Here, we debunk a few common contract myths that may expose your business to unnecessary contract risk:
Two myths in one, as these misconceptions have the same consequence – that a business has entered into a deal without clear, written terms that define the parties’ rights and responsibilities.
One common sentiment is that “nothing has gone wrong so far”, so a business decides to operate on a handshake or one page document, trusting that nothing will go wrong this time either. Things quickly change if something does go wrong. What if the other party tries to terminate your agreement, or isn’t performing as you want them to, or fails to pay you, or complains that you have breached the terms of your deal and tries to claim money from you? Without anything in writing, you will struggle to determine what your position should be and what you can do about it.
Another consideration is that businesses can change ownership or management. Whilst relationships with current owners/managers can be good, this can change quickly. If there’s no written contract and the goodwill of previous relationships are gone, you can be left exposed.
Equally, businesses may make the mistake of thinking that a contract is only a contract if there is something written and signed. This is not the case – a contract can be written (either signed or unsigned) but can equally be verbal or agreed informally, such as via email. The contractual implications are just as serious as if there was a signed document but without the certainty of knowing the agreed position on points such as pricing, payment, liability, rights to terminate etc.
The fundamental question to ask is “what is the business risk?” related to the contract. One-off, low value deals may not involve too much risk, though even the supply of one piece of equipment throws up numerous issues (for example, the law implies that you give certain warranties (promises) in relation to such equipment) and the liability you might have if something goes wrong. Longer term arrangements, or contracts or deals with a higher value, are likely to involve more risk and it therefore becomes even more important to have a robust written contract to protect you and your business investment.
Getting terms & conditions drawn up is all well and good but they are worthless if not properly incorporated into contracts. Too often, a business will go through the trouble of having terms prepared, but then don’t actually have them apply to the deal and/or inadvertently allow the other side to introduce their terms (for example on a purchase order).
The rules on the incorporation of terms into a contract can be complex but the basic requirement is that the terms are brought to the other party’s attention before the contract is formed. This will normally mean providing a copy of the terms, or referring to them in whatever order form or other document you use to record the key details of the contract.
Things become more difficult when the so-called “battle of the forms” happens, where the other party is trying to impose their own terms on the contract (e.g. the purchase order example referenced above). In this case, it is the terms which were imposed last (at the point at which the contract is made) which prevail.
We can assist in reviewing your sales process, to ensure your terms apply to the contract rather than those of the party you’re dealing with.
Businesses that have a standard-form contract sometimes think that they can change a few words and it will work for other situations and deals but this is not always the case.
There may well be some contracts that can be made to work in various scenarios applicable to your business. However – as an example – terms and conditions for the supply of goods would not work well for the supply of services; and a customer-facing agreement is unlikely to work well when dealing with other parties such as suppliers, agents, or distributors.
Equally, there are clauses that should not be amended without professional advice, in case you inadvertently alter the legal position with regard to intellectual property ownership or contractual liability (for example).
Without guidance, repurposing a contract is dangerous.
Likewise, businesses sometimes think they can accept another party’s contract terms without much scrutiny, on the basis that it looks like a contract should look and surely couldn’t contain anything too bad. The reality is that, whilst clause headings may look similar, contracts are very easily skewed to favour one party or the other and you may well be signing up to very onerous terms. In the worst-case scenario, the contract may contain something truly oppressive or inappropriate, whether intentionally or not. It’s also the case that contracts can be skewed by being silent on issues (for example, limitation of liability). Whilst you may be able to spot a clause that is drafted in a one-sided manner, it’s quite hard, without legal training, to spot what’s missing!