Legal Contracts – You Often Get What You Pay For
I was watching Dragon’s Den this week and there was a commercial for a legal forms web site. It promised to save you hundreds in legal fees and to avoid the need to go to see a lawyer. Of course, I laughed when I saw (in very small print near the bottom of the screen for only a few seconds near the beginning of the commercial and never again) a quick line saying that they did not give any legal advice and shouldn’t be taken as giving such advice.
Pre-printed, generic legal forms are nothing new. They’ve been available in Grand & Toy or Staples or Office Depot for decades. And, yes, $19.99 is a heck of a lot less than what you’d pay to come see me to draft a similar agreement for you. So why should you use them and why shouldn’t you use them?
The pros:
1. As set out above, they are considerably less expensive than having a lawyer create the same document.
2. It is usually better to have some written agreement than no written agreement at all.
3. If nothing goes wrong between the parties, then whether the agreement is good, bad or otherwise is irrelevant. (As I’ve always said, if the parties deal honourably and favourably with each other, then a “handshake deal” will be sufficient whereas if one of the parties never intended to deal honourably then even a very lengthy and detailed agreement might not be worth the paper its written on.)
The cons:
1. You are almost always dealing with a “generic” contract. That is, one which will try to cover the legal area regardless of where it applies. So, for example, suppose you get a template employment contract. The contract will try and satisfy the employment laws in all of the Canadian provinces. Oh, well, that’s assuming, of course, that it’s not a template prepared in the U.S. – where the employment laws can be very different. But even among Canadian provinces the employment laws can be different. In order to get a contract that complies with all provinces’ laws, you can end up with an agreement that is very unfavourable to your position than one that was written with only your province’s laws in mind.
2. How up-to-date are these contracts? Let’s go with our example of the employment contract again and let’s suppose that the contract is restricted to being an Ontario employment contract. The Ontario Employment Standards Act has been amended three times so far this year. How often do you think the generic contract has been revised to reflect these amendments? Maybe once.
3. One size does not fit all. An employment agreement will be vastly different from one for a retail employee to one for a travelling salesperson to one for a potential employee in upper management. Moreover, this assumes that what you want is actually an employment agreement. It may be that what you need is an independent contractor agreement. Well, can’t you just use an employment agreement? Sure you can. Oh, except for the little problem that when the person doesn’t pay his/her taxes and Revenue Canada starts to look into and sees the agreement and says “he/she is an employee, so you should have retained EI, CPP and income tax and remitted that for the past X years so now you’re on the hook for these amounts, PLUS interest, PLUS penalties.” Then, suddenly, you’ll have wished you used the right agreement instead of using the generic employment agreement.
4. If you have any questions or don’t understand something, then either you usually have nobody to ask or you end up going to a lawyer to get the answers with the result that your cost savings are, at best, reduced and, at worst, eliminated.
5. The old adage of “you get what you pay for” tends to apply here. For example, if something goes wrong, such as the example of Revenue Canada coming after you for the source deductions, you have nobody to blame or to seek compensation from if you used a generic template agreement. If you used a lawyer then you might have a claim against him/her for malpractice (depending on numerous factors but the reality is that at least you have a potential claim rather than absolutely no claim as would be the case if you had used a generic agreement).
In the end, I’m not going to sit here and be the “rah, rah, you must always use a lawyer, go lawyers go!” cheerleader. Every decision related to your business is an assessment of risk. Do I buy paper clips today or hope they go on sale and buy them next week? Do I sign the agreement with customer A today at the reduced rate or hope that I can find customer B who will agree to pay a higher price next week? Do I put this arrangement into the form of a written contract or hope that my supplier is a man of his word? Do I use a prepared form or do I get it reviewed by a lawyer or do I get the lawyer to prepare a form agreement that is tailored specifically to my needs? If I don’t use a form prepared specifically for my needs, what are the likely risks I will face? In a perfect world I would tell you to have every agreement at least reviewed and preferably drafted by a lawyer. By the same token, in a perfect world, every small business would have hundreds of thousands of dollars to pay for legal advice, accounting advice, taxation advice, marketing advice and management advice at the very beginning of their business. But it’s not a perfect world and each small business has to decide whether the risk of using one of these generic forms is outweighed by the benefits of going ahead and using the form.
The simple answer is that if something goes wrong, you can be guaranteed that the amount necessary to repair the damage caused by using a generic form will greatly exceed the initial savings obtained from using the generic form rather than going to a lawyer to have a similar agreement drafted. The more complex answer requires an assessment of (1) the likelihood that there will be a breach of the agreement, (2) that the breach will involve something that is either not provided for in the agreement or that involves a part of the agreement that is not favourable to you, (3) that the damage caused to your business by the breach will be significant and (4) whether you are willing to accept the risk based on the prior three factors.
If you want to use these generic agreement templates, I’m not going to put a gun to your head and say that you cannot or even that you should not do so. That is your call. My only hope is that you will do so with a full knowledge of both the pros and the cons of doing so. If everything goes fine and no problems ever arise, then congratulations for what turned out to be a good business decision. And if things go wrong, then you can come and speak with me about the costs of the litigation that will result to deal with whatever problem arose. (And, in fairness, this could result just the same from even a contract that was written by a lawyer – for example, where something comes up that nobody ever thought about when the contract was drafted and the fight is on as to who has to do what in that situation – so I’m not saying that you might only come see me about litigation arising from generic template agreements and that you never would from contracts drafted by lawyers.)
Something to think about.
CALC