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Do Your Contracts have a Grip on Reality?

Recently, I drafted a contract with which neither party is ever going to comply. In fact, after the parties sign it, it will be placed in a drawer, never to see the light of day.

The contract hinged, in part, on an agreed value for stock in the company.

According to the contract, the parties would sit down once a year and agree on the value and then commit that value to writing.

Except they never will.

We counseled against this, proposing they create formulas and set a default value. But the owners wouldn’t hear of it.

They would meet, they said. Every year, they said.

Except they won’t.

Too many contracts describe only how things will proceed in an ideal world:

  • In an ideal world, this is the employee discipline system we’d have in place, so that’s what we’ll specify in our personnel manual.
  • In an ideal world, this would be our evaluation and bonus system, so that’s what we’ll put in our employment contracts.
  • In an ideal world, this is how the company will be governed, so we won’t provide for dispute resolution and deadlock.
  • In an ideal world, this is how our customers will pay us, so we won’t spell out our rights in the event of a default.

Of course, if we lived in an ideal world, where everyone was a person of integrity and each of us looked at things the same way, I’d be out of a job. My only hope of paying for my sons’ college education is that we do not, and never, will live in an ideal world.

In an ideal world, every client and every business owner would take a hard look at the contracts, purchase orders and term sheets that document their rights and really read them to see if they say what they should.

Now, I know you can’t control what other business owners do, but you can control whether YOU will take the time to review your documents.

A little preparation goes a long way. And being prepared for something to go wrong …well…that would be ideal.

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Eliot Wagonheim shares business insights that help companies stay on course. Get our latest blog posts sent right to your inbox. Subscribe using the sign up form to the left of this post.