Loopholes are Red Flags

Loopholes are errors in contracts that allows one or more parties to exploit them to create an unintended consequence. Conversely, when you take advantage of the law, that is not a loophole. The difference requires a mistake in the drafting. You need an unintended consequence.


Examples of Loopholes

I once reviewed a contract that stated that my client could get out of the contract merely by threatening bankruptcy. In another case, the opposing party was able to take over the company by unilaterally requiring both parties to pay additional capital. Another time, I encountered an operating agreement that required unanimous vote to spend any money, leaving one of the five partners able to sink the entire company.


Beneficial Ones

As you can see, loopholes are not always positive. What about those that benefit you? Where there are good loopholes, there are also bad ones. As if that weren’t enough to convince you, you should also know that courts look at loopholes unfavorably. Although you may win your present case, when you rely on a loophole, courts will want to look at more evidence or focus on the intent of the parties. If you lose, you may also receive sanctions or lose a counterclaim for fraud. These are extreme examples, but they’re possible.


Obvious Ones

When you receive a contract that has obvious loopholes in them, this should give you pause. Either the opposing party intended to create these for himself or they’re bad at drafting contracts. In either case, these amount to red flags. To spot these red flags, you need to put your pessimist hat on. Imagine all the possibilities and try to find ways you can get out of the contract. This is what lawyers do, and combined with our experience, we can usually find issues pretty readily.


If you want help spotting loopholes in your contract, please feel free to contact us using the form below. Additionally, we can be reached by email at info@lawplusplus.com or by calling 919-912-9640.


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