Entrepreneurs love to do deals. Even businessmen at the more cautious end of the spectrum still seem to thrive on the excitement of a new and (hopefully) lucrative venture. What they don’t want is anyone telling them how to do the deal differently, pointing out what might go wrong and delaying things with a pesky contract. But cutting corners by not having a proper contract can end in disaster.
At the start of a fresh enterprise there is a great deal of optimism, not only about the success of the venture but also the abilities and trustworthiness of business partners. Often there is pressure to do the deal before someone else steals the opportunity. Sometimes the parties do not have equal bargaining power and standard terms are foisted onto one of them as a ‘take it or leave it’.
All of which means that instructing a lawyer to document the deal can be seen, at best, as an inconvenient expense. The bigger the financial commitment, the greater the justification for a detailed contract, and when large sums are involved there will almost always be some form of written record of what has been agreed. It might be a letter, a ‘heads of terms’ or even a longer agreement. But a document put together by the parties themselves often fails if things don’t go to plan.
Get it in writing
The first failing is not having anything at all in writing. If the parties fall out an oral contract is extremely difficult to prove, let alone what the true terms of it were. It is quick and easy to skip using a written agreement but in reality you will be left without anything on which to rely.
Or you might put something down in haste by cutting and pasting from existing sources. This can lead to inconsistent definitions across a document, making interpretation very tricky. It is not an approach to be recommended, although we see it reasonably frequently.
Rights to websites
Intellectual property rights suffer particularly without careful thought. For example, you hire a specialist for website or software development, which attracts copyright protection, but without a contract. Or you sign up to the consultant’s standard terms and conditions without further thought. The copyright remains with the consultant and is not transferred to you. This website or software often becomes the new start up’s key asset, and it transpires it is not theirs! We see this time and again.
“Standard” terms and conditions
You may be asked to accept standard T&Cs in place of a contract. It is important to know what they say and consider whether they are acceptable. If they are not then push back; you can alter them by agreement but, if you do not, the chances are you will be stuck with them.
Some of the things that often get left out of DIY contracts
A cap on your liability. This is a really important protection for smaller companies particularly if they supply to big organisations. Even if a contract is in place it might be silent on the liability of the supplier – meaning there is no contractual liability cap. This is often overlooked by a supplier but it needs to be considered before unlimited exposures are taken on, to the benefit of the bigger company.
Representations made before the ‘deal was done’. Negotiations leading to the ‘deal’ can be reported back as contractual terms or binding representations unless they are clarified. For example, you offered discounted price for volumes at one point in the negotiations, but that discussion was superseded by the detailed specification discussions you had the following week. Is the other side clear that once the specification altered the pricing offer no longer applied? Real life examples tend to be more subtle but it is vital to be clear about what parts of the negotiations stayed in the deal and which did not. Careful drafting and the use of an ‘entire agreement’ clause solve the problem.
Compliance with regulations. Is the supplier required to comply with all applicable laws ‘in force at date of agreement’ or ‘as amended from time to time’. This can be a big cost implication depending on the regulatory environment in which you operate. The customer standard terms will provide compliance with laws ‘as amended’ and this might be slipped in to standard terms or in parts of a contract that are skipped over as longwinded and unnecessary ‘boilerplate’. Be careful of signing up to it if you are not sure what it means for you.
Termination/renewal. Does the deal have a shelf life? How and when does it come to an end? Is it to be renewed at certain points on certain conditions? Do you need notice and a gradual withdrawal if the other party wants to terminate, or is it better that you have freedom to walk at a moment’s notice? This needs to be thought through. If nothing is in the agreement you may be left in the cold unreasonably. One way this may impact is if delivery dates are missed, even by a day or so. If time is of the essence the other side might be entitled to terminate the contract even for that minor breach.
Disputes. If a dispute arises, you can decide in advance how it is to be resolved. You can agree to mediate, or arbitrate to keep your affairs out of the public courtroom. You might need to have the rights determined by foreign laws or a court abroad. Bear in mind that any deal with Scottish connections could be determined by Scottish law – not necessarily the same as the law in England and Wales. Only you will know what is suitable but you can include provisions to your advantage if you think about it in advance. The hope is that no disputes ever arise, but if they do make sure you have a clear route to resolve them.
A self-serving article?
This article may sound very self-serving: a lawyer would say you need a costly contract wouldn’t they! But as someone who sees the fallout of badly drafted agreements every day, I can only suggest that a proper contract is a wise investment.
Written by Susan Hopcraft, Professional Negligence Lawyer with Wright Hassall LLP.