Volume 17 Issue 3 -- May/June
Volume 17 Issue 3 -- May/June 2013
From time to time, law firms receive calls from potential clients like Melvyn Mynt who wants to buy a hair salon in mint condition. Mynt says “I just signed a contract to buy a hair salon, will you review the contract?” Mynt says both buyer and seller have signed the contract.
Suppose Mynt’s lawyer reviews the contract and then tells Mynt, “This contract is terrible and outrageously unfair to you.” What can be done? In most cases, practically nothing.
Many non-lawyers seem blissfully unaware that courts will usually enforce signed contracts if there is lawful consideration (a legal term of art). This is often true even if the agreement is unreasonable or clearly unfair to one party, unless there has been misrepresentation or fraud.
Would you consider buying an automobile without first seeing and driving it? Probably not. The same sort of reasoning should go into business relationships, and in particular the purchase of businesses, but sadly it often does not.
Contracts can be written and rewritten many times before they are signed. After a contract is signed, the contract usually cannot be changed unless both parties agree to any change.
There are no “lemon laws” or rights to cancel for most types of contracts, such as Mynt’s contract to buy a hair salon.
The idea that an attorney, upon reviewing the contract, can change it simply because it is not well drafted or is unfair is simply wrong. Of course, everyone would like to have a properly drafted instrument, but the fact that the parties have not that thought carefully through a contract before signing does not mean the contract is not enforceable.
Despite the veracity of the maxim that you can’t change most signed documents, there are still individuals who want to believe that useful input from an attorney can be obtained after a contract is signed. In many cases, far from improving the situation, going to an attorney after the contract has been signed may actually create more problems. Not the least of these is the amount of money paid to an attorney to review a document that cannot be altered.
While most attorneys can certainly wax prolific about nearly anything, it is often a waste of money to hire an attorney to review a document that has already been signed if the person seeking such advice believes that there can be changes to a signed document just because the attorney does not like the wording in the signed contract.
Signing a contract before it is reviewed by your attorney is rather like signing a contract you have not read. Clearly, the time to review the contract wording is before the contract is signed.
Some non-lawyers seem to think that the purpose of reviewing a contract is to make sure that the contract is “legal.” In fact, it takes very little to make a contract both “legal” and enforceable, even if it is badly written and unfair to one or both parties.
The real purpose of reviewing a contract before it is signed is usually not to make sure that the agreement meets some mythical standard for legality but to make sure that it achieves what the parties intend and that it allocates the benefits and burdens of the agreement as the parties understand and desire.
For example, a perfectly “legal” contract may have disastrous tax consequences to one party. A perfectly enforceable agreement may have serious, unintended consequences for one or both parties either because of poor wording or because the parties did not fully understand the implications of what they said.
Except perhaps in the very simplest of situations, the only reasonable time for having an attorney review the contract is before it is signed. That review is as much a part of a buyer or seller’s due diligence as checking the business’s financial records and past performance, investigating its assets and liabilities, finding out whether it has paid its taxes, etc.
Many would-be buyers or sellers have used our Checklist for Business Purchases or Sales, available on our website, as part of the process of investigating and verifying a business purchase or sale. Consulting an attorney before a contract is signed should usually be a part of that process.
If you are purchasing or selling a business, please consider contacting Newland & Associates before the contract is signed.
Published by the law firm of Newland & Associates, PLC
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