What is the Real Value of a Contract?
People like to talk about contracts in intimidating terms. They’re “iron-clad,” “bulletproof,” or “one-sided.” But how powerful are they after they’re signed?
Contracts as Enforcement Tools
In one sense, a contract is a set of instructions for a lawsuit. It describes what the parties must do, so that if someone doesn’t do what they’re supposed to, a court will force them to. Or the court might force them to pay the other party however much money they lost because of the non-performance.
So if a contract is “iron-clad,” that typically means it’s very hard for others to resist lawsuits based on that contract. That is, they’ll have trouble finding a loophole to wiggle away from performing or paying, and will probably settle instead of fighting it.
But that’s not ideal, because it’s better to have the person live up to his obligations in the first place. Even assuming any lawsuit is a winner, a lot of time and money is spent on the way to victory. In most cases, the “winner” settles for less than the total amount it’s entitled to.
Even worse, the person who failed might be broke, or extremely dishonest, which can make it hard to get any money at all from them even if you win. Some who breach contracts are bankrupt or underwater and couldn’t have performed or paid you if they wanted to. Others will go to great lengths to ferret away assets just to avoid paying (recall OJ Simpson, who paid nothing towards the wrongful death judgment against him).
Contracts as Preventative Measures
Sometimes, a thoughtful agreement that sets appropriate expectations right from the start is better than an “iron-clad” one (though the two aren’t mutually exclusive). The best agreement prevents disputes and breaches from ever happening, and even Ben Franklin has my back on this one.
Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended amicably, owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences.
-The Autobiography of Benjamin Franklin (p. 94) (emphasis mine)
When negotiating, be very honest about expectations. This exercise does more to prevent breach than any mean stack of paper.
The situations I’ve described are more relevant in smaller deals between parties who know each other, or will at least come to know one another throughout the process. There are larger entities who don’t care as much about breaching contracts because they’ve made a bottom-line decision that breaching and facing the consequences is actually more profitable. If this sounds odd, think about how a good deal might have gone bad after the great recession of 2008 started, compared to how the parties might have anticipated it proceeding in 2007.