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February 16th, 2010
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
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January 13th, 2010
There have been several blog posts recently upon why many lawyers seem unable to break away from the concept of strict hourly billing. Some of these can be found on a blog by a company called Exari. I have no association with this company and do not endorse their products, but you may find some of these posts interesting – if not a little scary: http://blog.exari.com/
It’s obviously difficult to estimate how much time it is going to take to draft a contract from an initial discussion with a client – and sometimes things turn out to be a bit more complicated than originally anticipated and take longer than planned. However, that’s life!
Buying any services with a deliverable – for example a contract, – on an hourly basis can leave you with an unexpectedly high bill unless you know how quickly (and effectively!) someone works. However, buying on a fixed fee arrangement can also mean buying an ‘off the shelf’ product, which may or may not be suitable for you. So what’s the best solution?
If someone is billing by the hour, ensure that spend limits are agreed in advance and that you receive regular progress reports and spend-to-date figures. That way, at least you won’t faint when you get the bill! Alternatively, if you opt for the fixed fee route, select your supplier based upon the referrals and recommendations of people you trust, so that you know that you will get what you are paying for.
All of my contracts and terms and conditions are tailored to the specific needs of the client, and whilst some clients prefer me to work on an hourly (or daily) basis – particularly when I am attending meetings with them to support their negotiations, – many smaller businesses prefer work to be done at a fixed fee. Accordingly, I offer both – and also retainer arragnements for clients who need more regular help and advice.
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January 6th, 2010
To contract ….. or not!
What do you think of when you see the word ‘contract’?
Unfortunately, through experience, people have come to associate the word ‘contract’ with other words beginning with ‘C’ – ‘confusing’, ‘complex’, ‘combative’ and ‘costly’. However, the alternative meaning of the word is as a verb meaning to shorten, so why can’t contracts be ‘concise’?
Good News – they can! Further, if they are drafted by someone who takes the time and trouble to undertstand your business needs, they can also be ‘clear’, ‘collaborative’ and ‘cheaper’.
If you can’t understand your contracts, then it is not unreasonable to assume that yor clients won’t be able to either – which makes the whole exercise pretty pointless. Also, money spent on preventing disputes is worth twice that spent on helping you in court – by which time you will already have lost your customer, potentially your reputation, and probaby some of your hair along the way.
This approach also applies to other documents involved in the contractual process. Here are 2 clauses, the first of which is taken from a real-life tender I reviewed – complete with typos. See which you prefer.
The confusing, complex, combative and (probably) costly one:
“The tender remains open for 30 days unless previously withdrawn. Thereafter, the tender is subject to confirmation or adjustment by the contractor/company. Acceptance of the Tender/Quotation/Estimate by the customer is deemed that the customer accepts the Terms & Conditions of Trading by the contractor and supersedes any Terms & Conditions as laid down by the customer, unless agreed upon in writing by the contracctor within 30 days of the customer accepting the tender.”
Or the clear, concise, collaborative (and almost certainly cheaper) one:
“If you wish to accept this tender, please do so by [insert dae]. If we wish to withdraw the offer to tender before that date, or agree to extend the date by which you may accept, we will notify you in writing.
Please note that by accepting the tender, you will also be agreeing to our Terms and Conditions (attached), which will apply in place of any terms and conditions of your own in respect of the work to be undertaken.”
“Res ipsa loquitor” as my old Latin teacher used to say – a no-brainer!
Why not make your resolution for 2010 to dump your confusing, complex, combative and costly documentation – and replace it with some which is more appropriate to business in the 21st century?
Happy New Year!!
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November 17th, 2009
Have you ever been tempted to create an Agreement by cutting and pasting? Here’s what can happen….
I have recently been sent a contract for review, and what I discovered was a mish-mash of bits and pieces which had clearly been cobbled together from several different agreements.
The result? A potentially very costly mess!
Many of the terms used were not defined, and the (single) subject matter of the agreement (defined as ‘the Products’) was also referred to in various places as:
“the Work (as defined below)” (It wasn’t!)
“the Research Services”
“the Results”
“the Development”
and a couple of others which I can’t repeat here for fear of identifying the parties.
None of these terms were defined in the document or used in any consistent manner – in fact they seemed to be used interchangeably. In addition, there was reference in one definition to a Schedule which did not exist and was not referred to anywhere else in the contract.
So, does this matter, or is it just nitpicking?
Unfortunately, not only does it matter, but it can have serious implications. Here’s why:
The payment terms did not refer to the Products at all – despite several of the undefined terms being used in it, – and the warranty clauses did not link back to the Products either. Accordingly, the only possible ‘agreement’ between the parties would have been for the provision of Products, without the benefit of a warranty, for an undefined (and therefore, by law, a ‘reasonable’) payment.
