Safeguard Your Business from Fraud During Contract Negotiations

Fraud is prevalent in the business world. In order to be successful, every business owner and business executive must understand this unfortunate truth. Although a business can be defrauded in many different ways, this article will focus on a few effective ways to protect your business from false representations made during the course of contract negotiations.

Every business needs a strategy to safeguard itself, as well as possible, from fraud. It is common for one or more parties in business negotiations to make false representations or exaggerated claims to attempt to induce other parties to enter into a contract. People tend to say things that they would never put in writing. Due diligence before the contract is signed goes a long way toward preventing future litigation, or, at least, to place your business in the best possible position in the event that litigation is necessary.

The Merger Clause

Make sure all promises and representations upon which your business relies are written in the contract. Many business contracts contain a “merger clause.” The purpose of the merger clause is to make it clear that no party to the contract has made any promise or representation regarding the subject matter of the contract that is not written in the contract.

The merger clause typically appears toward the end of a contract amidst several paragraphs of legal jargon. These last paragraphs in the contract may appear innocuous, but many cases are won or lost because of such seemingly harmless provisions. A merger clause typically contains language that is similar to the following: “This Agreement constitutes the entire agreement and contains all promises and representations between or among any and all parties to this Agreement relative to the subject matter hereof.” The merger clause may also go on to state, “All oral representations and promises have been included herein.” Not all merger clauses are so thoroughly drafted.

The merger clause can be a very effective tool to prevent another party to the contract from claiming that the person(s) who negotiated the contract on behalf of your business made false oral or written representations before execution of the contract that do not appear in the contract. When relationships sour or the contract becomes unprofitable for a party, people have a tendency to try to reinvent history. The merger clause can effectively protect your business from this situation. Even if there is no merger clause in the contract, a legal principal known as the parol evidence rule may also prevent the introduction of evidence which contradicts the written contract.

Similarly, the merger clause can also harm your business if you do not ensure that all promises and representations upon which your business relies are written in the contract. It is extremely difficult, and impossible in some cases, to sue for damages caused by an intentionally false representation made by another party to the contract before the contract is signed, if the contract contains a merger clause. The bottom line is that, if a promise or representation made during contract negotiations is important to your business, it needs to be written in the contract with clear language that states who is responsible for that promise or representation. If possible, the contract should state what will happen if the promise is breached or the representation proves to be false.

Verify the Facts

If reasonable under the circumstances, your business should verify the truth of the representations made by the other side during contract negotiations. Consider asking for documents from the other party to the negotiations or from a third person that prove the truth of the representation. Research public records, such as real property records, to confirm the facts. You may even wish to hire an expert, such as a business valuator, accountant, or real property appraiser, to confirm the accuracy of the statements made. You may also interview people who have knowledge of the facts.

Your business should also research the person or business on the other side of the transaction. Is the business frequently involved in lawsuits? Does it have the capital or financing necessary to fulfill its end of the bargain? Does it have the financial resources to compensate your business in the event that it does not fulfill the contract? Is it properly insured? Has its representatives acted honorably during the course of its negotiations with your business? Why is the other business interested in your business?

Thorough research before execution of the contract can save your business a lot of time and money in the future.

Experienced Business Litigators

In most circumstances, the best way to protect your business from fraud is to clearly include in the contract all promises and representations for which each party is to be responsible, to verify the truth of the representations made, and to thoroughly research the party with whom you want to do business.

Despite your best efforts to foresee and prevent all potential problems before the contract is signed, disputes will occasionally arise. It is important to retain an experienced business litigation attorney to advise your business on how to handle the situation. Some problems can be resolved without the need for filing a lawsuit. Other problems cannot be resolved without filing a lawsuit, but a good attorney can advise your business on the best way to minimize damages, properly terminate the business relationship without breaching a contract, and prepare for litigation. If your business has a dispute, contact the experienced business litigators of Schklar & Heim, LLC at (404) 888-0100 or email us.