I have many business people coming to have their business contracts either drafted or reviewed. Sometimes there is a fine line between a business decision and a legal decision. When it comes to this area, I tend to take a more hands-off approach and instead take a more advisory approach when it comes to certain clauses.
Let’s be real here. Businesses have losses and gains and they views those losses and gains differently than households do. For example, Citi was fined $158 million for the Federal Housing Authority for fraud. Citi probably made a lot more than that and the fine was worth it (unfortunately). Ok, disclaimer this is obviously unethical and illegal and never something I would advise my clients – but it brings home the point. That is – you can take a ‘legal hit’ knowing you’ll get a profit.
In contracts it is different. Violating a contract is not illegal or criminal (unlike Citi’s fraud. Bad Citi!) because it is a civil matter. I would never advise my client to break a contract either, but well – it happens. Further, such a situation could apply in other ways. For example, if there is a liquidated damages clause (a clause that says ‘if you violate this contract, you must pay $X’), a business might say ‘hey, I’ll pay that amount and get my way.’ Another instance is a business agreeing to contract terms that are risky or heavily favors the other party, but the gains might just be worth it. Conversely, I try to look at the contract from a business perspective as well. Although a clause may be legally sound and fair, sometimes it may be detrimental to a business. Applying these principles are very important when drafting or reviewing a business contract because often times, the contract isn’t just a relationship, a business’ gains or losses may hinge on just a few words.