Know What You Need to Know
No one has time to read the small print and even if you have the time, you don’t want to spend it reading through the legalese covering an otherwise uninteresting subject matter. However, whether you do or do not fully understand the terms and conditions of an agreement you sign, it is still your responsibility to know what you are agreeing to and what your responsibility is according to the terms of that agreement.
While it is always advisable to seek the opinion of an attorney who specializes in contract law to provide you with guidance and sound advice, it is also important to develop your own independent understanding of matters in which you have involvement.
That said, we all could probably do a better job of understanding what we are agreeing to upfront. It is not realistic to expect everyone who ever signs an agreement or a contract to read every word of the document that represents the agreement, but we can all develop a better and clearer idea of the agreement we are entering into by knowing what to look for and focusing on those key aspects. This is especially true when it comes to financial transactions and loan agreements.
Financial agreements will vary by type, scope, issuing institution, application, etc., but every financial agreement should clearly define the following five key areas for your consideration. Depending on your exact situation and the nature of the circumstances under which you are entering into an agreement, there may be other elements of a contract to consider, but you will go a long way toward furthering your understanding of contracts, in general, if you focus on these five areas.
Rate/Fees
There are all different types of rates. Your job is to understand what type of rate and fees are contemplated in the terms and conditions presented to you and what actions impact the rates and fees. Questions that you should be able to answer after reviewing this section of the contract are:
Is the rate a variable rate or a fixed rate?
If it is a variable rate, when and how often will it vary and to what extent can it vary?
If it is a fixed rate, how long is the rate fixed and how is the term “fixed” defined?
Is the rate tied to a determining factor such as the Prime Rate or a LIBOR rate?
If not, how is the rate determined?
What fees are your responsibility and what types of fees are they?
When are the fees incurred and are they refundable?
Are the fees representative of actual costs to the financial institution?
The section of a contract that defines the rate and fees has the potential to have the most substantial positive or negative impact on you and your budget and corresponding expectations. This is also the area of a contract that tends to contain the smallest print and leave most, if not all, of the leverage in the hands of the financial institution. If you cannot answer these questions after reviewing this section, either seek professional counsel so that you can develop a clear understanding of the rate and its variables or do not sign the agreement.
Duration/Cancellation
This section of the contract defines the length of time for which the agreement is scheduled to remain in place. It is always important for you to know how long your obligations will last and if it is possible for them to either extend or end prematurely. Other important questions that should be answered in this section of the contract include:
What events or factors can impact the duration of the agreement?
What are the cancellation rights of each party to the agreement?
Is there an opt-out provision?
Is there an obligation to affirmatively renew or cancel the agreement at any time?
Are there any fees or penalties associated with the cancellation or end of the agreement?
Default and Cure Period
At some point in time during the duration of the agreement, there may very well be a situation that constitutes a default by either party. Defaults are most often associated with a failure to pay as agreed, but some agreements define a default in much more benign terms. If you are not fully aware of what constitutes a default you may wind up with an unpleasant, but completely avoidable surprise if and when that time comes.
It is equally important for you to understand what you can do to cure a default. The definition of a cure should include the length of time you will have and the methods you can employ to cure a default.
Dispute Resolution
In the event that a dispute occurs or that you are unable to resolve a default or breach declaration in a mutually beneficial manner, it is important to be aware of how the matter will be escalated and there are several questions you should know the answer to including:
Is there a mandatory arbitration clause?
If so, what organization will have jurisdiction and what is their process?
Which state’s laws will the matter be subject to?
If the matter is litigated, is the losing party responsible for all attorney’s fees?
If you do not take the time to obtain answers to these questions, you run the risk of going forward with some erroneous assumptions that could have a major impact on your options down the road.
Most people assume that they have the right to file a lawsuit at any time and to do so under the laws of their local state or municipality. Most agreements, however, are written with a partial bias to the service provider. Many service providers believe it is in their best interest to mandate arbitration as a way to hold costs down and most, if not all, will include language in their agreements that indicate the state where they are located will have jurisdiction. That may not be the state in which you are located.
Indemnity/Liability
This aspect of contract law has received a lot of attention in recent years as businesses take steps to greatly limit their exposure to liability for their actions or lack of action. Many agreements attempt to absolve the service provider from any liability regardless of the circumstances or their contribution to those circumstances.
Liability is really a case of “what’s fair is fair.” Be on the lookout for agreements that contemplate you taking all the responsibility and not having any recourse. Also, you should be highly skeptical of any language that allows a financial institution or service provider to commit gross negligence or willful misconduct and still not have any liability to you.
While it is completely understandable that a business would not want to be on the hook for a minor error that is committed despite their best efforts or intention, it should never be acceptable for a company to be negligent through the actions or inactions of their employees and not face the consequences.
If there is an Indemnity clause, it should be mutual. In other words, if the business is indemnified under certain conditions then you should also be indemnified under those same conditions.
Lastly, there has been and there continues to be quite a debate in Congress about the role of regulation and the extent to which government should be involved in ensuring that transactions are legitimate and consumers are protected. No matter how that debate plays out, it is essential that you take responsibility for your actions and that you know what you are signing, what you are agreeing to, and what the consequences are. Don’t expect someone else to be responsible for what you do or don’t do. Know what you need to know.
Scott Arney
Chief Executive Officer
Chicago Patrolmen’s Federal Credit Union
