Is Signing a Contract that Is Wrong Risky?

Corporate attorney Kami Galvani writes today’s post about signing a contract that might be incorrect, might include provisions that are not applicable to your situation, or might have terms with which you cannot comply.

The Dilemma

I’ll pose a hypothetical conversation with a hypothetical client:

Attorney: “Hey Client, I was looking over that Supplier Agreement you asked me to review.  I noticed that it requires you to have an umbrella insurance policy with a limit of at least $5 million.  If I recall, your umbrella policy has a limit of only $2 million. Is that correct?”

Client: “Yeah, that’s right, and we explained that to our prospective customer’s procurement coordinator.  He said they aren’t allowed to amend that section of the contract.  But he reassured me that for our deal, it’s not a problem, so we can just sign it as is.”

Unfortunately, this type of situation happens quite a bit in contract negotiations.  One party questions a provision, and the other party tries to minimize its significance.  While everyone’s intentions at this stage are usually genuine and in good faith, signing that business contract can create real problems.

Pitfalls of Friendly Reassurance

If you sign an agreement, you will be bound by its terms – all of its terms.  After that, your failure to meet contractual obligations can expose you to a lawsuit for a breach of contract, as well as other consequences.

While you may get a verbal, or even an email, promise that something in the contract won’t be enforced, if push comes to shove, the language in the contract will almost certainly rule in the event of a dispute.  Essentially, a court will reason that if something was important enough to put into the signed contract, it must be what the parties intended.  There is no reason for the court to examine less formal documents that may show something which contradicts the clear language of the contract itself.

Exceptions?

It’s possible that a dive into case law would reveal that, in certain cases, certain writings may override the language in a signed contract, but you should not rely on this remedy being available.  If you are signing a contract, review it carefully.  If there are terms with which you cannot comply, change the terms or refuse to sign.

Tough Negotiators

From time to time, I encounter what I’ll call “bully customers” who state that if you want their business, you must sign their form agreements as provided without making changes.  If this happens to you and you cannot meet the customer’s contractual requirements, I encourage you to continue to negotiate.  A reasoned explanation as to why you need the change often helps.

While customers may not want to redline their standard terms and conditions, they may be willing to change certain terms in an ancillary document like an addendum or a statement of work.  If you do go this route, make sure that the ancillary document specifically states that it is meant to supersede the language in the original agreement and be sure that it is signed by both parties.  Finally, it is always wise to consult with business counsel prior to signing any material contract or ancillary document; he or she can advise on the proper way to ensure that you will not be bound by terms that you know you cannot meet.