As much as us lawyers love to draft contracts (the longer the better!) you don’t need a written agreement to make a contract. This is obvious really – no one demands your signature to buy a Wispa at the corner shop – but when matters are beyond the merely routine, a written agreement is essential in ensuring that risks are agreeably allocated, there is consistency of understanding between the parties and that all the aspects of the agreement needed to make the agreement work, are included.
The tendency in business contexts; to start with the commercials, to focus optimistically on the positives and to forge ahead is short-sighted. This is because it leads to partially formed agreements that either fail to deal with the imperatives (when you get paid as well as how much, for example,) the specifics (what precisely is included in the price) or the disasters (perhaps an unexpected change to the regulatory regime.)
Ideally, contracts are drafted and then filed away. The parties are already aware of the business process flow that the contract embodies and they adhere to their side of the bargain. Contracts are only dug out when the relationship hits a bump and at this point, the parties want the contract to spell out what will happen in that circumstance. Where the agreement was verbal or the detail is absent, the parties must resort to dispute resolution methods in order to resolve the problem. If engaged, the Courts will imply terms into a holey contract either relying on the statutory position, common-law, or imposing terms for the needs of business efficacy.
Some unexpected results of being in this situation are:
- That payment is not an essential and central term of a contract but the time of delivery is. This is not what suppliers of goods would want.
- That interest on late payments is 8% above the Bank of England base rate. This is a rate that no one could commercially expect to receive on deposits (although may be a fairer representation of the cost of short term borrowing for SMEs) and a substantial price increase for the payer.
- That profits and losses of a partnership will be divided equally in the absence of agreement to the contrary. This will be problematic where one partner has contributed greater capital or workload and expects a higher profit share as a result.
- That the goods must be fit for any purpose expressed to the seller as required by the buyer, at the time of purchase. This can be problematic if the seller has over-enthusiastic sales staff prepared to agree to anything in order to make a sale.
- That the intellectual property in a commissioned work belongs to the contractor not the purchaser and only a limited licence is implied to use the work. This means the contractor can charge extra for further uses or possibly refuse to extend the licence.
- That liability for damages extends to all that is reasonably foreseeable and not just direct losses.
- That a fee agreed orally for arranging a sale at a specific price does not prevent a fee being due when the price agreed was lower.
- That employers must exercise reasonable skill and care in providing an employee reference which is true, accurate and fair, or face a potential claim by the employee
- That there is an implied term of good faith in dealings where the contracting parties are in a relational contract that is long term and where the bargaining power is unbalanced. This will lead to unexpected obligations on the stronger party.
- That sales agents are entitled to a compensation payment upon termination that can be up to two years of commission, no matter how long the agency has been in place. Such costs will need to be factored into the pricing structures to avoid a nasty (expensive) shock.
With the above elements in mind, it quickly becomes clear why a comprehensive and well thought through contract can ultimately help save time, money and stress.