A third-generation family business wanted to update its practices. It hired an independent consultant to review and revise its entire business, from bookkeeping to human resources, to computers, to workflow. After 6 months of work at the cost of $60,000 to date, one of the business owners discovered that the consultant was a fraud. A multi-page manual that the consultant provided at a significant cost to the business turned out to be taken from an online source. The manual did not even identify the industry involved. To make matters worse, the consultant was requesting an additional $10,000. That is when the business called in the lawyer.

The first obvious thing was that the business went into the deal with no idea how the business review should have been structured. There should have been specific predetermined goals to achieve. Once a goal was achieved, there would be a review with the owner. If it was acceptable, payment for that item would be made, and the next one started. In that way, there would be quality control and transparency. Instead, the business allowed itself to be blindsided.

The contract itself was inadequate, but under general legal theory, there is an implied obligation of good faith and other legal theories, including fraud and failure of consideration, so an argument could have been made for the return of the funds. On the other hand, had the contract been properly written, the entire problem could have been avoided.

There was one further problem, however. The boilerplate, which most people never read, required disagreements to be arbitrated in Denver, Colorado, which is where the contractor was from. Arbitrators do not have to be lawyers. They do not have to follow the law. Unless their ruling is truly bizarre, they can do whatever they want. (In one case, an arbitrator said that my opposition did not have to send me exhibits to his paperwork. The reason was that he didn’t like my client. I had no practical recourse.) The New Jersey courts said that the arbitration provision was controlled, so the only recourse would have been to arbitrate in Denver. We do not know the arbitrators who could have been friends of the other party. The client decided that the cost would be too great and the likelihood of success under the circumstances too small to warrant proceeding. The outcome was that because of the boilerplate in the contract, the client was forced to walk away from a $60,000 claim.

The moral: Sometimes it pays to know what you are signing before you commit a large sum of money.