Photo: Five Ways Corner, Paddington, Sydney.
It’s understandable that some business owners view contracts as a problematical area of the business, best avoided whenever possible.
However, in our free market system, understanding how contracts can work for or against you is a major start in building valuable intangible assets for your business (as well as staying out of trouble).
5 ways contracts can be very boring
1.When you relied on trust
“Hope for the best but prepare for the worst” is a good adage to bear in mind when entering into a contract. In these days of intensive networking and social media marketing, the lines between friendship and business can sometimes get a little blurred. It’s not until you have been burned that the difference becomes crystal clear. If someone tells you they “will look after you” and you won’t need independent advice, be very wary.
2.When you didn’t know about the fine print
Contracts don’t have to be in writing, or the terms all in one place. It’s common for larger companies to “make it simple” by providing basic details and referring the other party to additional terms on a website or elsewhere. However the additional terms may be onerous and can be enforced against you, if you are deemed to have notice of them. A business person is expected to know what they are getting into.
3.When you didn’t realise you were even in a contract
Contracts may be entered into “informally”, i.e. verbally, by electronic communication, and even by part performance. Recent trends towards reduction in business formalities can be to the advantage of unscrupulous operators. What seemed like a casual “let’s see how it goes bro” relationship at the beginning can quickly change if you don’t play ball. It’s a hard and embarrassing argument to make to a court that you were naive and gullible.
4.When the terms don’t work out as you had intended
Legally enforceable contracts (and let’s face it, what use are they if they aren’t enforceable or are unclear) are based on legal precedent. This means that certain words and phrases have a specific meaning derived from the rulings of judges in the past (sometimes the very distant past and under English law). Law students spend years struggling to master these concepts, and the courts are full of cases where parties didn’t fully understand the ramifications of a contract. If there’s a big downside to getting it wrong, skimping on expert professional advice can have serious consequences.
5.When you can’t afford to dispute the contract
If you can’t afford to take the other party to court, your contract had better be very user –friendly. For this reason a good contract is said to be one that “goes in the drawer and is never seen again.”Experienced business people don’t begrudge time spent working through the what-ifs, upsides and downsides before entering into a deal. They know that a poorly drafted contract can be the trigger to things going wrong between the parties at a later date.
Also very important is that potential conflicts of interest by advisers involved in the pre-contractual process are identified and remedied.
5 ways contracts are definitely not boring
1.When they unlock the value in your ideas
How can creatives earn money from ideas? Can you risk giving customers access to valuable intangible works? How do you control standards? The answer is called licensing, one of the most useful forms of contract invented. Licence agreements may be one-to-one or one to many, short or long term, local or international, and can prove the most valuable of business assets.
2. When they level the playing field
How can a small player do business with a large corporation without getting crushed when they roll over? Two main types of contract apply here: 1. Standard form, one size fits all. These are generally government regulated (in NZ anyway); and 2. Negotiated, one-off deals. The results of these are reliant on the skill and imagination of the drafters.
3. When they protect you against customers’ financial woes
If you’re supplying businesses on credit, you’re not the only one with a financial interest in the customer. There’s likely to be overall security to a bank and possibly finance company and other creditors. What happens if the customer gets into trouble and can’t pay you? Do you have an effective terms of trade contract with them?
4. When they give certainty for your business’s future
Do you need to ensure you can stay in your premises long enough to build goodwill? Do you need to know how much parts or ingredients for your products will cost on a yearly basis? Are you worried you are at risk of co-founders setting up in competition to your business? Lease, supply and shareholder agreements are just a few examples of contracts that can give you peace of mind.
5. When they underpin international expansion
How do you structure business expansion into places where they don’t speak your language? Even if you’re lucky enough to find a trustworthy business partner, there can still be a problem. What if the overseas law is very different? Don’t forget this works both ways. For NZ businesses the best place to start is always a draft contract, whether it’s a joint venture, distribution, licence or supply agreement. This is where you trigger the benefits of internationally accepted rules and trade treaties, including dispute resolution and arbitration processes, giving higher-risk ventures the safety net they will need.