Read the Fine Print

Contracts are often ignored until there’s a problem. When a dispute arises, large or small, the written agreements suddenly become all-important as the parties rush to carefully review what they should have analyzed before signing.

I was involved in a significant real estate deal in which the legal documents were rushed through to meet a strict financial deadline. Years later, when the partnership required additional funding, some parties chose to pay their shares while others couldn’t or wouldn’t. Unfortunately, the partnership agreement didn’t spell out how to handle this common scenario which led to much fighting and ultimately, a failure of the investment. This neglect of crucial paperwork happens much more often than you’d imagine.

Careful Contract Review Is Crucial

It’s surprising, but many businesspeople will negotiate a deal carefully but then barely pay attention to ensuring that the contracts reflect the agreed-upon terms. The thoroughness of legal and financial advisers varies greatly: just because you’re paying for oversight doesn’t mean you’re getting it. It is crucial to make sure that someone knowledgeable and trustworthy reviews every dot of all business agreements.

While it’s possible that an attorney can be experienced enough to know at a glance that specific clauses are acceptable, an attorney who is not paying attention can’t be of help even if they are experienced. Every term was put into a document at some point for a reason, and while it may be boring to review lengthy legalese, any clause that is ignored can come back to bite one or more of the parties involved.

Different Players with Different Perspectives

Many players only get paid when a deal closes and have an incentive to gloss over any bumps in the road to their compensation. They are usually the ones who minimize the importance of combing through documents, claiming that any suspicious language is “Just standard wording, there to satisfy the lawyers.” The easiest way to gauge if the wording is unimportant is to suggest removing it: “If indeed it has no real ramification, then let’s just cross it out.” Often, the other sides’ lawyers won’t allow that, proving that the phrasing is indeed meaningful. And if it’s genuinely not required language, it should be removed anyway to keep things as clean and straightforward as possible. This practice lowers the risk of misunderstandings and future legal fights.

Beware an Unpleasant Surprise

When dealing with contracts from big institutions like banks, insurance companies, and title companies, it’s virtually impossible to have the language changed; to enable mass production, they must use standard wording that fits many scenarios. But that doesn’t mean that it’s OK to ignore the documentation presented by large companies.

Professionals who deal with these documents consistently know them like the backs of their hands and can clear them for signing very quickly. But individuals who either don’t review or hire someone else to look at the lengthy proposals and agreements presented by various mortgage, investment, or insurance brokers will likely end up disappointed or even in financial peril. Complex documents favor the drafters, and all kinds of unpleasant surprises can be lurking within.

Reading Boring Legalese Is Someone’s Job

I recently met with some very nice investment brokers from a large Wall Street firm. The glossy marketing brochure they showed me presented a hedge fund investment that seemed like a no-brainer. This fund supposedly earned 14% annually for 20 years, much more than comparable investments, and did so with significantly less volatility. When I requested the full prospectus document (which every fund is legally obligated to produce), the broker voiced surprise that I even read them.

“How can you get through them?” he asked, as they’re usually hundreds of pages of tightly spaced numbers and legalese. “That’s my job,” I responded simply. And in truth, as a broker, it’s his job to sell, not read the dull prospectus to ensure that what he is selling is a good product.

At Your Own Risk

So, what did the fine print reveal? The outstanding annual performance advertised in the brochure (14%) was earned by a different fund, supposedly very similar to the one being offered. And while the other fund had done exceptionally well since it opened 20 years prior, the investment actually being offered to me had mediocre returns (7%), performing worse than comparable investments.

One doesn’t have to be a cynic to wonder why this information was hidden in the boring document that many people, likely including the brokers, don’t read. And even I, a cynic when it comes to Wall Street, was surprised at the brazenness of this particular bait and switch. This anecdote supports my opinion that ignoring the fine print is at your own risk.

Want to dig deeper?

Try these related articles

Preferred Returns: Uncovering Surprises Lurking in the Fine Print

Beyond Track Records: Researching Real Estate Investment Managers

The Potential and Pitfalls of Business Partnerships

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