What's the point of contracts?
Flipping through Donald Trump's book The Way to the Top: The Best Business Advice I Ever Received I came across this provocative bit from former Vail Resorts CEO and Chairman Adam M. Aron.
As much as possible, deal only with good and honorable people. If you deal with good people, you won't need a contract, and if you deal with bad people, no contract can protect you. Don't worry about contracts.
Really? That's pretty radical advice from a guy who was the Chairman and CEO of one of the most successful real estate/resort development and management companies in history. A "real life" CEO and real estate pro telling people to fire all the lawyers and shred all the contracts. All you need to do is deal with "good" people and you too can become CEO of Vail Resorts.
Did he really say that? Is it really possible or even desirable to avoid having to deal with contracts? Well, in the real estate world, the answer is a resounding "No." There is no good at all that can come from following this advice. Why not?
In general, real estate contracts perform at least four important functions. 1.) They define and clarify the parties' respective roles in, and their expectations for, the transaction; 2.) They provide a clearing house for the accuracy and completeness of critical disclosures; 3.) They allocate risk in the event that something goes wrong in the consummation of the deal, and 4.) They create a trail of breadcrumbs in the event that a court, arbitrator or jury is later called upon to figure out what it was the parties agreed to in the first place.
Deals that fail or which trigger later litigation don't go south because someone "good" got hornswaggled by someone who was "bad." They usually go south because what was promised--in one way or another--was not what was delivered. This isn't what I agreed to and therefore the deal needs some fixing.
More often than not, such misunderstandings and miscues are not caused by bad people but by bad contracts.
So what's the point of a contract and what is its value in a real estate transaction?
- Contracts allocate risk. They provide a means of directly deciding and articulating who's paying for what if some part of the deal caves in.
- Contracts define the parameters of the transaction. What am I actually buying? What are you actually selling? Let's make a list. And then let's call that list a contract.
- Contracts force the parties to think about things that they might not otherwise want to deal with in the heat of the sales moment. This is more about structure than content; if we write it down and acknowledge our agreement that what is written is what we desired, then everyone is going think first about whether or not it is something you can live with. If all we have are "good" people and "bad" people--whatever those squishy terms mean--
- Contracts remind the parties of what it was they agreed to in the first place. They exist as a snapshot of a moment in time, when everyone was sane.
- Contracts help the parties decide how any post-transaction disagreements are going to be resolved. Arbitration? Mediation? Will attorneys fees be paid by a loser if the dispute goes into litigation?
- They're required by law. Every state in the United States has what is called a "statute of frauds" which requires that certain types of agreements must be in writing or they are unenforceable. Agreements for the purchase and sale of real property are subject to the requirements of the statute of frauds. Now, like everything else in the law it is riddled with exceptions, but the general principle exists and is rock solid. (For history buffs, it has its origins in English law, and dates back to 1677. In California it is codified at Civil Code section 1624(c)).
