Do not blindly sign form contracts

I have written about contracts here before. Spend a few dollars now to save more dollars later by having your lawyer review them. At least focus on a few key contractual terms before you sign any contract. Here, however, I want to emphasize a simple and direct message: do not blindly sign form contracts that are presented to you in your business.

In a variety of unrelated matters recently, I have been working with contracts that one or another party signed without scrutinizing (or perhaps even reading them at all), or at least that the presenting party wanted my client to sign without scrutinizing them.

Bill Nolan

I was going to write that it is coincidental that I have been encountering many of these matters recently, but it actually is not. Signing business contracts as casually as we accept the terms of service to hop on a wireless network is in fact a very common practice. Many businesspeople, even very sophisticated ones, sign contracts without so much as reading them.

The reason it is important not to blindly sign contracts is simple. At best they are not written with your interests in mind. At worst, they are written with the intent of being completely unbalanced in favor of the other side.

If you are reading this article you already know that, yet many of you will engage in this practice anyway. So let me try to come at this from another angle. There are four basic scenarios that can happen with form contracts:

1. You don’t read it and nothing bad happens to you. In fact, this is the most common result when you sign a contract without reading it, as most business relationships and transactions go reasonably well. It is possible that you will never read a contract and never have it negatively impact your business. Good for you if that’s the case.

2. You don’t read it and it comes back to haunt you. Of the four scenarios presented here, this is the one on which lawyers make the most money. Nobody that I know has conducted a precise study, but trust me when I tell you from experience that many lawsuits and other disputes arise because contracts were not carefully drafted to reflect the mutual needs and expectations of both parties. And even when the party who wrote the contract behaves unreasonably and/or unfairly, that party likely has a big leg up in the dispute with the party who uncritically signed an agreement that was handed to them.

3. You read it and succeed in making changes to the agreement to your benefit.  Of these four scenarios, this is the far and away one I encounter the most.  Distinguish that, though, from the scenario on which I spend the most billable time– that, of course, is the second scenario above.

The reason I encounter this scenario most often is twofold. First, many clients have come to believe me when I say that they will save money in the long run by having me review documents upfront. That accounts for the reading of the document.

Second –and this is important– in many circumstances you do have the ability to make changes to a contract. Even if you are dealing with a much larger organization as the other contracting party, you are likely dealing with an individual who wants to make a sale, develop an ongoing business relationship, and has financial incentive to do so.

I always particularly enjoy a situation where a client did not expect to get any concessions on the terms of the agreement, but did. In fact, I was inspired to write this article recently when a client I consider a medium-sized organization obtained significant improvements in a service contract from a very large organization. However, there was an individual salesman who wanted the client’s business and he got the job done for everybody’s benefit.

4. You read the agreement and get stonewalled on your attempt to make revisions. I must acknowledge of course that there are situations where the other party will flatly refuse to make changes to a contract. They have made a business decision where they can afford to set the terms, and to the extent they lose the occasional customer, or perhaps long-term good will as a result, they believe contractual uniformity is worth the price.

If you encounter this scenario, you have a decision to make. How badly do I want or need to do business with this person? What is the value of the contractual revisions I will have to forego? What are the potential consequences and how likely are they to occur? (Your lawyer should be able to answer these questions.) Then you make your cost/benefit decision.

Sometimes you will accept the terms that have been dictated to you. But at least in that case it is an informed risk/reward decision like those you make every day in all aspects of your business. You would not develop a new product or open a new office without doing a risk/reward analysis. Do not enter into legal documents without doing that as well.