In litigation, we routinely see contracts, entered into by both people and companies that have been messed up, with varying consequences for those who enter into them.
1. Understand what constitutes the contract:
A contract need not be in writing. Often, for more casual business relations, we see a very general written contract supplemented or amended with a later ‘handshake’ agreement, or even a contract based entirely on a handshake.
A handshake can be as enforceable as a written contract. The problem is it is more open to subjective perception and interpretation. The benefit of a written contract is that you know, to a high degree of certainty, what the terms are, and more importantly you can prove those terms by pointing to the written contract alone. If you are seeking to enforce an oral agreement, either you will need the person you are enforcing it against to agree with you regarding its terms (unlikely!), or you will need to satisfy a court as to what the terms are. This can be a difficult process, and contains a large subjective element (witness credibility: an “I said, he said” dispute).
Given the potential for subjectivity, when you enter into a contract you need to be careful to ensure you know what the contract is. The only way to have a degree of certainty in this regard is to reduce the terms of the contract to writing, and include in the contract a clause indicating that the written contract alone represents the agreement between the parties, and can only be amended in writing. Such a clause is commonly overlooked.
2. Know your rights, know your obligations:
It sounds trite, but often we see disputes arise in circumstances where one party failed to fully comprehend the meaning of a contractual term.
When entering into a contract, consider carefully what you are hoping to achieve from it. You will have in mind some specific targets, perhaps regarding time of delivery, or quality of product or work. Be specific about these terms, and satisfy yourself that they are clearly and properly expressed in the contract.
The other party to the contract will also have specific targets in mind when contracting with you. These are the terms you need to be most careful of, as they will inevitably favour the other party, potentially to your detriment. As tedious as it might be, you must discipline yourself to consider these terms carefully and satisfy yourself that you understand the impact and effect of these terms to the same level of clarity and detail that you would insist upon for the terms that favour you.
The only airtight answer to this issue is to seek legal advice on the terms.
When presented with a contract, discipline yourself to sit down and read each clause one by one.
3. Ambiguity is your enemy:
The worst disputes tend to occur in circumstances where a contract has been drafted with such ambiguity that it can be interpreted in two different ways.
Where the interpretation results in a significant difference to the rights and liabilities of the parties, one way or another, disputes are likely to arise. Inevitably each party will adopt the interpretation that most favours them.
The problem with such a dispute is that where genuine ambiguity exists, until the court makes a ruling on the point, there can be no absolute certainty as to which interpretation is the correct one. The potential for this to lead to wasted legal costs is almost limitless.
We usually see ambiguity arise in contracts drafted by people without legal training (although lawyers have been known to mess this up as well!). We have a range of contracts drafted for all types of commercial transactions which have been ‘battle tested’ (upheld in court), and can provide them for a reasonable cost.
4. Be aware of the consequences of getting it wrong:
In determining how closely you need to scrutinize a contact before signing it, you need to have an appreciation for the potential consequences of stuffing the contract up. A Mars Bar contract is unlikely to have significant commercial repercussions for anyone. However, most serious commercial contracts will cause significant loss to one party if the other does not properly abide by its obligations. For example, if you supply goods to someone who runs a business of selling them to consumers, you can expect any dispute over the contract to include a ‘loss of business’ component, which in the right circumstances can be shockingly high.
Before entering into a contract, consider the worst-case scenario mess-up. If the worst-case scenario is something that your business cannot afford to occur, it is probably worth speaking with lawyers to confirm the terms of the contract, and to ensure that your interests are protected.