However, in this case, the wording created such confusion and uncertainty that the whole agreement would almost certainly have been unenforceable.
This was a high value, technical contract, which ran to several pages. However, whatever the nature or value of your agreement, if you have taken the trouble to negotiate a deal, surely you want it to be enforceable?
If you have an agreement that you know (or suspect) has been created by cutting and pasting, and want to be sure that you are protected, please get it checked out – it may have been cheap to create, but it may also not be worth the paper it is printed on.
Tags: Cut and Paste, Definitions, Enforceability, Uncertainty
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November 5th, 2009
“No-one ever looks at our Terms and Conditions”
This is what a new client told me recently – when both the Managing and Sales Directors confessed to never having read their own company’s terms and conditions of sale. So, the question is: ‘Do Terms and Conditions really matter if no-one ever reads them?’
If there should be an area of dispute between you and one of your customers, your terms and conditions – provided they apply to the transaction at hand – will be the rule book by which any misunderstandings can be resolved and your business relationship preserved.
Unfortunately, for some organisations, this is the first time they take any real interest in them.
The problem with this approach, is that it equates to buying an insurance policy in a sealed envelope – without having any idea of the cover it provides – and only looking at it in the event that you need to make a claim. By then, if the policy does not cover the circumstances of your claim, it will not protect you. The same applies to your terms and conditions.
So, even if you only plan to use your terms and conditions in the event of a dispute, (and anyone who has read my previous article on Using Terms and Conditions as a Sales Tool will know that they can be so much more useful than that,) you might think it wise to ensure they are carefully drafted.
Do your terms and conditions reflect your particular circumstances, and set them out in such a way that both you and your customers can refer to (and understand) them whenappropriate? If not, now might be a good time to shut the stable door before the horse has bolted.
Tags: client relationships, clients, customers, disputes, terms and conditions
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October 29th, 2009
Have you ever thought about using your terms and conditions as a sales tool and not just as a mechanism for dispute resolution?
A well drafted contract / terms and conditions should set out very clearly the responsibilities of both parties, and look at the PRACTICAL as well as the legal issues which may arise. In doing so, it should achieve three things which will help you in the sales process – and I will use a machinery repair contract as an example:
Firstly, your terms and conditions can prevent disputes arising by avoiding the misunderstandings which usually create them. This may be enough to disqualify some enquirers – for example, if you only offer a service after 5pm for clients within a 25 mile radius of your base, there is no point in spending a long time persuading the client how fantastic a service you provide if they are 30 miles away and want all their servicing done in the evenings.
Secondly, if they contain reasonable provisions and are written in user-friendly terminology it will demonstrate your desire to have a successful and long-term relationship with them – engendering trust and building that all important rapport. For example, by acknowledging that things don’t always go according to plan and explaining how you will deal with that situation, you can both highlight your commitment to customer service and manage expectations at the same time. An appropriate clause for our machine repairer might therefore be: ‘If the necessary spare parts are not in stock, we will use all commercially reasonable endeavours to have them delivered and installed within 24 hours’.
Thirdly, they can enhance the emotional ‘pull’ so critical in sales by reinforcing the issues of importance to the client. For example, if the machinery being maintained is in sensitive areas (e.g. a laboratory) the client may be concerned about confidentiality. So, if you can, make a positive (but not onerous) statement such as: ‘We warrant that all our repair operatives have signed a contract of employment requiring them to respect the confidentiality of our clients’ information’. This will remind the client of their concern, reassure them, and perhaps set you apart from your competitors!
Fourthly, if you have the contact with you and are able to go through it with the client, they not only know that there will be no ’small print’ to worry about later, but you do not lose the momentum by having to send out the contract later – when they have had chance to change their minds!
Many contracts / terms and conditions are full to the brim of the type of clauses used to defend your business in the event of a complaint, and are regarded as a ‘weapon’ to be removed from the filing cabinet only in the event of such a situation arising. I would strongly argue that by then, the client is lost – not just for this deal, but for all future ones – and that as bad news travels fast, other (potential) clients may not be far behind.
In contrast, I always advise my clients to see their legal documentation as a part of their sales pitch – and to have it drafted accordingly.
Do you think your terms and conditions could be improved to turn them into more of a sales promotion and client retention tool than a blunt instrument?
Tags: clients, contract, sales, terms and conditions
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September 29th, 2009
It seems as if the list of definitions at the beginning of contracts gets longer and longer, and often they are very useful. However, they must be carefully constructed.
