Thursday, January 7, 2010

Business Contracts Audit

When was the last time you went through all your contracts? If you are in business, you have contracts. Maybe you buy goods and services or sell them; probably both. But do you know the quality of your contracts?

If you tend to do business on a handshake, you have a contract, you just don’t know all the terms. You may know the price, the quantity, and the delivery terms, but do you know the warranty, the limitation on liabilities, the governing law, or the extent of extraneous documents that are considered “contractual”?

Maybe you are one who insists that all contracts be documented but have accepted the other party’s paper with terms and conditions even though your paper also has “fine print.” If a dispute arises and there is a conflict of terms, do you know which provisions will withstand the test?

Well written contacts may be evidenced in a single document signed by all parties or on multiple non-conflicting documents, each signed by a single party. Anything short, and you may find yourself having a third party constructing a contract for you based upon the Uniform Commercial Code.

One method of trying to get a handle on your situation is to audit a sample of contracts. Pull out 10 to 20% of your files from a specified period of time and determine the strength of the contracts. To keep it simple, divide them into four groups:

1) A single document containing all the terms and conditions, and signatures of both parties.

2) Two documents, each signed by a party, where offer and acceptance is obvious and there are no conflicting terms.

3) Two documents where the parties attempted to agree but where conflicting terms exist.

4) No documentation evidencing a contract is contained in the file – no signature, few if any terms, some or no supporting evidence of an attempt to agree to do something.

While reviewing the contract files, take notice of the processes used (or lacking), use of checklists by those touching the files, signature authorities, access to systems controlling and supporting the relationships, the language used by the other party, the formatting of your documents, etc.

Once you understand your exposure, you may take steps to tighten up language, processes, approvals, etc. while also taking steps to strengthen the relationships with the other parties. You may never achieve 100% “air-tight” documents and processes (or even care to), but the less you strive for excellence, the more risk you accept for your business.

Don’t believe that bad things don’t happen to good people (or good companies). As many found out in the recession beginning in 2008, the ripple effect of negative behavior by some has touched many families and businesses who thought they were secure.

It may be legal, but is it right?

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