As we march through our lives, folks shove documents under our nose for signature all the time. In reality, we should carefully, very carefully, read them and consider their implications before signing any of them.
After all, there are charlatans and fraudsters standing eager to take advantage of us at every turn. And even if other parties don’t start out as such, life events can put people in default or desperate straits – and then “desperate people do desperate things” as they say.
Still, certain documents bear significant additional risk or have a history of resulting in litigation or economic calamity for the signer.
Here, we take a serious look at six transactional documents that frequently result in legal or financial problems:
- Personal guarantee for debts of another. Your daughter and son-in-law are buying a house, but have bad credit, or you are starting a business and need to guarantee the lease or franchise agreement to provide the fiscal backing for the undertaking. A personal guarantee is fine and in some instances both called for and reasonable. But think it through:
–> Am I financially capable of fulfilling this guarantee if the underlying obligation falls into default?
–> Would the other party accept a guarantee limited in time, amount or some other cutoff? Or proceed with no guarantee?
–> If there are multiple guarantors, would the lender be satisfied with me just paying my pro-rata share of the underlying debt?
–> Is there some other way that the transaction can proceed without my guarantee? Can someone offer security for the loan instead?
- Non-Compete agreements. More and more employers are asking new employees to sign non-compete agreements or agreements wherein the employee agrees not to solicit customers, employees or vendors of the enterprise. Employers are entirely within their rights to demand such agreements (the question of whether they are enforceable is addressed here). But should an employee agree to restrict his future earnings potential and career path based upon this job opportunity? If you really think it through, many time the answer is “No thanks, I’ll take a pass.”
- Agreements with attorneys. We really hate to say this, but one of our clients was a seller under a land installment contract for the sale and purchase of real estate. The buyer was an attorney. After repeatedly falling into default, our client initiated a forfeiture action against the attorney. He countered with a blistering series of arguments that were all untrue or frivolous. Confronted with withering legal bills to prove their case, they quickly settled on relatively unfavorable terms. Lesson learned.
- Businesses with 50/50 ownership. It seems to make sense: Two partners throwing in equal shares of cash and effort to start a business; they should own it 50/50. And in decision-making, decisions are 50/50, meaning it requires the consent of both parties to move forward with anything. However, after years of addressing business disputes, it has become clear that these ownership structures – with no one in charge and everyone’s cooperation required to make decisions – are the source of operational and legal gridlock, resulting in painful, expensive and endless litigation. I have even seen very difficult dispute resolution between former (or soon-to-be-former) spouses in a 50/50 ownership structure. Indeed, getting into business with any third party can be the source of conflict, monetary losses and litigation.
- Agreements you are not prepared to litigation to conclusion. If you think about it, in an instance in which you are investing time or money, you have two essential choices: Either be prepared to “eat” these investments by walking away or be prepared to litigate your claims to conclusion to defend your investment. Is the person you are contracting with someone you are prepared to sue to enforce your rights? Is the transaction structured and documented in such a way that you could prevail in that litigation? Will the cost of enforcing these agreements (or defending against a suit from the other party) of such magnitude that it will be worth litigating?
- Indemnity and “hold harmless” clauses in leases and other contracts. It’s easy to sign a 50-page legal document that satisfies the major business terms you have negotiated. But what about the fine print? Buried deeply within a lease, loan documents, or asset purchase contracts can be all sorts of warranties, indemnities, and “hold harmless” provisions. It seems simple that a seller or borrower should stand behind his obligations, but do you really want to give an open-ended contractual indemnity or warranty in this specific instance? It is, as is addressed here, a potential blank check, open-ended access to your checkbook.
We are not saying that you should never sign any of the foregoing instruments. What we are saying is that experientially these undertakings result in much conflict, legal fees and emotional angst, and should be undertaken only with great caution.