Risk Management Strategies – Contracts

“Education is when you read the fine print. Experience is what you get when you don’t.” – Pete Seeger

I know that many attorneys hate it when this happens, but sometimes the best legal advice comes from experience and common sense and not from attorneys. Take the Pete Seeger quote above. I am not sure what life lesson about fine print led to this comment, but I find the advice to be spot on even if the source is a folk singer. Or maybe because the source is not an attorney.

One of the tasks I spend a huge amount of time working at on behalf of my firm’s clients is risk management strategies. Frequently, this takes the form of identifying risks. One of the primary tools that I use in this effort is the contract. It does not matter who the contract is with and what transaction is covered by the contract; this is the first place to stop when looking for risk.

Most people look at contracts as a necessary evil. My position is that contracts are like car insurance; you don’t buy car insurance expecting to have an accident every time you operate your car, but when you are involved in an accident it is critical that you have coverage. Contracts work the same way; frequently no one even looks at the contract if the transaction goes smoothly; but if something does not go well, the contract becomes the most critically important document the parties have.

I am going to let you in on a little secret. Most people either do not read a contract or they just look at the “important stuff”, like cost. I understand the challenge of reading a contract; frequently contracts are drafted in such a way that they are designed to be difficult to read. Many attorneys see their job in drafting a contract to protect their client from any risk that could occur, which means that if the attorney can think it up as a possibility it is then added to the contract. This leads to contracts that run on page after page. Many attorneys also cling to antiquated language, at the expense of using plain English that anyone could understand.

The problem that occurs when a contract has been signed and not fully reviewed and understood, is that someone is agreeing to terms and conditions without knowing what they are. Frequently, these terms and conditions are “buried” in the contract. There are attorneys who use the Miscellaneous section of the contract to bury terms and conditions favorable to their client. These provisions lie in wait, harmless if everything goes as planned but if a dispute occurs able to be used to hammer the other side. The contract drafter trusts that no one will possibly read that far into the document, in fact they count on it.

So how do you protect yourself? First, read every contract you are a part of, before you sign it. It does you no good to discover what you have agreed to after you have signed the contract. Second, if you are not sure exactly what the contract includes or excludes, have the contract reviewed by an attorney. The cost spent on legal review is usually a small fraction of the cost involved when the contract has been breached and the issue moves to litigation. Third, make sure that the people involved in the transaction covered by the contract have read the contract and know what it contains. If the senior leadership knows what is contained in the contract but the people involved in the transaction do not, things may be omitted or missed. Finally, remember that you have control over what is in the contract. Frequently we are asked to review contracts that are being furnished by the other party; do not assume that nothing can change, everything is negotiable until the contract has been signed.

Contracts are wonderful tools for laying out the agreement of the parties, but care must be taken to know what is included in the fine print.

Matthew C. Boomhower is the founder and president of Southern Cross Property Consultants; a construction management, architecture, and facilities management consulting firm. He is licensed as both an Architect and an Attorney. He can be contacted at matthew@southerncrosspc.com or 858-395-8657.