The Single Most Important Question You Must Ask Before Signing a Contract

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How many contracts do you review in any given month? How about in a year? If you run a growing business, the number of contracts you consider on an annual basis can run into the hundreds. The question is whether you really know what you're looking for from a legal perspective? For most business owners, the answer is "no."

After almost thirty years as a business lawyer, I've come to realize that there is one crucial question every company must ask about every contract every time:

"Why will I want to get out of this contract?"

Not long ago, a client asked me to review a contract for his new Internet and telephone service. The contract called for a 5 year term and a significant monthly payment, but that wasn't the part that worried her. What kept her up at night was the fact that she would be transferring her phone, including the emergency numbers that were the lifeblood of her disaster recovery company, as well as her internet access, website, and email to this vendor. She had done her due diligence, but her hand still shook whenever she contemplated signing on the dotted line.

So I asked her the question:"why will you want to get out of this contract?"

She thought about it and gave me the following list of reasons:

  • If the vendor failed to respond within a six-hour window.
  • If her phone system was out of service for more than 4 hours in any 6 month period.
  • If she couldn't connect remotely to her server.
  • If her 800 emergency number went down
"Where in the contract does it allow you to terminate if any of those things happen," I asked? The answer, of course, was nowhere. Instead, what the contract said was this:

PHONE COMPANY, LLC MAKES NO WARRANTIES, REPRESENTATIONS OR OTHER AGREEMENTS, WHETHER EXPRESS, IMPLIED, OR STATUTORY, TO CUSTOMER OR ANY THIRD PARTY WITH RESPECT TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS, OR FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE OF ANY SERVICE PROVIDED OR NOT PROVIDED HEREUNDER, OR AS DESCRIBED HEREIN, OR TO ANY OTHER MATTER, ALL OF WHICH REPRESENTATIONS, WARRANTIES OR OTHER AGREEMENTS ARE HEREBY EXCLUDED AND DISCLAIMED. CUSTOMER ACKNOWLEDGES AND ACCEPTS THE REASONABLENESS OF THE FOREGOING DISCLAIMERS.

There were no performance guarantees anywhere. If my client had a problem, she would have to provide written notice. The company would then have 30 days to "act diligently" to fix the problem. If that didn't work, there was another whole procedure before my client even had a shot of terminating. She'd be out of business in half that time.

We went back to the company and asked for a quick-trigger termination right based on my client's list of concerns. The resulting contract, after much negotiation, provided for a one year period to terminate at will.

The fact is that most of the really comforting assurances are contained only in marketing brochures. If you want a better contract, figure out why you'd want out, and then build each of those issues into the agreement. Sure, it will take a little more time to negotiate on the front end, but you won't have to call your lawyer six months after you sign.