I have come across the following example today of a ‘circular’ definition:
Definition: ‘Protocol’ means the protocol which the supplier must provide to the client in accordance with Clause 2
Clause 2: The supplier will provide the client with the Protocol
This definition creates a perpetual loop. As the supplier, you would read to clause 2 and see that you have to provide a Protocol – you would then look to the definition to see what it means, and find that it is the document you have to provide under clause 2!
As a lawyer who focuses on the practicalities of contractual agreements – and on making them as short as is reasonably possible – if I was re-drafting this, I would firstly decide whether a definition was required at all. If it was, I would probably re-word it along the lines of the following:
‘Protocol’ means a protocol in the form set out in Schedule 1, or in such alternative form as the parties shall agree in writing from time to time.
The first part of the wording gives the parties certainty as to what is meant, and the second part gives them the flexibility to make future changes.
Do you have definitions in your agreements which don’t make sense to you or go around in circles? If so, I’d be pleased to hear about them.
Tags: certainty, Definitions, flexibility, practical
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August 10th, 2009
I recently reviewed an agreement which had been professionaly drafted for my clients – but which they did not understand.
It contained long and complex clauses upon matters which have routinely been the subject of academic debate in the courts. In some cases these clauses can be critical, and a well drafted clause can mean the difference between survival and financial ruin for a business when an agreement turns sour. In this agreement, for example, as in many, the right to terminate if the other party suffered any one of a number of financial problems – including, I suspect, losing his change down the back of the sofa, – was the subject of several paragraphs of prose.
However, given that my client’s only real obligation was to pay for work completed to its satisfaction, I personally did not feel that such a detailed clause was appropriate. What was more worrying, however, was that there were several practical issues of much more signifcance to the client which had not received such detailed attention.
For example, my client required regular progress reports and had the right to terminate the agreement if adequate progress against an agreed schedule was not being maintained. This obligation was critical to my client, – who needed to be able to dump and replace the contractor if appropriate. Critical in a practical sense, but clearly not the type of clause which regularly excercises the learned minds of the judiciary!
The agreement defined ‘Report Dates’ as the first day of each calendar quarter – so far so good – but then merely required the other party to produce reports ‘in accordance with the Report Dates’. What did this mean? Neither my client (nor, it turned out, the other party,) fully understood how to interpret this clause, which meant it was already doomed as a useful weapon in the contractual armoury.
A report, scribbled on the back of an envelope, prepared on 10th April for the period from 1st January up to 31st March, but not delivered to the client until 31st May would fulfil the obligation – but was certainly not what my client needed. Accordingly, the clause was ‘legal’ but practically ineffective. (Lawyers will know that there would be an implied clause to the effect that the report had to be delivered within a reasonable time – but the clients didn’t know that, and anyway, why place them in a situation of having to argue about what was reasonable?)
The clause was changed to make it clear that the reports would cover the activities of the quarter ending on the relevant Report Date, would be in such format as my client reasonably required, and would be delivered within 7 days of the end of the quarter in question.
Tags: Definitions, effectiveness, report
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July 17th, 2009
I’ve resisted it for a long time, but I’ve finally succumbed to having a blog!
Whilst solicitors do an excellent job of protecting their clients’ legal interests, I still come across too many examples of unnecessarily long-winded contracts, full of complex legal phraseology, and which do not reflect the practical needs of the parties.
Sometimes this type of contact is simply the result of sloppy drafting – the ‘here’s one I prepared earlier’ approach. However, mostly, it’s down to the fact that the solicitor does not know enough about the nature of the businesses and the transaction involved – and the client can’t afford the time it would take for him or her to find out – to be able to draft a better document. In either case the client, not being legally trained, won’t realise the limitations of the document – unless and until it is too late.
I’ve therefore decided to share some examples of poor drafting I come across and to look at how these can be remedied. (Confidentiality is obviously paramount though, so certain details will be changed where necessary.)
So, to start:
Last week I reviewed an 8 page (yes, 8 page!) confidentiality agreement for a client. It had been drafted by reputable and expensive lawyers, but they clearly did not understand the structure of the client’s organisation – and the client did not understand the complexity of the agreement.
This created 2 major problems:
1. Much of the information to be disclosed by my client would not have been protected because it belonged to organisations not covered by the agreement;
2. Disclosure of the other party’s confidential information to my client’s associated companies – which was always what was intended – would have put them in breach of the agreement.
In other words, the agreement was utterly and totally useless for the purpose for which it was intended. 8 pages of wasted rain forest!
Ideally, it would have been better to have had separate agreements with the associated companies, but – let’s get real – this was never going to happen. Accordingly, remedying the contract involved drafting tighter definitions, and providing rights for the associated companies to be able to rely upon the terms of the agreement under the Contracts (Rights of Third Parties) Act 1999.
More examples to come. Watch this space!
Tags: confidential information, confidentiality, contract, practical
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