Look before you leap: the importance of getting contracts right

In this current period of economic instability ensuring the effectiveness of your business' contracting process is now, possibly more than ever, of paramount importance. During the boom times many businesses paid little regard to contractual terms and conditions and many deals were conducted on the basis of a ‘gentleman's agreement'. As the dust begins to settle in the wake of the credit crunch it is imperative that businesses learn from the mistakes of the past and ensure that all future contracts (as well as any potential revision of current contracts) are entered into with full knowledge and understanding of the rights and obligations contained therein.

Many people pay little regard to the mechanics behind the formation of contracts and, as a result, can find themselves being bound by terms they have neither read nor considered. Worse still, people may end up entering into contractual relationships in instances where they didn't believe they were doing so. This has resulted in a plethora of legal actions being taken at high cost with little or no guarantee of success. In simple terms, it is better to get the contract right in the first instance rather than spending time and money arguing about it after something goes wrong.

We have listed below some common contractual issues together with a recent example we have encountered in each case. Whilst seeking legal advice when a contract goes wrong can assist businesses, there is no certainty that such advice will manifest itself in a positive resolution in your favour. It will always be a prudent step to seek advice before committing yourself or your business to contractual obligations. We have included some useful tips in the event that you should find yourself with a problem similar to one listed below - however, do note that as all circumstances are different there is no single piece of advice that can be universally applied - each case will differ depending on its own unique facts.

Issue: it is important for businesses to understand how easily contracts can be formed. The legal elements of offer, acceptance, consideration and intention can often be satisfied within a matter of words, or even by a single email. There are circumstances when words aren't even required - the shrug of the shoulders can be enough to form a legally binding contract! With this in mind, individuals and businesses must be alert when entering into negotiations.  

Recent example: a purchaser sent an email offering to purchase a number of products at a specific price. The seller duly supplied the goods without any further communication. The purchaser believed that as no contract had been signed he was under no obligation to accept the products and attempted to force the seller to take them back. It was held that the supply of the products created the contract which was binding on the purchaser on the terms of his offer.

Tip: if you do not wish to enter into a contractual relationship it would be a prudent step to ensure that all written or electronic correspondence is expressly marked as "subject to contract".

Issue: there may be instances where you believed that a transaction was taking place on your terms and conditions, when in actual fact the deal had been conducted on those of the other party.

Recent example: a seller offered goods for sale on its standard terms and conditions. A potential buyer accepted the offer with his terms and conditions attached on the back of the letter of acceptance. The seller then delivered the goods. A dispute arose as to which terms governed the contract. It was held that the buyer's acceptance actually amounted to a counter-offer and the delivery amounted to an acceptance of this counter-offer, so the contract was held to be governed by the buyer's terms.

Tip: Whilst this is an area of law that is fraught with difficulties, it will be prudent to ensure that you include a copy of your standard terms in all correspondences in advance of the deal being concluded, and expressly state that any acceptance is subject to your terms and conditions. Inclusion of your terms on a receipt will be too late, as the contract will already have been formed prior to this.  

Issue: there are circumstances where one party believes they will receive much more from a contract that what they actually get.

Recent example: a company entered into a very short form agreement in exchange for a large sum of money. The terms of the agreement granted to the company much fewer rights that it had believed it would. The company claimed misrepresentation but lacked the requisite evidence to back up this claim.

Tip: read all written contracts before agreeing to their terms. Ensure that all matters which may have served to induce you into the deal are included in writing for the sake of clarity and certainty.  

Issue: if goods are sold on credit and the purchaser cannot discharge its debt, the seller will not have an automatic right to possession.

Recent example: a party sold an asset to a purchasing company for a fixed fee which was payable in five instalments. After the second instalment had been paid the purchasing company went into administration. The seller was unable to reclaim the asset and was ranked as an unsecured creditor in the impending administration.

Tip: it would be a prudent step to include an appropriately worded retention of title clause in the sale agreement. In the event that the purchaser is unable to pay for the asset in full, for whatever reason, the seller may be able to retake possession.

Whilst these are useful pointers, there is no guarantee that these tips will apply to your individual circumstances, as contractual relationships can be very technical in nature. A full understanding of the issues relating to your specific matter would be required before any advice could be offered. Should you wish to speak with someone about anything contained in, or arising from, this publication; or to discuss contractual matters more generally please feel free to contact us.

Aidan Johnston
Solicitor
Carson McDowell