Contracts: read 'em to avoid disapointments

When you enter into a contract that obligates you to do something in the future, even if it’s as simple as paying for goods or services you’ve received, you may find a contract provision that allows your customer to escape payment. Imagine that you’re manufacturing an expensive piece of machinery.  What if a contract clause allows the customer to not pay until they have been paid in full by their own customer. That’s a debtor escape clause…sometimes referred to as a “pay-when-paid” clause.

From the standpoint of a debtor, it’s easy to see the advantage of an escape clause. If their customer cancels the order or never pays for the machinery, they don’t have to pay you. You end up taking on a huge risk that you can’t control. You’ve shipped a valuable product to your customer, your customer used it (sold it to their customer), and you still can’t get paid because your customer hasn't been paid.

When you’re negotiating contract terms with a buyer, particularly if the buyer has presented you with its own form contract, watch carefully for any debtor escape clauses like the one just mentioned.

Remember to read contracts before entering into them. Some contracts contain provisions that you may not like. Before you sign you can renegotiate their terms or, if not possible, you can refuse to enter into the contract. Sure, you can just go along with the contract and hope for the best, but that approach has a way of sometimes blowing up in your face.

Another example is an arbitration clause in a contract.  While it may be a good idea in many circumstances, arbitration clauses are not particularly helpful in many ordinary collection cases as they result in more costs than a routine collection case and the creditor still has to file the matter in court to have the arbitration award accepted as a final order of judgment, required to enforce collection via garnishment or other forms of court-ordered collection.  For example, a $30,000 collection case could easily cost $3000 to arbitrate, whereas an ordinary collection law suit may only cost a few hundred dollars to file and serve.  Of course, this decision should be made on a case by case basis after consulting with an attorney as there are distinct advantages and disadvantages to each.