Understand Contracts

By MATTHEW D. MOHR

Legal contracts have become a large part of running a business. Nearly every business owner is faced with the daunting task of understanding the various contracts he or she agrees to. They’re such a dominant factor in our economy that the Nobel Prize in Economics was awarded to Oliver Hart and Bengt Holmstrom for their analysis of them.

Knowledge of how contracts work and understanding what you signed is essential to operating a business. Jim Rohn, a popular motivational instructor, discusses this issue in a lecture series. He talks about how he signed a loan guarantee for a business, and the loan was paid, but after the business continued to borrow from the bank, he was required to ensure payment again. He had not investigated or fully understood the contract language when he signed it.

I was once on the board of a local business whose board members and owners were asked to sign loan guarantees with a bank. The business had started to lose ground and the bank was concerned. At that time, one of our board members said he didn’t think the bank would call upon the loan guarantees, despite the fact that they were signed, indicating he didn’t intend to make good on his guarantee. Fortunately, after less than a year, the business changed, the loan was repaid and the guarantee was not enforced.

In a recent business purchase transaction, the seller, upon reading the agreement, asked me, “You are not really going to hold me to that are you?” This, in most cases, would be an indication of trouble, but I trusted the seller and wanted the transaction to occur. Upon reflection, making the changes required to accommodate unknown expectations was just not in the best interests of either organization, we were not in the condition to deal with the uncertainties involved and, as a result, I asked the seller to cancel the sale, which we did. Sometimes challenges such as these lead to bad results.

A binding contract is said to exist when two willing and able parties mutually agree to act or conduct themselves in a certain way. As economic conditions change, and as a business chooses to change its direction, one party to a contract might seek to abolish the agreement

Matthew D. Mohr CEO, DACOTAH PAPER CO. FARGO MMOHR@DACOTAHPAPER.COM

or even refuse to honor what was agreed upon. Courtrooms are filled with litigation prompted by broken agreements. Failing to abide by an agreement entered into in good faith is considered by many a lack of integrity.

Contracts help establish requirements and expectations. If an organization chooses to consistently disregard what has been agreed upon, eventually it will face negative consequences and damage its reputation.