Debunking five myths about contracts

Out-Law Analysis | 17 Aug 2006 | 4:28 pm | 3 min. read

OPINION: Contracts underpin the money-making activities of most businesses – but are all too often neglected. This is a missed opportunity and a poor investment decision.

The links in the supply chain are those contractual relationships that can either turn a profit or cost you a fortune. It can be tempting to dismiss contracts as small print that nobody reads – after all, you know how your business works.

Consider the following common points of view.

"I can draft a contract; there's no magic in it"

It's true that there is no magic; but there is some law. Contract law is based on various statutes and also previously-decided court cases that rarely made front-page news. It's not always what is written in a contract that makes the difference; it can be what has been left out.

Contract drafting skills are honed with training and experience. Commercial solicitors draft contracts for a living and unsurprisingly become good at it. There is no scope for "I thought that meant…" or "I meant it to say…" when the provisions of a contract are judged at some future point. Litigation lawyers lick their lips when they hear these words.

"We avoid court, so we don't need a lawyer writing our contract"

If your policy is to concede every dispute you get into, you are unlikely to end up in court. But if you answer claims made against you or seek to enforce your contractual rights, the lack of a good contract can thwart your best endeavours to win justice. Keeping contractual disputes away from the courts relies on well-crafted contract documents.

Contracts should provide certainty. There is an obvious tension between certitude and flexibility, but properly-structured contracts can accommodate the parties' need for the contract to live and breathe without compromising certainty.

There is a view that whatever the contract says, businesses will work something out if a problem arises. Contracts do not prevent compromises being reached which accommodate prevailing commercial realities, but the goodwill to resolve issues amicably can be a light which fades with the passage of time. A good contract provides a baseline for negotiated solutions and the party with the better contractual position stands more chance of achieving the outcome it seeks.

"We cannot afford to upset the other side by challenging them on their contract terms"

Contracts are never negotiated in a vacuum. The commercial strengths and vulnerabilities of the parties will impact upon their ability to negotiate the terms they want. It can be difficult for a company that needs to win a contract to stand up for itself without incurring the displeasure of the other side, but the other side will be more willing to accept that a prudent company, advised by lawyers, cannot ignore the professional advice it has received. A lawyer on the negotiating team can enable you to punch above your weight.

"Our supplier's form of contract is pretty fair – they know what the contract needs to say"

Contracts record a deal. There is a common interest in many of the contractual provisions in a typical agreement. However, contracts also apportion risk and determine reward. One party to a contract will hold differing views to another. The balance of a contract can be skewed if one party relies on the other to be even-handed. Fairness is a subjective concept.

"People do deals – our contract just explains the deal"

This is how it should be and what most businesses think; but the courts deal with contractual disputes on a daily basis. Many such disputes turn on the interpretation of clauses that were poorly drafted, but most contractual disputes never come before the courts. The cost of litigation operates as a strong deterrent to legal proceedings and disputes are resolved informally. Relying on a badly worded contract is unlikely to produce the desired result in a negotiated settlement.

Contracts forge the links in modern supply chains. Contracts, like chains, can restrain freedom, or they can take enormous strain. Chains are only ever as strong as their weakest link. In your supply chain, are your contracts as strong as they should be? The investment in a properly-drafted contract is one which you will only appreciate if you have to rely on contractual terms to get paid or to seek other remedies. Hopefully, such occasions are few and far between, but when they do occur, the return on your initial investment in a robust contract will pay handsome dividends.

This article was written by Simon Pigden, a partner in Pinsent Masons' Birmingham office. Simon leads the firm's national commercial contracts practice.

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