Preview, Don't Review Your Contracts

By Terrence C. McAndrews  

Reading is Fundamental is a popular public service program, with the emphasis on fun.  However, reading a twenty page insurance contract with six riders and a host of exclusions is never considered fun. However, it is fundamental to operating a successful business.  Have you read your business insurance policy and all of the attachments? How many people have gone to settlement on their new house and signed every document without reading it? Even if you read it, do you know what it means? The consequences of failing to read and understand the document you are signing can be catastrophic.

There is no such thing as good review of a contract or agreement.  A good preview is the best defense to future trouble. Every week I receive frantic phone calls from business owners who have signed leases, contracts, employment agreements, and other documents that they have never read nor shown to an attorney.  It is only after a problem arises that they bring the contract to me to review.  Recently a client brought me a Health Club agreement which required full payment even if the client did not utilize the services and a termination fee equal to ½ the contract price.    He paid me twice as much to review the agreement and negotiate a settlement than he would have paid me to preview the agreement, plus twelve hundred dollars for the privilege of terminating the contract.

As an attorney, I recommend that all of your agreements, leases and contracts be previewed by an attorney. In addition, you should be able to read and understand the agreement in order to comprehend the effect on your business. An attorney can tell you what the contract says, but you need to know what this means to your business.  Contracts tend to be overlong, dense and hard to read.  However, there are common elements in most agreements, elements that usually favor the party that drafted the contract.  You should be aware of them, understand them and DO NOT BE AFRAID to ask they be modified or eliminated. Much of what I do for my business clients is drafting and negotiating the terms of their contracts.

Term of the contract.  How long are you bound by this document? Is it renewable? Does it require notice to terminate?  Is there an automatic renewal?  It is not unusual for a lease to contain a provision for a substantial rent increase if the lease reverts to a month to month lease. Be sure that you understand the length of the contract and any options or extensions. If there is a notice requirement, note that in you tickler system or on your calendar so that you don’t miss that deadline. Failure to timely perform on your service contract can result in daily penalties. A delay in renewing your lease may result in a forced relocation of your business or shutting the doors while you look for new space.

Clauses that limit your rights and clauses that limit your remedies.  Under Maryland law you have a right to be made whole if someone breaches a contract.  That means you can bring that person to court to let a judge or jury decide the matter. You typically have three years to bring that suit in the Maryland courts.  However, many contracts limit your ability to do exactly that. An arbitration clause may require you to submit your claim to Alternative Dispute Resolution (ADR) before going to court. If you fail to go to ADR you could be liable for attorney’s fees and costs if you file suit. It is possible that the time for bringing a claim (the statute of limitations period) could be drastically shortened.  Many contracts require you to waive your right to a jury trial.  There are even clauses that state that any claim or suit will be governed by the law of some other state, or that all claims or suits must be filed in another state.  Having to fight or file a lawsuit in Texas or California can cripple a small business.  Again, a preview of those terms before signing can save thousands of dollars in the event of a dispute.

What happens in the event of default or breach. This type of clause is usually the least understood because no one expects to breach the terms of the contract and few people review it in detail.  It should be the first item that you read. Default provisions include late fees, accelerated payments, interest, attorney’s fees, forfeiture of property or deposits and indemnification of the other contracting party for all costs associated with enforcing the contract or collecting the payments.  When you are in default on contract is not the time to learn what the consequences are.  Read it, question it and negotiate the most favorable terms you afford. A contract that contains unreasonable risk in the event of default is not one that you should sign. 

Two special circumstances:

(1) Insurance policies.  Insurance policies are notoriously difficult to penetrate and utilize circular language and require referring to several sections in order to understand the coverage.  First, use your agent to explain every level of coverage and most importantly every exclusion.  Second, have an attorney read the policy, preferably one who is experienced in reading such policies to confirm the terms of coverage.

(2) The home made contract. The parallel risk regarding contracts is drafting your own.  As a business person, you may know your product, but probably very little about employment law, securities law or other areas of law that come into play when using a poorly drafted contract.  It is a great temptation to download a generic contract from the Internet and put your company name on it and make it yours. There are numerous risks associated with that.  If it’s a lease, is it in accordance with Maryland law? Does it contain unenforceable clauses that may invalidate the entire agreement? Do you know about three day recession clauses and when they apply to you? Does the contract do what you what it to do; does it protect you?  A good small business attorney can prepare an enforceable agreement for a lot less than the cost of defending a lawsuit.

So now, you realize that you have a file cabinet full of contracts, leases, letter agreements and work orders that you’ve signed but you are unfamiliar with their contents.  Even if you have already signed the document, it is still prudent to have it reviewed by your attorney to advise you of your rights and responsibilities.  Many times an agreement can be redrafted or renegotiated.  You will learn very quickly, what pitfalls may be in those documents. Even if there are unfavorable surprises, it is better to be forewarned than foreclosed. 

Terrence C. McAndrews is an attorney based in Howard County. He may be contacted at 410-772-9696 or visit http://www.lawyers.com/terrencecmcadrews.  

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