Good People Make Good Agreements

Posted on 09/16/2010

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As important as it is to have a good written agreement in place to memorialize the terms of a transaction, doing so may not be enough to avoid litigation. Even more important is dealing with trustworthy people.

It’s a painful fact of life that some people are just not honorable; they will not meet their obligations regardless of what they put on paper. In that case, the only true protection is running away as fast as your legs can carry you!

But how do you know who can be trusted and who can not? How can you increase the odds that you will not wind up in litigation? While no measures are foolproof, you should:

1. Trust Your Gut.

Often you can tell right away that a situation doesn’t pass the smell test. Your first impression of your counterpart is negative. They express values or strong opinions that don’t mesh with yours. They bad-mouth their competition or acquaintances. Their initial proposal is completely one-sided and border-line insulting.  These are all flashing beacons warning you to change course! 

Rarely will you go wrong if you trust your gut feeling. However, when your gut is sending you missed messages, consider investigating the other party.  Use background checks, review their financial statements, check out their Dun & Bradstreet reports, and contact the Better Business Bureau. Ask them for references and then actually call to verify them. Even a simple Google search may set your mind at ease. In business, the devil you know is definitely better than the devil you don’t know.

2.  Beware of Low Bids.

It’s almost cliché to say it, but if a deal is too good to be true, it probably is. Just as an onerous one-sided proposal in your counterpart’s favor is a warning sign, so too is a proposal that overly favorable to you. If the other party seems generous to a fault, it may be because they have no intention to deliver what they promised. Even with the best of intentions, if the transaction is not economically viable for the other party, they will have less incentive to honor their obligations.  They may also cut corners and deliver shoddy results in order to stem their losses.

Beware of bids that are far lower than others. Court dockets are full of lawsuits against people who have over-promised and under-delivered.

3. Put An End to Endless Negotiations.

When two parties’ differences are so great that they can only reach an agreement after arduous and protracted negotiations, chances are these differences will continue to flare despite the signing of a contract. Look at Israel and Palestine:  after over sixty years of negotiations and despite the signing of several agreements, they still have not achieved a lasting peace.  If you have to negotiate even the simple points to your agreement, you may be better off agreeing not to agree and doing business with someone else.

Also beware if you receive hard-fought concessions from your counterpart. If they concede to these terms under protest or because they feel they have no choice, you might be in a worse situation than if they never agreed at all. Resentment, anger, and economic distress all become “reasons” for them not to fulfill their obligations. Hollow promises fill court houses.

 4. Get Paid Up Front.

The more time you give the other party to pay for your services or products, the less likely your are to receive full payment. There’s no law that says your payment terms have to be “net 30 days.”  Get paid as much as possible on the delivery of your work. 

If you are not in the banking industry, you should not be acting as your customer’s lender. Let someone else finance the transaction.  I hear complaints that, in today’s credit environment, loans are hard to obtain and that “seller financing” is often the only possible way to get a deal done.  But think about it:  if the banks–with all their investigative resources, analysis and underwriting requirements–determine that your customer is not a good credit risk, why would you decide otherwise? Is any deal worth doing if there’s a good chance you won’t be paid?

But if you insist on being a lender, at least act like one.  Know your borrower (see Rule 1), and charge sufficient interest to justify the risk. Just be aware of your state’s usury laws and the Applicable Federal Rate (AFR) in setting your rate.

When you reach a fair agreement with a party you know and trust, and get paid on delivery, your written agreement becomes a sword you can leave in its sheath.

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Posted in: Contracts, Litigation