If someone told you that you could spend $5,000 now and it would save you $300,000 later, would you invest? I’m guessing the answer is yes. Yet so often business owners skip attorney review of a transaction to save a few dollars not thinking of the ramifications of a contract dispute; or simply trusting there will be no dispute which is understandable since, as a business person, you have taken risks and made cost decisions to maximize profits. If this article can help with one thing, it is to mitigate that risk and save money.
Common concerns business attorneys hear sound a lot like this scenario: “Do we need a contract for this? I mean we did the deal on a handshake last time and everything went ok.” The client knows the answer to her own question, but she does not want to incur any legal costs. So often clients don’t seek review until after a deal goes bad. And eventually, there will be a deal that goes bad.
Before I continue, I should add a disclaimer that this is not some shameless plug for our services. This is actually advice for the business owner that is hesitant to “get the attorneys involved.” This article will hopefully draw that negative connotation away from a transaction and save you and your business risk and money.
As an attorney, the number one response I get from people after they hear what I do for a living is “Oh! I hope I never have to call you!” It’s a common misconception that our only function is to step in when someone is in trouble. This response doesn’t come as often from experienced businesswomen and men. What I hear from some of my clients is the equivalent response, and it sounds like this: “I was hoping this deal would not come to this,” or “We have a problem, what we can do and how much will it cost?”
Almost every business attorney can tell you about a client that decided not to have an attorney properly draft or review a contract. That decision would cost that client many thousands of dollars to publicly fight, and privately settle that case. The result could be a win, but not after substantial costs that could have been prevented.
A good case law example is Davis v. General Foods Corp. In that case, Davis wrote a letter to General Foods offering to reveal an idea for a new food product. General Foods responded with a letter stating that they would consider her idea, “but only with the understanding that the use to be made of it by General Foods and the compensation, if any, to be paid therefore, are matters resting solely in our discretion.” Davis revealed her idea thinking General Foods would surely pay if it was a good idea. But General Foods used the idea and paid Davis no compensation. The court ruled in General Foods’ favor stating that the letter was too vague to consider it a contract and that no promises for compensation were made. One call to an attorney before the idea was revealed could have made Davis a lot of money.
Often we also hear that clients don’t want the attorneys to “overdo” the deal. This admittedly can happen if an attorney does not fully comprehend the client’s needs. But what is often perceived as “overdoing” is actually the attorney being careful to protect the client. This is because attorneys are the last line of defense prior to signing. Our job is to protect your interests. The goal is to memorialize the agreement, and make sure the client understands the ramifications, so there is little to no room for any expensive legal battle later.
An attorney’s perspective comes from our training. Starting with law school, as a Northern Minnesotan, I remember the shock of my first Contracts class. Growing up around here, you are taught that your handshake is your bond. But in law school, you learn that business is a colder world. We read cases of brothers turning on each other, families torn apart for a dollar, and bitter fights of businessmen who grew up best friends and split as hated enemies. It happens when the deal gets broken, money is on the line, and things get ugly.
What I try to impress upon my clients, is that as attorneys, we don’t want things to get ugly. Yes, the fees from a deal gone bad are much higher. But we would rather execute a complete, well drafted contract and never get another call again, than to have a deal go bad that we could have prevented if our client had just picked up the phone.
Surely not every deal will need attorney review. My larger clients integrate our firm into their business practice because they consistently engage in transactions justifying the fees. But what about deals involving smaller amounts?
I have prepared a list of a few considerations when deciding if you need to have attorney review. This list is not exhaustive but it will help in deciding whether it will be economic to have an attorney draft or review a contract.
- Subject of deal – examples:
- Real Estate Agreements are not binding unless they are in writing. If you do not understand all the terms you should always call your attorney. Most real estate agreements are worth enough to justify the advice.
- Sales of Goods are subject to UCC regulations, sometime difficult for a client to sort through.
- Is the transaction an asset purchase or full business purchase?
- Is the operation subject to state or federal regulations?
- Changing employment or ending a business relationship has the potential for dispute.
- The value of the Deal:
- Consider more than just cost. Consider lost profits, lost good will, ramifications if a contract dispute arises.
- How important is it to your operations?
- How replaceable is the service?
- Consider if it is a small amount or will it be a repeated transaction? If so, perhaps your attorney can provide one template contract for each similar transaction?
- An existing contract in place:
- Are there terms you don’t understand?
- You may want to discuss a limited review with your attorney.
- Will the contract need to evolve or change?
- Experience and familiarity with the other parties
So after considering the value presented, you may still think, “How small is too small to call an attorney?” The answer is no deal is too small to pick up the phone. Establish a relationship with your attorney and you will learn that if review is uneconomic, he or she will tell you and may even give you a little complimentary advice. A good business attorney knows that establishing that trust will open the door for a client to call when the advice will truly be valuable.
Dante Tomassoni is an attorney at Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Business, Corporate and Energy Transactions and Government Relations. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.