Contracts make the business world go round - John MacKenzie

As the world of business and commerce continues to evolve, deals are still struck, partnerships are still formed, and transactions are executed. The foundation for these relationships is trust.

However, when personal relationships are distant or tenuous as teams within organisations evolve and change, a clear written legal agreement is the best way to record and demonstrate that trust.

Clarity is critical. If there is ambiguity then when tensions arise, whether due to cashflow problems for one side or quality issues in the product or service, misunderstandings and disputes will inevitably follow.

Whether it is the payment regime, deliverables or promises made, a good contract makes it clear to all concerned who does what and when. This helps manage expectations and provides a basis for accountability and, importantly, the prompt resolution of disputes.

John MacKenzie is a Partner, Shepherd and Wedderburn

Of course, most contracts don’t end up in the courts, or anywhere near lawyers.

For complex deals, time and effort spent at the outset when negotiating the contract saves time, energy and costs through the life of the deal. Many contracts are built on standard forms – for example, the details of the product and price are on the purchase order form, and the terms and conditions are on the back. Typically, these form the contract.

Sometimes there can be an exchange of forms – a battle of the forms – and it can be unclear which form has won. Contracting and procurement teams need to be careful not to let unwanted terms slip into a contract by agreeing to the last set of contract terms received.

It's all very well saying that a contract should be clearly expressed, but the reality is that what one person says is not always what the other person hears. And in the midst of urgent negotiations to get a deal “over the line”, language can be deliberately fudged.

Hard deadlines become “reasonable” – in that a product might be deliverable in a “reasonable” period of time. Faced with the challenge of interpreting the language used in a contract, the courts will try to figure out what both sides meant – they will try and find the common intention of the parties.

Other tricky issues in contracts include the promises made as part of the negotiation process. Sometimes these are just marketing buzzwords, but sometimes they are central to the decision to go ahead with the deal. If that is the case, they are usually converted into warranties and indemnities. These need to be carefully considered and known issues or circumstances disclosed in advance.

Then there is the question of what to do if things go wrong. Are there circumstances or events that are so important that they justify immediate termination? How should notice be given and when? Are there some things that can be remedied, and when?

If the breach can’t be remedied, what happens then? Ideally, there will be a clear escalation procedure that sets out a stage-by-stage process, usually starting with meetings between senior team members, followed by mediation and finally litigation or arbitration. Other dispute resolution processes are available, but what is important is that it is discussed in advance so that a satellite dispute about the method of dispute resolution process is avoided.

The contract team at Shepherd and Wedderburn address all these issues and more in their new Commercial Contracts videos and articles: shepwedd.com/commercial-contracts-series.

John MacKenzie is a Partner, Shepherd and Wedderburn