Comment: Contract advice should save heartache

E-Ming Fong

E-Ming Fong

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Commercial disputes can be expensive – horribly expensive. At best they can punch a hole in your company finances; at worst they can destroy a business and the livelihoods of the owners and employees.

Sadly, we have become a more litigious and dispute-orientated society with discussion frequently replaced by confrontation.

Disputes can arise from a myriad of different reasons.

Taking a structured and systematic approach to dispute prevention, however, can help avoid problems arising in the first place.

This “top ten” prevention checklist will be a useful reference for any management team or company interested in avoiding disputes and saving large amounts of time and money:

What is the contract?

An oral agreement is just as binding as a written contract. However, if it is written down, not only is it easier to refer back to the terms of the contract, but the terms of the contract are easier to prove in the event of a dispute.

Do you need a lawyer to enter into a contract?

Anyone can enter into a contract, but as it is legally binding, it makes sense to have it professionally considered before signing. Only you know the commercial terms you wish to agree. So in order to have that distilled into a legally binding agreement, you need to know what it is you wish to achieve.

Who are you contracting with?

Make sure you know as much as possible about the party on the other side of the deal. The pre-contract due diligence is just as important as the commercial terms. Before you contract, you should ensure their financial covenant is adequate or that you are satisfied they are capable of delivering the required results.

Concerned that the other party might not be able to fulfil the contract?

If the due diligence reveals a cause for concern, there are ways to manage the non-performance of a contract. For example, guarantees can be taken from a third party to step in to fulfil a contract term in the event that the other party is unable to do so. That contract term might be the payment of money, or the carrying out of a specific obligation.

What should your contract say?

Before you commit your contract to writing, agree in advance the key commercial terms, such as price, interest, duration, scope of work and so on. This makes the drafting much easier and each party can see exactly what they are signing up to.

Length of contract?

Your contract should be as long as it needs to be to deal with all of the important points, and no more. The key is to keep it simple. The more complex the drafting, the more likely a dispute will arise. Simplicity does not necessary mean brevity. Key points must be expressly stated in the contract to avoid leaving such matters to implication.

Do you agree with the other party’s interpretation of the contract?

Where there is dispute over what a contract is supposed to do, start by examining the terms of the contract. This is the reason why a written contract is invaluable. Generally speaking, where there are competing interpretations, the court will favour the commercially sensible interpretation. However, that needs to be distinguished from a bad bargain. If you have entered into a contract on unfavourable commercial terms, it is not the role of the courts to save you from that bad bargain.

Do you need to change the terms of your contract?

Your contractual obligations should always work for you, not against you. Business dealings usually require flexibility within defined parameters, so when terms are negotiated in the first place, a degree of commercial flexibility should be built in. If you find yourself needing to change your contractual obligations however, then negotiation is the key.

What overall consideration should you have when entering into a contract?

A contract could be a standalone agreement or just a piece in a jigsaw. If it forms part of a jigsaw, you need to be aware as to how it may affect your existing contractual obligations.

Does legal advice matter?

Your business needs to avoid the disruption and cost of legal problems. Legal advice costs money, but good advice at the start of the process should save a lot of heartache and financial pain. Prevention is always, without exception, better than cure.

• E-Ming Fong is a partner in McClure Naismith’s commercial dispute resolution team

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