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The BUSKLAW December Newsletter: Consider a Legal Audit of Your Contracts

Most of you are business professionals and thus are involved with contracts. Depending on the nature of your enterprise, you have various contracts in force, for example: 

>sales agreements
>purchase agreements
>real estate leases
>purchase order terms and conditions
>software license and maintenance agreements
>service agreements
>equipment maintenance agreements
>consulting agreements
>contractor agreements
>employment agreements
>non-disclosure agreements
>non-compete agreements
>transportation or logistics agreements
>financial institution agreements

Perhaps you work with these documents on a regular basis and are familiar with their content. Or you pay a high-priced law firm to do that for you. More commonly, however, you keep these documents in a file cabinet, rarely review them, and only call your expensive big-firm lawyer when there are problems with the transaction. Whatever the case, consider the advisability of a legal audit to focus on the following:
  • Are your contracts properly signed, dated, and legible to the reader? I once had a client who had the other party sign its contracts but never signed them itself, thinking that if something went wrong, it could argue that it never agreed to the contract. This is a poor - and fruitless - approach to contract administration. And I once had a judge refuse to admit an opposing party's contract into evidence because the text was unreadable. 
  • Are your contracts still in force or have they (intentionally or not) expired? Do you know the steps to renew (or terminate) them?
  • Do you have multiple contracts with the same party that may conflict with each other? You may have a master agreement and an operating agreement, a term sheet, or a statement of work with an outside party. But if you don't carefully specify what agreement controls, you may find yourself in a court battle as my colleague D.C. Toedt discusses here.
  • Do your contracts contain ambiguous and confusing legal jargon? Examples of legal jargon (and suggested remedies) are discussed in this article that I wrote for the Michigan Bar Journal. Legal jargon is more than a nuisance; it can lead to costly litigation about what the parties intended. And there are no excuses for legal jargon, as my colleague Michael Braem and I point out in a recently-published Michigan Bar Journal article.
  • Do you have a contract management system? The system can be as a simple as a table or spreadsheet or as complex as an enterprise software solution. But due diligence demands that you keep track of your contracts, including key provisions, expiration dates, and renewal deadlines.
  • Finally, do you have a corporate records retention policy (with a designated record retention manager) that requires the preservation of your contracts for the proper period? If not, you could get in trouble for destruction of evidence if you discard a contract that is (or becomes) the subject of a lawsuit.
The purpose of a legal audit is quite simple: find potential problems with your contracts now and fix them before they can lead to a costly and time-consuming legal dispute. 
A legal audit of your contracts makes sense even if you already have an established relationship with a lawyer who may have prepared your contracts. The old adage that "two heads are better than one" makes good sense here. And my view is that even experienced corporate lawyers conducting a legal audit for their clients shouldn't "get rich" in the process but instead charge a reasonable fixed fee largely based on the number of contracts reviewed. (You'll recall that my approach to practicing law is stated here.)

So as you are getting in the holiday spirit with inspirational music and stories of Xmas long ago, consider a legal audit of your contracts as an appropriate "gift" to your bottom line.   
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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.comThanks!  

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