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Bad Contracts: What Could Possibly Go Wrong?

More often than not, parties will enter a contract on good terms, with the expectation that things will continue to run smoothly because they think they “get along” with the other party. If things continue to go well, that’s great. The more important question is, what if they don’t? What if things go wrong down the road? Are you protected if things take a turn, or are you betting the house (sometimes literally) that everything is going to go as planned? What happens if that other party you get along with “just great,” isn’t at the company any more? Then what?

[Read: Understanding Contracts: The Contractor and Subcontractor]

Contracts are an interesting paradox in the sense that once the contract is signed, if everything goes according to plan, there is a good chance you will never look at the contract again. However, if something goes wrong down the road, every word of the contract will be scrutinized to determine who prevails.

The reality is, that if everything went harmoniously, there would be no need for a contract. Contracts exist to protect the interests of the parties against what might go wrong. Think of your contract as insurance. You may not ever need it, but if something bad happens, you’ll sure be glad you had it. Of course, some issues are more likely than others, and most contracts will account for the obvious issues. But just because something is unlikely, doesn’t mean it should necessarily be overlooked. Some of the unlikely circumstances could be catastrophic if they did transpire. We refer to these unlikely circumstances as “edge-cases.”

What are “edge-cases” in contract law?

Edge-cases could be anything from a client stopping payment in the middle of your work, to a partner embezzling money from your company. There are any number of things that you would never expect, that would be crippling if they came to pass. Sometimes the issue is as simple as a misunderstanding between the parties.

I am not saying that someone has to do something disreputable for the contract to become important. Even if both parties are completely on the same page and everyone has the best intentions, there are factors in life which are outside our control. What if one party is unable to perform their duties because of an earthquake? You’ll want to know if your contract contains a force majeure clause. Or what if one of your business partners dies? Your partnership agreement could very well determine what happens to your late partner’s interest in the company.

By making sure your contract addresses “edge-cases” as much as possible, you reduce the chance of a bitter and expensive dispute, losing everything, or even bankruptcy should an edge-case occur sometime in the future.

How do I protect business against “edge-cases?”

Practically speaking, what does this mean? Simply put, it means that when you draft a contract, you have to account for the worst-case scenarios. The old adage “Hope for the best, prepare for the worst” seems particularly apropos. You may be thinking, “If I didn’t trust the other party to hold up their end of the bargain, I wouldn’t be making this deal in the first place.” That is a fair point, but it doesn’t mean that you want to leave yourself unprotected if something goes awry. Your contract should be your protection against the unexpected.

The reality is that trying to account for these potential edge-cases can be a bit like predicting the future. Obviously, we’re not expecting you to actually predict the future and there is no way to account for every possible contingency. However, it is useful to think about what could happen, whether likely or not, that would seriously damage your company.

Sometimes it can be difficult to think of these potential issues, and sometimes you just don’t want to. Your focus is on how this deal is going to help your company, not how things could fall apart down the road. That is completely understandable, and your business probably wouldn’t be where it is if you spent all your time thinking about the negatives. However, it probably won’t surprise you at all to hear that lawyers have significant training and experience in thinking about all the ways something could go wrong. Our attorneys can review your contract and worry about the edge-cases, so you can spend your time focusing on the things that make your business prosper, instead of worrying about what happens if your deal takes a turn for the worst.

Want to speak with a Contract Attorney?
Contact us or give us a call at 505.715.5700

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