Sunday, March 25, 2012

Protecting Against Unethical Parties

In a discussion on LinkedIN someone asked me how to protect themselves against the potential unethical party that may want to change or substitute pages within the contract documents. Here was my response:

A good customer or supplier will also want to be protected. When you deal situations like you describe here are several things you can do.

1. On each page make sure it lists the contract number, page number and total number of pages. That way pages can’t magically disappear.
2. When you incorporate documents by reference into the agreement always include the document name or reference number and the number of pages.
3. If you incorporate drawings list every drawing, its title or reference number and revision number.
4. Have the documents permanently bound before presenting them for signing.
5. Have every page sealed by impression.
6. Have the parties initial each page at the seal.

I've also had one time when I had a previous problem with a negotiator for a supplier where I had a Notary Public be in attendance at the contract signing to also have them sign and seal the documents. My counterpart didn’t like it but I made my point that the game he played in the past wasn’t going to ever happen again. I also had a time when I negotiated a contract for construction for an office in Manhattan. My counterpart who was also employed by the lessor balked at having to initial every page of my twenty-five page document stating we should trust them. I was prepared for that and pulled out a copy of their ninety-nine page lease we had to sign that had every page initialed by both parties. That ended the discussion.

Each of these approaches will make it more difficult to tamper with the document. You can't just pull one page out and replace it with another. To replace a page the other party would need to unbind the document, duplicate the seal, forge the initials and have it rebound in a way that shows it wasn't tampered with. If the documents were sealed and signed by a notary public, they would also have to forge that seal and signature.

Any time you consider potentially using soft copy documents for later changes to the contract, you first should determine whether the courts accept soft-copies. If they do you should include language in the contract that legitimizes the use of the soft copies. I also recommend establishing a control on what items may be added or changed by soft copy to limit the potential exposure. I also prefer to periodically execute written amendments that capture the soft copy changes that had been agreed during the interim period so I also have a writing of exactly what was agreed at that point in time. Most of the time the initial agreement contains the real liability and money related provisions. Addendums or appendixes that get added later are usually changes to the scope of work.

Let me give you an example of limiting what may be changed by soft copy. I had a group that managed thousands of different part numbers where there would be frequent changes. New products would be added, older products would go end of life, there would be negotiated changes to pricing or changes in lead-time. Rather than do a written amendment for each of those changes, I added a provision to our contracts that legitimized the use of an E-tool to make those types of changes. The supplier had controlled access to the system so only those that had the authority could input new or updated information. Their input was an offer to agree to make that change. We accepted that by e-mail or by issuance of orders for the new item or changed term. For each supplier we would periodically have a print out off all items that were in effect, their price and the lead-time and we would have both parties sign that print out. We limited the use to only those items. I didn't want changes to any of the other terms to be made using that approach because of the potential risk in changing other terms. We had proof of their access and inputting the data. They had either our e-mail or order showing we accepted the change. Both of us agreed that the use of that tool served as a written amendment to the agreement.

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