Business Law Articles

Contracts – “Penny Wise and Pound Foolish”

Company owners and executives frequently cannot resist the temptation to draft their own agreements. They may feel that since the parties are agreeable and the issue is not complicated that there is no need to consult an attorney. One of the parties may even have an agreement that was used previously for a similar type of transaction and may believe that it can be used in the present situation as well. Whatever the reason, there is rarely ever a good reason to draft your own agreements. The apparent benefit in doing so is illusory in light of the inevitable litigation costs to undo what has improperly been done. Two examples demonstrate the truth of that statement:

Last year, this firm was retained by an international company to defend it in a breach of contract action commenced against it by another international company. The action sought damages for approximately $200,000 for reimbursement of alleged expenses that had been advanced on our client’s behalf. In support of its claim, the other party relied upon a letter agreement between the parties that its president had drafted by “cutting and pasting” from past agreements. While there was no question that the $200,000 had actually been expended by the other party, our client believed that the expenses were nonetheless exorbitant and refused to pay. Ultimately, our client avoided reimbursement of the expenses simply because we found, and was able to exploit, a minor provision in the letter agreement that we interpreted to require consultation with our client before expenses were advanced by the other party. We also argued that since the other party had drafted the contract, the wording had to be interpreted against that party if there was any doubt as to our reasonable interpretation. Not only did the court agree with our position and deny the other party reimbursement of its $200,000 expenditure, our client even received an award of costs and attorneys fees. That was an expensive lesson in contract law for the other party.

In another case, our client sought to enter into a long distance joint venture with a much smaller business as its “junior” partner in an industry that our client had become a major force. Feeling a sense of superiority, and with a paternalistic sense of trust, our client prepared its own contract to govern the parties’ relationship. Unfortunately, after only a few years the other party had grown to be a significant business in its own right and had very cleverly boxed our client out of a good-sized portion of its own business. When our client sought to raise its “heavy hand” in protest it found that it had undermined its superiority with its own agreement as a result of very poor drafting. Although the client ultimately recouped its business it came at a costly price. Litigation was commenced in New York State and continued for years until its resolution in a bankruptcy court in the Midwest. All of that could have been avoided with a contract that properly defined the parties’ responsibilities and rights and protected our client’s proprietary business interests at the outset.

The point is clear -- a little knowledge can and will be used against you in a court of law. A layperson should not draft a contract any more than he or she would render a diagnosis from their own medical chart. Therefore, it is “penny wise and pound foolish” for a layperson to draft a contract no matter how simple it appears to be since it is nonetheless a legal document that can have far-reaching ramifications.