Three errors to avoid in contract writing
You just finished negotiating a deal. Next step? Have a lawyer write the contract.
Read the contract carefully. Ensure it reflects the agreement. Lawyers or deal writers make three common mistakes, often with severe consequences:
- Clauses do not reflect the negotiated deal accurately.
An NJ fitness center was experiencing high mid-term contract cancellations. The current policy held members liable for a trainer’s monthly fee only until the center signed a replacement member, which happened quickly. The members received their deposit ($1,000) and exited the contract at no cost. The trainers ended up losing a significant amount in fees.
The trainers negotiated with the owner for a policy change. The clause in the agreement stated, “Deposit will be held until the contract end and may be applied towards the final month’s trainer fee if a member cancels enrollment.”
To compensate for the trainers’ lost fees, the owner agreed to require members to forfeit their deposit if they canceled the membership before the end of the term. This policy applied even if a replacement member was available immediately. The center asked the lawyers to incorporate this policy into the membership agreement. The revised clause read:
“The deposit will be held in an escrow until the contract end and may be applied towards the final month’s trainer fee if the member completes the contract.”
A member left mid-term the following year, triggering the revised clause. The center’s trainers and the owner were puzzled when the member pointed out that the new language said nothing about not refunding the deposit. Were the trainers and the owner not clear about what they wanted?
With the help of a professional negotiator, the trainers and the owner revised the verbiage. The revised clause read:
“If a member decides to terminate the contract before the end of the contract term, the deposit will not be refunded. If the member stays until the contract end, the center may apply the deposit towards the last month’s trainer fee.”.
The center finally got a contractual language that reflected its intention.
- Critical terms are often missing or unclear.
A silicon valley tech company included significant stock grants in the compensation package of top executives. The board of directors assumed there would be a provision to change the number of shares awarded. But what the shareholders signed off on did not have such a provision. When the stock split in a few years, the board assumed an adjustment in issuing the stock grants. The shareholders sued – and won.
A court ordered top executives to return the company millions of dollars in stock. Here it was not inaccurate language. The attorneys just neglected to include a clause to handle a likely scenario.
- Deal clauses are conflicting.
In complex deals, negotiators can sometimes help identify conflicts of terms in the agreement. Could you suppose an arrangement where the seller delivers business analytics services once a quarter, but the buyer pays monthly? The mutual intent is most likely to allow the buyer to pay in installments. A negotiator will point this out so all parties can confirm the agreement.
Sometimes, the deal writers can unknowingly create such conflicts. When a business analytics firm went public, its bylaws said that directors could be removed “with or without cause.” In contrast, under the company charter, the company could remove directors only “for a cause.” Which was it?
In most states, I believe corporate law dictates that the charter prevails in such cases. In other situations, however, such discrepancies cause trust issues and could lead to litigation.
