contract reviewPractically every single day, each of us enters into a legally binding contract and – for the most part – we think very little of it. When you buy gas, a candy bar, etc., these all constitute a contractual agreement.

The most basic principle of a legally binding contract is where “offer” is met by “acceptance”. However, there are implicit terms to this agreement and most are common sense. For example, all parties must have legal “capacity” and the contract cannot be for any form of illegal activity.

Commercial contracts are founded upon the same basic legal principles but, as is always the case when lawyers get involved, they start to get complicated.

Very complicated.

Straightforward terms and conditions are usurped by “legalese” which more intimidates than clarifies the legal obligations of the parties. Whilst these are intended to protect the individual parties of the contract and mitigate any future issues with their agreed deliverables, they can be so restrictive as to threaten the very arrangement and relationship that the parties intend to develop and grow.

So here are a few points to consider when contracting.

  • Focus
  • Intention
  • Flexibility
  • Adaptability
  • Mutually Beneficial
  • Future Relationships
  • Arbitration
  • Litigation – Risk -v- Return

Focus

Never lose focus on what you want and what you are prepared to give in return when negotiating any contract. These are the parameters of your agreement and, as I have experienced all too often, the focus can be all too easily lost in the sundry terms and conditions of what may, may not and, oddly, will almost certainly never happen.

Intention

What is your intention and, indeed, what is the other party(s) intention? There is a huge difference between the letter of the law and the spirit of the law. If you, or the other party(s), enter a contract without good faith, then the agreement can, and would, be voided in a court of law.

Flexibility

This is particularly important for longer term contracts. Conditions change over time and, in the spirit of “good faith”, a strong and mutually beneficial contract should allow for flexibility throughout its duration. This builds trust and strengthens ties.

If there is no flexibility and one of the party(s) profits directly at the expense of the other(s), then this will only harm future agreements, irreparably in all probability.

Adaptability

The contract should also allow for adaptability – especially, again, over those longer term contracts. Technology is ever developing and evolving and so this must be considered and reflected in the contracts. This also includes developments in materials throughout the lifecycle of the contract.

Adaptability allows for such advances.

Mutually Beneficial

Contracts need to be mutually beneficial, so this must be considered when negotiating, but they must also be realistic and this demands prudence and due diligence on the part of all party(s).

For example, there is a case where a contractor agreed to build a stadium for far less than their competitors. Unsurprisingly, they won the contract and started the build. During the construction, the inspector enquired as to the location of the commercial kitchens and toilet facilities. It was then that the contractor disclosed that he was legally obligated to build the stadium, these facilities were not part of the contract and would cost extra.

Caveat Emptor – Buyer Beware!

If it seems too good to be true, it probably is.

Future Relationships

For the most part, commercial contracts are renewable and not merely one-offs. As such, it is prudent to consider the future relationship with the other party(s) when negotiating to allow for growth and development for all concerned.

Arbitration

Arbitration is hugely appealing as a form of dispute resolution and should be carefully considered as a binding clause in the terms and conditions. A major part of its appeal is that it allows for complete confidentiality and so all party(s) can negotiate through an intermediary without fear of public exposure.

This protects the reputation of all party(s) throughout and is now a standard clause in contracts from the major companies worldwide.

The only downside is that it can be an open-ended arrangement and so it is prudent to install an agreed timetable for negotiations and conclusions.

Litigation: Risk -v- Return

When negotiating, it is always prudent to be mindful of the value of the contract. A one-off agreement to wash windows, for example, does not require a long and laborious contract. If such a contract is breached in any way then legal action would, in all probability, simply not be worth it.

So even when fundamentally breached, some contracts may not be worth the stress, cost and expense of time and effort to litigate.

Conclusion

Contracts are the cornerstone of any commercial enterprise and demand the respect of all parties due to their legal ramifications. However, they are intended to protect these same parties whilst expressly clarifying each individuals responsibilities.

Cheap contracts can prove costly so this must be considered when negotiating.

Never forget the aim and purpose of your contract and always act in good faith to achieve these objectives. There are reputations and relationships to be built through these contracts and all parties, in the main, are seeking to grow, develop and evolve through these agreements and so they must be mutually beneficial.

For more information on our Contract Agreement Review Services, please review our Fast Contract Advice webpage or contact Karen McElroy at Boardroom Metrics in Toronto/GTA-
Telephone: 1-416-994-6552   Email: [email protected]