It is often a nightmare of many investors that just as they become comfortable navigating around complex property and share transactions they are confronted by a monstrous morass of legal documentation so lengthy, wordy and complex that it brings to mind the Joseph Joubert quote: When you go in search of honey you must expect to be stung by bees. It’s enough to make anyone throw up their hands in frustration and head for the hills.
Here are a few tips to help determine whether to flee or stay the course of the contractual investment journey.
Tip 1: Remember the first contract
The first contract known to mankind was probably that between G-d and Adam and Eve which in legal terms dealt with rights of use. The terms of the contract were fairly simple. G-d would give Adam and Eve the right to use the Garden of Eden on condition that they did not partake from the tree of knowledge. In practical terms the agreement was easy to understand and easily enforceable. Adam and Eve understood their obligations and the consequences of not complying with those obligations, i.e. on eating the forbidden fruit the rights of use would be extinguished or to put it in biblical terms would result in expulsion from Paradise.
In today’s precedent-fuelled legal world, simple financial contracts are well and truly historic. Added to this in the current fast-paced Internet environment when confronted with modern contracts obscured by legalese it is very tempting and certainly understandable to hit the ‘I Agree’ button without reading through these tortuous documents. Even lawyers find the exercise not only to be a painstaking, but also, painful experience.
However, when these contracts relate to matters such as your superannuation funds as opposed to the latest mobile phone App it is best to read the terms and conditions to ensure that your assets are well protected. Even in the face of the most complex legalese it is possible to stay the course and wade your way through. Just keep in mind the first contract, ignore the legalese and much like a treasure hunter search the contract to find the basic tenets of the transaction, i.e. does the contract contain terms which accurately and adequately describe the transaction, the cost of the transaction, each party’s material rights and obligations and the ability of both parties to enforce the transaction.
Tip 2: Discard the Obsolete
It is very common for financial institutions to include every possible issue, probability and risk in their contracts. The problem this poses for the client is that even when seeking a fairly simple service you find yourself bound by terms and conditions which have nothing whatsoever to do with that service.
A few months ago I was negotiating a custodial contract on behalf of a client with a well-known international bank. My client had been handed a contract consisting of over 80 pages in tiny print. The prospect of reading through the morass of legalese was not very enticing and would have required a stiff drink to face the barrage of harsh and unreasonable terms and conditions flying off the pages. However, much to my relief I discovered that of the 80 pages, only 15 pages related to custodial services. Indeed the majority of the harsh terms and conditions were relevant only to loan products and therefore were irrelevant to my client and the service to be provided. Accordingly we negotiated away the obsolete terms, and ended up with a simple, easily understandably, reasonable and relevant contract.
Tip 3: Know When to Walk Away
Sometimes, no matter how much you want enter into a transaction it is best to walk away if despite attempts at negotiation the contractual terms remain unreasonable and/or don’t adequately reflect the important aspects of the deal.
Usually unreasonable terms will be contained in the termination and liability and indemnity clauses, the most common examples being where financial institutions sometimes give themselves the right to:
• terminate the contract whenever they please without penalty while restricting the rights of the client to terminate the agreement;
• claim damages for the slightest breach of contract while restricting the client’s right to claim damages under any circumstances;
• avoid all liability regardless of their actions or omissions while holding the client liable for any act or omission.
The way in which companies approach their contracts is a good indication of whether they value their clients and stand by their products/services. When companies require clients to sign up to onerous terms and conditions while at the same time avoiding any or most obligations themselves walking away from the transaction is often the best choice especially if this could prove costly both from a price and risk perspective.
Tip 4: Manage the bees and you won’t get stung when collecting the honey
Remember to always read contracts carefully, ensure that transactions are accurately and adequately recorded, ensure that the terms and conditions are reasonable as they apply to you and most importantly if there is any doubt consult your legal adviser.