TO SPEAK about the importance of agreements is to state the obvious: flawed agreements can lead to great loss and difficulties.
Having an agreement is not the only important thing – you also need to have a clear understanding of what it means. Do you know what you are or are not entitled to, and where the risks or flaws in the agreement lie?
Don’t leave it up to a representative to ‘explain’ the risks to you – you won’t hear them; the chances are you will only be too keen to sign the deal and get the moment over with.
The mind is not always receptive to hearing negative statements, so having something explained to you won’t carry the same degree of gravity as quietly reading, making notes and later seeking advice or opinion.
Patience is the key here.
Agreements are put in place to provide the parties concerned with a clear understanding of the terms of the relationship. But however simply they are written, there is still much opportunity for disagreement.
Although preambles gently take care of interpretation, this is often an area where contractual flaws arise – what you say and think you are agreeing to may not be what is written, or what the other party thought or meant.
Take this simple clause pertaining to an investment in a property development: “…the (investment) shall be redeemed by the issuing of shares, on the date of completion of the development and the reconciliation of all accounts in respect of the development, from which date the right to share in the dividends shall accrue to the shareholder….” (taken from an actual case file).
A perfectly good sentence construct. An impressive clause in a contract but, there are numerous flaws here:
1. The agreement presumes the development will be completed – what happens if it doesn’t, for whatever reason?
2. What defines completion – technical completion, occupation or transfer?
3. There is no provision for a time period by which time the development must be completed.
4. Who is responsible for the issuing of shares?
5. Shares in what?
6. Who is responsible for doing the reconciliation? What happens if the reconciliation is not finalised? What happens if the reconciliation is disputed? What is meant by ‘all’ accounts?
So, not only could you be duped by the existence of an agreement, you would be doubly duped by the inability of the company you invested with to complete certain events directly linked to the realisation of your investment.
Not to be fickle, but we would never recommend that you sign an agreement that failed to provide more clarity, or at the very least provided for a bullet-proof exit – usually there’s no such thing anyway!
What to watch out for
There are certain issues to note in the agreements you are asked to sign:
• Don’t rush into it;
• Is the opportunity capable of failure?
• Does the time period between events seem reasonable, logical and realistic?
• What does the investment structure look like? If it is too complex, it could be a ‘construct’ to cleverly relieve you of your hard-earned cash.
The more complex a structure, the more legal hurdles are put in place – make sure your agreements deal with a simple structure.
• Do a due diligence – it’s your money, and you need to know what’s going to happen to it once it leaves your bank account.
Who is in charge of it, what does it contribute towards, what is the return, how is the return generated? There are many more questions to ask, but those are basics.
• Where does the risk lie in the opportunity?
• Understand the transaction – seek professional advice.