This is a question which anyone who advises on contracts or terms and conditions is frequently asked. It seems quite reasonable at first – but then, what does ‘OK’ mean?
There are several things which may stand out as being ‘not OK’ or unacceptable in a contract – unreasonable liability provisions, restrictive covenants etc – but these can sometimes pale into (almost) insignificance, if we ask a different and wholly more important question: “Does this contract achieve what I want it to?”
In the last few days, I have looked at three separate contracts in relation to which the anser to the first question was ‘yes’, but the answer to the second question was a loud and definite ‘NO!’
In 2 of the 3 cases, whilst in totally different industries, the agreements effectively involved the clients setting up supply chain arrangements under short-term agreements. On the face of it, whilst there were some drafting issues, these could easily have been resolved. However, on digging deeper into what the clients actually believed they were signing up to, I found that in both cases, they were expecting long term, exclusive, product supply agreements – with a long term income stream to match. They were therefore quite shocked when I explained what their contracts actually meant and how limited their rights would be.
In the third case, I was being asked to review terms and conditions, and these were generally ‘OK’ in relation to the products which the client sells. However, the client’s greatest source of income comes from the provision of services – and these were not even mentioned.
As well as creating a huge amount of uncertaintly, the above examples highlight a common problem – which is the tendency to focus upon what a contract contains, rather than what is omitted. This is an especially easy trap for lawyers with no practical commerical experience, and business people with no legal experience, to fall into. It is also a serious side-effect of cut and paste drafting (as to which, see my earlier article: The Cut and Paste Trap.)
So, when reviewing or constructing a contract or a set of terms and conditions, what is the best approach?
Firstly, put any drafts on one side, and get a blank piece of paper!
Write down your own understanding of the arrangement (in English, not ‘legalese’), and try to think chronologically. Then ask how long the arrangement will last, and what each party hopes to get out of it. Finally, think about what the other party (or their successors!) could do which would make the arrangement less profitable or acceptable to you – for example, using your ideas to create a product of their own, or not providing you with the information you need to be able to provide your services on time.
Once you have a clear structure, it is much easier for your or your advisors to answer that all-important question: Does this contact achieve my objectives?’ – and to suggest amendments based upon ensuring that the opportunities for misunderstandings are minimised.
This approach results in a win-win situation and is the basis for building great business relationships – which is the objective of all of us in business!
Tags: client relationships, contract, Cut and Paste, disputes, practical, terms and conditions, Uncertainty
Another down to earth set of tips for us – thank you! So much more useful than most legal advisers I have used. Correction. Any legal advisers…
A wonderful synopsis of an otherwise complex scenario! This is quite apt to both those who believe in, and those who haplessly get taken in by,the fallacious concept of “Standard Contracts”! Be forewarned,the devil is ALWAYS in the detail!!!
The issue is not just one of legal contracts in my view but of educating people to go about their business in a common sense way. The principles are simple: You should always discuss the expectations of both parties before getting to contract stage. This will throw up many of the “misunderstandings” before they ever reach pen and paper. This is particularly relevant when you expect the contract to be lucrative, long term or it involves parties who haven’t worked together before. Second: even the most savvy business people should be sensible enough to take advice over contracts that commit them or their business to long term arrangements and especially where the terms and conditions are not bespoke to this arrangement but almost “off the shelf”
The latter of these principles is clearly the realm of the legal fraternity but the former should be able to be handled by all businesses/business people although some may need with help and guidance. I have undertaken Expectations Exchanges for many clients with their supply chains and their customers and when done robustly they provide a means for a long and successful relationship. Understanding the expectations of the people/companies that you do business with is a simple but highly effective approach that can both protect and differentiate your organisation.
Thank you to Neville and Nyamodi for your kind words.
Chris – I wholeheartedly agree that the time to discuss expectations if before pen is put to paper. Unfortunately, in my experience, what mostly happens is that the ‘expectations’ remain in the heads of the business people and never actually get translated into the written word. This is generally down to the fact that an ‘off the shelf’ or ‘cut and paste’ contract has been used which makes no reference to these things – and is not understood by (and therefore cannot be challenged by) the client.
In the cases I referred to, I would describe all the clients as ‘business savvy’ – in fact one of them is the CEO of an international operation – but the contract he had been presented with was so convoluted and long-winded that it was difficult for him to see the wood for the trees as it were. Clarity is in everyone’s interests – and your last sentence is spot-on, Chris!
You would expect people of that calibre to be more savvy than that wouldn’t you but I continue to be surpised (although you would think I would have learnt by now) by the way that seemingly experienced and successful people behave. It’s almost a case of they get what they deserve.
Ooh! I think that’s a bit harsh Chris!
Business owners and senior managers spend their time concentrating on doing what they do best – running their businesses. This means that they are very close to whatever their current ‘big’ project is, and may have spent months negotiating their agreements by the time they send them to their lawyers. In such situations, therefore, it’s mostly not sloppiness on their part, which results in things being missed – but simply a case of ‘not seeing the wood for the trees’, or of seeing what they want to see, rather than what is actually written.
Accordingly, whilst the question ‘Is this contract OK?’ may not be an unreasonable one for a client to ask, I strongly believe that it is not one the adviser should answer. I therefore found it quite frustrating when a client told me that whilst her terms and conditions had previously been reviewed by more than one lawyer, who had told her they were ‘OK’, I was the only one who had told her ‘how [she] could further protect [her] business’ – and it was that comment which spurred me on to write this post.