the item delivered? Is the lease one year or five years?  When is payment due? And what are the ramifications and penalties if the deadline is not met?  What conditions will excuse timely performance (ie. Force Majeure or “Act of God”)? Master the timing and you will master your transaction.

3.  Representations and Warranties.  These clauses are also ripe for litigation. The “representations” are facts you or the other party are stating to be true and upon which the other of you is relying in entering the agreement. This could include facts associated with the subject matter of the agreement, like the property taxes in a real estate transaction or that the business being purchased is not involved in any litigation. Other common representations include a party’s authorization to enter into the transaction and that the seller has legal title to the asset it is selling. Most information the other party has told you verbally or even in writing outside of the agreement must be included in the agreement in order to be enforceable. 

Warranties are similar to representations and the two terms are generally used synonymously. However, warranties are most generally associated with sale of goods transactions under the Uniform Commercial Code, and  references to them generally involve the warranties that are excluded or waived. These include warranties of “merchantability” (that there are no hidden defects) and “fitness for a particular purpose” (that the product is suited for the task for which the buyer purchased it). If these “implied” warranties or others are important to your transaction, make sure they are included in the agreement (see http://en.wikipedia.org/wiki/Implied_warranty and http://www.abanet.org/buslaw/blt/2005-11-12/adams.shtml for further discussion on reps and warranties).

Representations and warranties ensure you and your counterpart are entering into the transaction with  your eyes open and fully aware of the relevant facts.

This list is certainly not complete and every written agreement will have its own particular clauses of importance. But if you understand the basic deal, the timing, and the representations and warranties in your agreement, you will know your rights and obligations. Only with understanding can there be a meeting of the minds and a true agreement. A true agreement, memorialized in writing, prevents disputes and keeps you working productively on your business rather than wasting time, money and energy fighting over misunderstandings.

With agreements, it’s only if you read that you “get what you need.” (Apologies to the Glimmer Twins http://en.wikipedia.org/wiki/Glimmer_Twins).

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