August 10th, 2021

Reflex CapitalBlogContracts

Nobody likes to read contracts (except myself, but other people have weird hobbies too, right? … someone keeps poisonous spiders, I read contracts). Tens of pages of boring text and contrived sentences, written in a language few understand.

Even worse when it’s in legal English, established sometime in the the middle ages and riddled with strange words like „theretofore“ or „hereinbefore“, which, when used in a conversation, would raise doubts about your mental health. But when it’s business as usual, nobody looks at the contract anyway. One party delivers, the other pays the invoices and nobody cares that the contract says something a bit different, than what is actually going on.

Everyone starts to read the contract when there is a dispute, but that is a bit late to wonder: “Did we really sign this?” What everyone thought was clear, becomes blurred and each party understands it differently. Two similar words can have a significant difference. A missing or an extra comma can alter the meaning of the contract. Statement X, which seemed clear, now has a completely different outcome when combined with statement Y two pages up and statement Z three pages down. And what is not clearly stated in the contract is governed by current legislation. Oh my, what a surprise! The law exonerates us from liabilities in case of a force majeure event, but does not protect us from a breach in contract. We did not cover this in the contract, so Covid or not, the customer can cancel the contract and demand a penalty fee.

How about relying on the court do deliver justice, if you can’t reach an agreement? To this day I remember, what my lawyer (whom I still consider my great law teacher) told me when I was a business greenhorn: “Law is not mathematics. You can’t fill in the variables into a formula, perform a calculation and get a verdict. If you go to court, it does not matter, if you are right or wrong. It’s always fifty-fifty, because it depend on the person in the black gown, who is about to make a ruling in something they cannot possibly understand in detail. So they make a subjective choice who they like best and then they find the law to justify their decision.”

When that happens with a single business contract, it’s survivable. It costs some money, but “no pain, no gain”. It teaches you to pay more attention next time. It’s worse when that happens with a long-term contract and one which cannot be amended or cancelled. Like a shareholders agreement. There is no escape in that case.

So, what can be done? Read carefully, what you are about to sign and hire a good lawyer. Ondřej Fryc wrote something similar about M&A advisors recently, but the same applies to lawyers. Sure, the big law firms charge horrendous rates and your friend from college can do this for few beers. The difference is, those law firms have done this many times before and have a lot of experience. I have seen several founders, trying to save few tens or hundreds of thousands on lawyers, subsequently losing tens or hundreds of millions to bad contracts. And even when the worst can be avoided, fixing something that could have been done right in the first place, can easily cost ten times as much.

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