Why DIY contracts, partnership and shareholder agreements are bad news

It may be one of my recurring themes, but sometimes I am really surprised at how often I have to mention the problems with using someone else’s template or altering up another contract to save professional fees. I do not think I protest too much. This is not because I want to protect the income of the legal profession or some in my own line of business. It is just that there is no substitute for paid professional and insured advice.

I frequent quite a few on-line forums and am a member of several networks as are many of us. Time and again I see people asking for drafts of contracts for clients, of Non-Disclosure Agreements, Patent Agreements, of Partnership and Shareholder Agreements. In fact you name it and someone is trying to save money with some DIY bit of paper.

I have mentioned elsewhere that faulty partnership and shareholder agreements can be costly in terms of tax, but I have also seen a situation where an amateur partnership agreement led to dissident partners gaining an interest in the land and premises of the business which were owned by the other partners, simply because of some vague wording as to the interest they acquired upon introducing partnership capital.

Most of the agreements we may enter into in this area are supposed to define our rights. The time when these become most important is when the parties fall out, there is a dispute or disagreement or someone reneges on their undertaking. As soon as there is a major break up of a business, every party and especially those in breach of their agreement will be out for everything they can get; that is human nature. Unfortunately that may be a lot more than some deserve. There will be winners and losers and those who were trying to honour their part may end up the losers. The important thing is to know always and exactly what every party is entitled to.

Bizarrely I have even seen situations where amateur contracts have been exported and have been supposed to have the same meaning in another land. The law in the other country will be different and anyway an agreement in one language may lose something in translation in the eye of a judge, who may anyway have to rule that the law of the second country trumps the agreement anyway.

If it might rain and you need an umbrella, do you try to make one copying someone else’s design? No, you buy one that suits your purpose and your needs and from an experienced manufacturer of brollies. Why should it be different when people need a legal agreement?

Have you heard some sorry tales re dodgy contracts? I would be interested to hear your views.

© Jon Stow 2010

[tweetmeme source=”JonStow” only_single=false]

Related posts:

Why we SHOULD reinvent the wheel – business agreements and contracts

Pitfalls in faulty contracts – partnership and shareholder’s agreements

Enhanced by Zemanta

Why we SHOULD reinvent the wheel – business agreements and contracts

One of the most irritating cliches I hear is “I don’t want to reinvent the wheel”.

It is a favourite refrain amongst many well-meaning business owners and business advisers who will typically ask for a template for a sale agreement, partnership agreement, shareholders’ agreement or some such thing. One of the worst which gets me upset is a request for a template share option agreement.

Why am I concerned? Well, all of these documents are legal agreements. They are contracts. People fall out and resort to lawyers. An amateur document may not mean what it is supposed to mean or may not fulfil its desired purpose. Indeed it may not be fit for purpose at all and will give lawyers a field day, and an expensive one at that.

Something that is also not considered is that these documents which are legal agreements do not travel well internationally. The law is not the same everywhere. There are different laws of succession, different family laws,and of course different commercial laws and different tax laws The last is why share option agreements which are tax-efficient and beneficial in one jurisdiction may be disastrous in tax terms in another.

I guess this is returning to one of my favourite recurring themes which is that there is no substitute for paid advice from qualified professionals. Some people might think this would be expensive for their clients or themselves, but professional advice up front has great value in being cheaper by far than expensive litigation. Do not be tempted to re-hash someone else’s document for your own purpose. Invest in a bespoke agreement from a specialist backed by someone else’s professional indemnity insurance rather than yours. Sleep easily at night.

© Jon Stow 2009