Contract catastrophes: 5 common dangers in contracts and how to avoid them

Contracts form the basic features of any business and play a significant part in how you carry out your business. It is also a very common area for mistakes with even the simplest agreements proving challenging. The following reveals the most common errors and the best way to avoid them.

Contract Formation

Firstly, a common mistake parties make when forming contractual relations is the assumption a contract must be a formal written document. Certain contracts must be in writing, but ordinarily, as long as key legal ingredients are included a contract can be written, oral, or even made in the behaviour or course of dealings by the parties. In fact, the courts have even found contracts to be validly made by email.

Parties should be aware that they may inadvertently enter into a contractual arrangement. If disputes arise in these circumstances, in particular with oral contracts, it can be quite difficult to determine the key terms of the agreement. Therefore, when entering into discussions with another party, ensure that all documentation is marked “subject to contract” before you are certain that you wish to enter into legal relations with the other party. Make sure there is a clear offer and acceptance of that offer remembering that acceptance does not need to be explicit and can be implied through conduct of the party.

Battle of the Forms

Often in business dealings, parties will seek to rely on a set of standard terms and conditions to govern the contractual relationship between them. However, this can create a difficult situation known as the “battle of the forms”. One party will send off its terms and conditions and the other party may respond providing its own terms and conditions. Whose terms apply? The standard rule is that the last set of terms despatched before acceptance or performance of a contract is the set that will prevail.

Therefore, if using standard terms and conditions make sure that they have been provided on acceptance of the contract to ensure they are incorporated. This must happen by acceptance. To avoid any uncertainties of whose terms apply, you can incorporate a “prevail clause” which stipulates that your terms will prevail over any terms issued by the other party. Alternatively include your terms in as many pre-contractual documents as possible.

Essential Terms

In the event that a contract is agreed informally it is likely that the agreement will lack clarity in relation to its terms. However, this problem can still arise in a poorly drafted written agreement. For example, a situation arose where the goods and the price were agreed but with no time for delivery. Many months later the party was still waiting for its order to be finished and the goods delivered.

If there is no evidence of what the terms are, this makes it difficult to enforce the contract or determine where the other party is in default. In the absence of an express term, the term will be what is “reasonable” in the circumstances and in the most severe cases, the court’s assistance may be required to imply a missing term into a contract.

Avoid informal agreements in the first instance or if not possible, ensure that you have recorded the agreed key terms in written form, for example, in an email.

Authority

Another issue that can arise is when individuals have entered into contractual arrangements on behalf of their employer without any authority to do so. This can have very serious implications, for example, where two individuals unwittingly negotiate separate contracts with separate companies to provide the same service to their business. This gives rise to financial obligations for the organisation in relation to both contracts.

Unfortunately, businesses can be bound by the actions of employees if those individuals appear to a third party to have apparent authority and the third party enters into the contract in good faith. Therefore, businesses must be careful to ensure that all employees know their role and the extent of any permission they have to negotiate on behalf of the business. It is prudent to ensure that you have written evidence recording who has the requisite authority on behalf of your business. It is also sensible for parties to a contract to make separate enquiries as to the authority of the person they are dealing, especially if anything seems out of the ordinary. If you are concerned about the otherside’s representative, check on Companies House for details of directors and secretaries to ensure that the relevant signatories are duly appointed officers of the Company.

Varying Terms

Much like the contract itself, variations to a contract can also be agreed both orally and in writing. Often, events do not work out as planned and the parties will agree to vary terms of the contract to suit them practically. It is important that any variation must be agreed by all parties and cannot be imposed unilaterally, such as the supplier seeking to increase its prices. If the original contract was written, check the contract first before agreeing to vary the terms. Some contracts contain express clauses requiring any variations to be in writing. Typically, most variations of contracts are written and signed as a deed.

Additionally, a variation to a contract will not be enforceable unless it is supported by some detriment or benefit to the other party. So, a promise for a party to do something it is already bound to do under the contract is not sufficient. Although variations can be agreed orally, this can lead to evidential problems when a party seeking to rely on an oral variation will need to prove that the variation was agreed. Therefore, we would always advise that any variation is recorded simply in writing, for example by email or at the very least in notes.

Contracts can be a minefield if you do not know how to safely navigate through the different ways they can be formed. If you are concerned about an agreement you have entered or proposing to enter and you would like to further discuss any of the information detailed above please contact Joanne Gallagher, Partner and head of Corporate and Commercial joanne.gallager@ts-p.co.uk or telephone 01322 623708.