By: Katherine Romano Schnack, VP Legal, LSC
We live in a world of contracts. Think about all of the products and services that your credit union has as the result of a contract–transaction processing, ATMs, HVAC, leases, internet, and more. I work with contracts day in and day out, and offer a few myths about contracts that should be busted.
Myth #1: You can’t change a vendor’s contract template, so don’t even bother to ask.
You should always ask for changes that would benefit your credit union. There may be a good reason why a vendor cannot change a particular provision in the contract, but it doesn’t hurt to ask. Choice of law is a good example of a provision that a vendor reasonably will not want to change. If a vendor has customers located in more than one state, the vendor will want only one state’s law to apply to interpret the contract the vendor uses in various states. Otherwise the same contract could be interpreted and enforced differently depending on where the customer is located, potentially resulting in major operational issues for the vendor.
However, there are many times when a vendor will be willing to change a contract term, or at least offer a compromise that is better for your credit union than the standard template version. Venue is a good example. Typically a vendor’s contract will state that venue for filing a lawsuit must be where the vendor’s headquarters is located. But often a vendor will change that provision, if requested, to the location where the defendant in the lawsuit is located. So if your credit union sues the vendor, you have to file your claim in a court where the vendor is located. If the vendor sues your credit union, the vendor has to file its claim in a court where you are located. That change could save you a lot of money in attorney’s fees and other expenses.
Myth #2: Contracts have to be written in convoluted legal language.
A contract should be written in plain English so that anyone can read it and understand it, now and in the future. How many of you have old contracts that have autorenewed repeatedly, and now no one who was familiar with it still works at your credit union and your current employees have to figure out what it means? A contract should be written so that anyone can pick it up today or 10 years from now and understand it. Occasionally particular formal legal language is necessary, but the vast majority of the time it is preferable to use clear, concise language in a contract.
Myth #3: Once you sign the contract, you don’t need to worry about it until it is time to renew or you want to terminate it.
During the term of the contract, you have to be sure the other party is actually living up to the requirements of the contract so that you can enforce the contract if there are performance issues. Do not put the contract in a folder (e-version or paper) and then leave it there for years. Performance issues in contracts come up frequently, and you do not want to discover a problem too late. Statutes of limitations set by the state govern legal claims on contracts (10 years for Illinois) but your contract may have a time limit on claims that is much shorter. For example, a contract provision may limit claims on billing errors to 12 months after you discovered the error, or should have discovered the error. For recurring charges, missing that 12 month deadline could be very costly.
Myth #4: You can’t change a contract after you sign it.
Parties to a contract can agree to change a contract at any time. So if you are 6 months into a 5 year contract and something is not working well, ask the other party to the contract to amend it. As long as both parties agree to the change, you can simply sign an amendment to the contract. If the other party does not agree to amend the contract, then unfortunately you will be stuck with the contract language you have. If the other party is not performing its duties under the contract, then check your rights to enforce the contract. Often there are enforcement rights provided in the contract. You may be able to immediately terminate the contract under certain circumstances that will be set out in the contract. Or you may be able to give the other party notice that you consider the performance issues to be a material breach of the contract, and trigger a time limit for the other party to “cure” the breach. If the party fails to cure the breach within that time limit, then you would be able to terminate the contract immediately.
Myth #5: The 10 page contract you received contains the entire contract.
Not necessarily. Particularly with large vendors, your contract may incorporate the vendor’s standard terms and conditions, license, operating rules, or other legal documents by a link to the vendor’s website. The 10 page contract will state that all of the provisions found on that website also apply to you just the same as if they were set out in the 10 page contract. That 10 page contract just became a 100 page contract (or maybe even thousands of pages, with vendor operating rules and procedures). Worse for you, the vendor can change those documents on its website at any time, and you are still responsible for complying with all of the changes. So be sure to keep up to date on any changes to those documents on the vendor’s website if they are incorporated in the contract.
Myth #6: Contracts are boring.
Well, I probably can’t convince you that this myth should be busted. But contracts are living documents and affect how businesses conduct themselves every day. You can use your power as a party to the contract to help your credit union.
Necessary Disclaimer: I am a lawyer but this blog only offers general information and does not constitute legal advice. You should consult your own legal counsel for advice on contract or other legal issues.