CONTRACTS – WHAT YOU NEED TO KNOW
I practiced law actively for some 25 years and remain a member of The Bar. As a lifelong devotee of the study of the English language and etymology, most of the contract-writing in our firm was passed to me. Frankly, I have always enjoyed writing agreements, and I have continued to do so for my sons and for all of the small businesses in which I have been, and/or am, involved. So, in the case of this Observation, I can fairly say that the subject is well known to me and, in many ways, dear to my heart. A legally binding agreement or contract can be oral or written. Oral agreements are simply more difficult to prove. To constitute a binding agreement, three elements must be present: a valid offer to do something that is legal, consideration and acceptance. Many people, especially those that pride themselves on keeping their word (i.e., “My word is my bond”), see little need for written agreements. This is ill-advised for these reasons: (1) The parties often do not understand each other, even when they think that they do, and putting the terms in writing forces the parties to read and make sure that they do understand the terms. (2) People’s memories are faulty, especially over time. A written agreement keeps all parties in line with the original terms. (3) People become incapacitated, demented and die; widows, trustees, guardians or strange lawyers suddenly appear in the place of the removed party, and all bets are off. The new or substitute party may require strict adherence to the agreement, as written; so, the agreement best be well written. There is no such thing as a “perfect” contract. I have never written a contract in my life that I couldn’t improve the next day and every day thereafter as long as I lived. As we think about the terms, new issues come to mind. A wise contract-writer will draft an agreement one day and return to it several times, over the span of a week or so, viewing it with fresh eyes, and continue to improve it. The parties to agreements would be well advised to do the same thing before they sign. This Observation on Contracts is not aimed at lawyers, it is, rather, directed to laymen: What are the most fundamental “do’s and don’t’s” when dealing with contracts (aka agreements). Here are some basic rules for your thoughtful consideration. (1) When choosing a lawyer to write an agreement for you, look for one who (a) knows the subject matter (real estate, patents, franchising, import-export, divorce, wills and estate, taxes, trusts, etc.) and (b) equally important, is an excellent writer. The latter is difficult to assess in advance, but keep it in mind. (2) Never sign a contract that you have not read with the utmost care. (3) Never sign a contract that has any word or provision that you cannot understand. (4) Never rely on your attorney’s or anyone’s explanation of what a contract means. (5) When the words or provisions are not clear to you, insist that they be re-written until they convey agreeable terms that you can understand by reading them; that is, without relying on anyone’s interpretation of them. (Judges and juries well may not interpret provisions the way that your lawyer or advisor believes that they will.) (6) Insist that initial lines be put at the bottom of every page, where each party will sign his/her initials. This will make inadvertent or malevolent substitution of pages initially, or even long after the fact. Prior to the 1950’s, contracts were often bound with metal devices that made taking them apart impossible without mutilating them. Today, as agreements need to be copied, faxed and scanned, this is impractical. Unfortunately, many attorneys do not routinely require the parties to initial each page. As a result, substitution of the wrong page can easily occur. Initialling will avoid this. (7) Beware of unilateral agreements. Many agreements are “boilerplate”; that is, the same template is used for most contracts of that type. The problem is that some of these boilerplate agreements are unilateral and will greatly disadvantage one party. If so, you don’t want to be that party. Lawyers can be guilty of human laziness, too, and they may want you to just sign, as “it’s boilerplate anyway”, but, to be prudent, you must read it and follow the above-suggested steps. In many cases, it is easy to add an “addendum” to such boilerplates that cure the major disadvantages that will otherwise be imposed upon you. (8) Warranting special mention are the boilerplate agreements of insurance companies (IC’s), as most of us feel the need to carry some or many kinds of insurance. Over the years, IC’s have been burned many times, but they remain among the world’s most profitable businesses (and one of Warren Buffett’s favorites for that very reason). Except for auto insurance (which is obligatory anyway), the problem has become that, what is good for IC’s is not good for the policy holder. The agreements of IC’s are generally written in the smallest print and are painfully long, and their bottom line is that the IC has so many “outs” and/or will pay you so little, that you are better advised to self-insure where you can (such as for jewelry, furnishing and for extremely unlikely events, such as fire, floods, etc.). If you don’t, you will likely find that your insurance premiums, if kept in your bank account for five years or so, will more than cover any statistically likely losses that you might incur. IC’s will not alter their boilerplate agreements for you. So, here is a case where must read the entire policy and make a hard decision: If I pay these hefty premiums and suffer loss, what will I likely recover from the insurance company? If it’s not sufficient to justify the premium, don’t buy the insurance. Example: The contents in X house would cost $50,000 to replace; the annual insurance premium (from theft, fire and other forms of destruction) is, perhaps, $10,000. If you decline to insure and put the $10,000/year in savings, in five years, you will have $50,000, the full cost of replacement of your furnishing. However, IF you insure it, and it all burns in three years, the IC will not pay you the $50,000 replacement cost; it will pay you the “depreciated value”, which it determines, in its wisdom, to be $25,000 – or $5,000 less than you paid in three years for the insurance. Bottom line: Insurance companies win; policy holders generally lose. Also, after you recover $25,000 for losses in year three, you will find that your premiums are increased dramatically the next year (to allow the IC to recover its $25,000 payment). Insuring only the house (not the contents) from fire may make sense; read the policy and do the math. You may argue that you need personal injury insurance on your home; that is, to cover injuries to others on your property, but PI insurance, by itself, is very inexpensive, and is well worth buying (at today’s premiums), as juries tend to give large awards to those injured. Forgive the diatribe about insurance, but this author believes that far too many of us pay insurance premiums which far exceed any likely return. (9) Do a Last Will and Testament and revise it every five years, and keep copies with your attorney, accountant and in your safe deposit box. Or, in the alternative and likely better, do a Creditor’s Protection Trust, which will act as a Last Will and will offer additional protection from creditors, including the IRS. (10) In summary, as to contracts in general, in most transactions, a written agreement is advisable. Contracts should be your best friends in most transactions, but do your best to follow above rules, and you will maximize your advantages. If you do not read agreements (and have them revised until you understand and agree with all the terms) before you sign them, you may be doing yourself more harm than good.