The Law Office of Hutchinson, Thompson, Henderson & Mott

Having a Lawyer Read Promissory Notes (Loan Agreements)

December 5th, 2013

By: Nathan Green

 

Money does strange things to people.  Knowing they have a lawyer who won’t – usually – bill them, my friends and family often come to me with various contracts they want me to look over for them.  However in my general practice contract review is a small part of what I do.  Is this because people are scared off by the legal fees?  And if so does it make financial sense to have a lawyer review contracts before you sign them?

You likely enter into dozens of “contracts” every day from the purchase of a cup of coffee, to installing a copy of Adobe.  The vast majority of them are so simple in their terms, for such a small amount of money, or made with a party that is offering you the contract on a take it or leave it basis, that there is very little a lawyer can do that adds much value.  Of course understanding your contractual obligations is always important but most people are not willing to pay $200.00 + an hour to find out what their contractual obligations are for a $30.00 piece of software.  By the same token I could buy travel insurance when I go on a vacation outside of Canada, and it would probably be prudent, but often I simply accept the risk and hope for the best rather than incur the cost.

Where things change however is when the amount of money in issue increases and the contracts become less standard.  For example, loaning or borrowing money from someone other than the bank.  The document most people use is called a promissory note.  I have seen dozens of promissory notes obtained through the power of google and they are all dreadful.  Either they are filled with impressive sounding legal terms that have a very specific and important meaning in California or Texas, but are utterly meaningless here, or they were selected because they are short and sweet and omit half the terms I think are vitally important.  They also occasionally contain clauses which would make them impossible or impractical to enforce in Ontario.

If you have written your own loan agreement and are reading this blog asking yourself “how bad could it really be?” go through your document and ask yourself these questions and find where in your agreement you have answered them:

1. When is the loan due?
2. How much is the loan for?
3. If payment is not made will the borrower pay for all legal fees for enforcement?
4. How are payments supposed to be made?  What happens if the borrower says they paid and I say they didn’t?
5. What happens if the lender decides he would like to sell the note to someone else to enforce?  Is that provided for?  How is it to work?  How can the buyer be sure he is buying a good contract?
6. Does the document attempt to protect itself from common objections (formalities of common law, undue influence, not my signature)?
7. Does the document clearly state the interest rate and how it is to be calculated (i.e. monthly, semi-annually or annually)?

 

If it is important enough to be in writing and signed it is important enough to have a lawyer look over.