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Flirting With Disaster: The Dangers of Not Reading Business Contracts

Otto Hanson, JD Dec 19, 2019 8:46:27 AM

We get it. Managers are busy. Reading contracts takes time. After a while, managers may feel all contracts are the same. With so much to do, it is tempting to skip the fine print, particularly given that so many lawyers draft contracts in an unnecessarily verbose style filled with “legalese.” But not reading a contract is dangerous and could expose you to personal liability.  

Here are the five things you must know if your role in your company has anything to do with executing contracts:

1 – Corporate directors and officers have a legal obligation to act responsibly and in the best interests of the companies they manage. In some cases, managers have been held personally liable for breaching these legal duties. One such duty is the “duty of care”, which generally includes the duty to make careful, informed decisions by assuming an active role throughout the entire decision-making process. Generally, managers can avoid liability  if they follow these guidelines:

     – Assure themselves that they have the information required to take action
     – Devote sufficient time to reviewing such information; and
     – Obtain, if useful, the advice of experts

2 – It doesn’t matter whether you read or understood the contract. A fundamental principle of law is that one who signs a contract is presumed to have read it, understood it, and agreed to it. Put simply, if you sign it, your organization is stuck with it, and any attempt to modify or nullify it will likely be costly, time-consuming, and unsuccessful.

3 – Contracts vary wildly. There are 1.35 million lawyers in the United States, and clients generally pay them to draft contracts favorable to them, not your organization. If you don’t understand a contract you sign, you’re playing Russian Roulette with your company.

4 – Contracts are not all “boilerplate”. Most contracts contain legally binding terms covering issues such as:

– Dispute resolution
– Limitations on damages
– Indemnification
– Attorney’s Fees
– Forum selection
– Remedies
– Insurance
– Representations and warranties

These things matter.  A lot. Properly drafted, these provisions help an organization minimize the risk of litigation and maximize the odds of a good outcome if the parties can’t resolve the dispute.

In a study of SaaS click-through agreements, TermScout found that software vendors require the customer to take on significantly lopsided terms with respect to risk allocation more than 95% of the time.  Typically this means that if something goes wrong, such as a data breach or third-party lawsuit, the customer is much more likely than the software vendor to suffer a financial loss.

5 – The past does not predict the future. If you’ve been signing contracts blindly and getting away with it, kudos to you.  But don’t assume that just because there was no problem in the past a problem won’t arise down the road. It’s unusual for serious contract disputes to arise, but when they do the outcome can make or break a company.

If an organization has access to legal counsel, managers may rely on them to review proposed contracts and identify potential issues. Those lawyers should scrutinize contracts for ambiguities, inconsistencies, and important issues the proposed contract fails to address altogether.  

If an organization does not have access to counsel, even experienced managers may be tempted to sign a contract without carefully reviewing it and fully understanding it.  However, unless those managers are lawyers, they may not understand the risks they take on when signing contracts for their companies. They may be obligating their organization to unnecessary commitments or agreeing to a contract that omits important protections for the organization. When those contracts turn out to be problematic for the company down the road, shareholders may be able to bring a claim for breach of the duty of care if the manager cannot show that they took proper precautions.

Though reviewing contracts takes time, new solutions are emerging that make contract review more affordable and accessible for growing businesses. One solution is TermScout’s Red Flag Reports, which help you quickly and confidently determine which contracts are okay to sign and which ones are not. Click here to learn about Red Flag Reports and how you can limit your risk for as little as $119 per document.