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Managing Risk in Contracts

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Liza C. Moore
Foster Swift Agricultural Law Update
July 2011

Entering into contracts is an important part of every agribusiness. No one enters into a contract expecting it to go sour but sometimes they do: the other party does not pay, or the goods purchased were not as expected, or the services provided do not measure up. While it is not possible at the time of contracting to anticipate and avoid every potential risk, strategies exist to help minimize exposure and avoid costs down the road. The list below does not cover every situation, but emphasizes the importance of avoiding costly surprises through proper investigation and good understanding.

Investigate risks before contracting.

Be sure that you know why you are entering into the contract and what you expect to gain from the contract. In this volatile economic climate, it is more important than ever to carefully evaluate whether changed circumstances or increased input costs in the future could affect the abilities of the parties to satisfy the agreement. Be comfortable that you are getting a "good deal" by understanding the market.

Know who you are contracting with.

Are you doing business with a corporation, limited liability company, partnership, or individual? Are they a Michigan business, or could litigation end up out of state? What assets does that entity have, in case you need to collect on a debt later? Is the individual or business creditworthy? Have they been through bankruptcy? Answering these questions will help ensure you understand whether the person has the money to pay, and whether you would be able to collect in the event of a breach.

Put it in writing.

People may forget or misconstrue the terms of an oral contract. Plus some contracts must be in writing to be legally enforceable and avoid the statute of frauds. Put the interest rate (not over the usury limit) or time price differential in writing.

Be specific.

Ensure that the contract contains all the essential terms. For example, identify the goods that are being purchased, the quantity and quality of the goods, the price and time of payment, the time and method of delivery. Detail any obligations of a party to be insured. Be sure that all parties agree on the terms.

Get advice.

Not sure whether you have covered all of the essential terms? Confused by legalese? Remember that it is better (and probably much cheaper) to get help understanding the terms of the contract before you sign it than to wait until the contract has been breached, or you find yourself in a lawsuit. Attorneys can help you ensure you have a perfected security interest, draft contracts to fit your needs, and explain what contract language means.

Take action if the contract is breached.

If the goods you receive do not conform to the contract, give notice. Follow-up if payments are not made when due. Do not sit on your rights, as statutes of limitations or other legal requirements could affect your abilities if you wait too long. If you need to enforce a contract, talk to an attorney. Attorneys can help you efficiently and effectively collect on debts.

Getting Paid: Debt Collection

Even if you fully investigate and get as much information as possible before contracting, sometimes you still find yourself needing to collect debt from the other party. Attorneys can help you effectively and efficiently collect debts. Your attorney will need all of the information you have about the transaction, the debt, and the debtor, which will help your attorney determine the best collection strategy. Depending on the type of debt and the type of debtor, different laws may govern. For instance, the Fair Debt Collection Practices Act applies to consumer debts pertaining to personal, family, and household purposes and imposes obligations on collection efforts.

Michigan collection statutes and the Michigan Consumer Protection Act also affect collection efforts. Bankruptcy is another issue that often affects the ability to collect. Your attorney may file suit in court to obtain a judgment against the debtor. Once the judgment is obtained, the attorney will still need to work to collect on the debt and may pursue garnishment or other proceedings. Usury laws and the laws governing time price differentials affect the rate of interest that may be applied. Foster Swift attorneys and paralegals have extensive experience in debt collection and bankruptcy matters and can help you get paid.

This article was originally published in July 2011 in Foster Swift Agricultural Law Update