Standard Form Contracts: Tips and Myths

Standard form contracts play an important role in business. They're useful to the extent that they simplify routine transactions.  But they’re a nightmare to the extent that the wording often appears in eight point type printed in a half shade of gray on paper so thin you can read both sides at once.  You often need a photocopier to enlarge the words and a legal dictionary to translate them. 

It can be a daunting process that makes you want to throw up your hands in frustration.  Yet you usually don’t because your take solace in the fact that the agreement is "standard."  You know that to be true because that’s what their representative told you. 

"It's standard" is a phrase we often hear in business.  Exactly what does that mean  It sounds comforting, but if you’re not careful it can often amount to little more than a false security blanket.

Myth #1:  All standard form agreements say the same thing.  Not true.  They don’t.  If you were to compare a few sales agreements side by side, for example, you would discover differences in warranty language, indemnity language, and more.  The disparities would probably surprise you.  Sometimes the differences will little impact in terms of real risk or hidden costs.  But sometimes they do and the disparity can be significant enough to change the value of the deal.

Myth #2:  Standard form agreements treat both parties fairly and equitably.  This myth is a corollary to Myth #2 and is also untrue.  Different standard form agreements will certainly contain many of the same concepts, but they don’t necessarily treat the concepts the same way.  Furthermore, it’s not uncommon for large companies leverage their perceived market power in standard form agreement and make them lopsided.

Let's take a look at a recent example.  In a lawsuit filed earlier this week, Trump Plaza is seeking to evict The Trump Corporation, owned by real estate mogul Donald Trump, for withholding rent in April and May totaling close to $87,000.  Mr. Trump is usually the landlord.  In this case, however, his business is the tenant. 

According to Andrew Perel, the president of the Trump Plaza co-op, one of Mr. Trump's internal lawyers used the Trump organization's landlord-friendly, standard form lease and -- you guessed it -- just filled in the blank that said "tenant" with The Trump Corporation.nbsp; the rest of the form language stayed the same.

The suit alleges that under the lease a default in rent payment must be cured within twenty days of receiving written notice of a breach.  Based on The Donald's past track record in court his organization will no doubt mount a vigorous defense."  But until the case is resolved, it looks like The Donald’s business is getting a taste of his own standard form medicine.

So the next time someone tries to tell you a contract is "standard" it may be worth the time and effort to read it and decide for yourself.  What’s "standard" for someone else may not be "standard" for you. 

Look for contract provisions that could represent hidden costs or risks, like the default and cure provisions in the Trump lease.  Ask yourself, for example, whether the time to cure is sufficient.  How quickly you could find other premises and move in before finding your business on the street.  Work through the mechanics of you would perform under the contract terms and whether you’ll be able to meet the terms in practice.  Then don’t be afraid to negotiate a more reasonable timeframe.

It's always easier to negotiate contracts in the beginning of a relationship. Bargaining power shifts once there is a contract default because the rules of the transaction have already been agreed to.  That's why when it comes to contracts, you want to make sure that the promises you make are the promises you can keep.