Before we get ahead of ourselves, let’s start off by saying contract loopholes don’t exist. When people talk to a lawyer about “loopholes,” they’re usually talking about an obligation that they want to get out of without being sued for breach of contract. People use the word “loophole” to signify that if there’s enough room to read a term a certain way, then you can get out of an obligation. But that’s just not reality. The reality is that if there are unclear terms in a contract you are setting yourself up for a lawsuit. One side may see a loophole while the other sees an obligation. So what is the best approach to avoid being sued before even having to search for “loopholes?”
People are way too quick to sign contracts. They want to get the deal done as soon as possible, so they think to themselves, “I can read this myself, how hard can it be?” or “I really just want to close this sale.” But there are so many contract principles that apply that the only way to create a language that can support your ability to avoid an obligation is in the initial negotiation phase. In the negotiation phase, we can negotiate terms such as condition precedents, contingencies, warranties, representations, and clear termination clauses that can get you out of the contract in certain situations. Once the contract is signed by both parties there is little that can be done.
If you’ve ever purchased a home you’ve likely seen a mortgage contingency clause. For the buyer, this clause states that the buyer is only obligated to buy the property if they can finance and get a mortgage. If the buyer can’t obtain a mortgage then they don’t have to close and the parties can part ways without a claim against one another.
We can use this same principle in many other ways. For example, if you are starting a business you may enter a lease agreement or a business-to-business relationship. In this agreement, you can put a contingency that states that a party is only obligated to these certain obligations if certain events happen. Should these events not happen, all a party would have to say is that the contingency did not materialize, and they can part ways. Similarly, a condition precedent states that both parties can walk away if a certain condition doesn’t happen.
Warranties and Representations
While in the negotiation phase we can also include warranties and representations. In fact, regardless of what a party might say, you should always have warranties and representations in writing so that it is clear why the parties entered the contract and what was the parties’ expectations. This prevents anyone from saying, “I know I said this, but the contract says that.” Put it in writing as an official warranty or representations so that it’s clear why the parties entered the contract and what their expectations were. Then, if the warrantying party breaches, the other party can enforce it. Using clear language is key. What kind of warranty is it? Are there exceptions to the warranty? Simply understanding the words that are on a contract is important, but what’s also important is what’s missing in a contract. This is why you should go to an expert.
Go to an Expert
When we decide to take contracts into our own hands and try to find loopholes and finding different ways to interpret certain clauses we leave ourselves vulnerable to possible litigation. Instead of having to go through this struggle, go to an expert. Take advantage of the negotiation phase to include terms that will help you in the event that something might happen. Don’t have money? Include a mortgage contingency or financing contingency. Go to an expert to help you put clauses that can decrease your chance of being accused for a breach of contract.