Signed a Contract? It's Too Late to Change It!
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.
Copyright 2013
Published by the law firm of Newland &
Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business
law and
tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.
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