Solicitordavid Walker is providing his expert advice on all things contract law, dispute resolution and intellectual property. Step fourinvolves a look at some of the most common contractual problems for a small business owner and the best way to address them.
As a solicitor, I deal with contractual problems all the time. In this article Im going to look at three issues I commonly encounter and give you some ideas on how you can solve them, or preferably avoid them in the first place.
Work starts before the contract is finalised
In commercial transactions there are often time pressures to get the deal done because work needs to start on a project as soon as possible. When there are just a few little details to work out? it’s tempting to start work and finalise the contract later.
However, this can lead to problems if a dispute occurs. Without a signed contract there are two possible scenarios either there’s a verbal agreement without any certainty of the terms agreed, or there is no contract at all.
From a supplier’s perspective, a verbal contract could mean that only the basic terms agreed are binding. This can be a dangerous position to be in if there is a dispute because the limitations of liability that they were negotiating are unlikely to be valid, and without them the client can potentially claim an unlimited amount of compensation for breach of contract.
Even if there is no dispute, getting paid on time could prove difficult if there is no certainty over your payment terms.
Ideally, you should avoid this situation by finalising the contract before starting work. However, if you really do run out of time and it is essential you start work early, you need to be very clear about what points are agreed and what are still outstanding.
At least then, you will understand the risks you are taking and can make a more informed assessment about whether you are prepared to accept them. Then, finalise the contract as soon as possible.
Battle of the forms
A battle of the forms? occurs when two businesses want to use their own standard terms and conditions in preference to the others.
The battle? starts with one party, let’s say the supplier, offering to provide a service on their standard terms. If the other party, the client, responds saying they accept the quote, but only on their terms, a contract will not be formed. Instead, the client has made a counter-offer and it is now down to the supplier to accept this counter-offer.
This to-and-fro could continue until one party finally accepts the others terms, but it’s going to take time, resources and is not good for the relationship. Therefore, suppliers generally use three tactics to try to ensure their terms apply.
First, they may add a clause to their contract that says something along the lines of:
?These term and conditions apply to the exclusion of all other terms and conditions which the Buyer purports to apply under any purchase order, confirmation of order, specification or other document.
Unfortunately, this approach is unlikely to work for two reasons. Firstly, the buyer won’t have accepted this clause because they have already rejected the supplier’s offer and made a counter-offer. Secondly, the buyer may have a similar clause in their standard terms so we are no further forward.
Next is a ‘shot-gun? approach. In this tactic the supplier includes its terms and conditions in as many pre-contractual documents as possible and hopes that it’s terms are the last sent so they are deemed to be accepted by the buyer.
This is risky because the supplier may not end up firing the final shot and therefore, their terms and conditions might not apply. However, it may be preferable to the final approach of direct negotiations because if it does work, the supplier’s terms will apply without having to accept any changes to them.
The final tactic is direct negotiations between the parties. The problem with this is that the negotiations will take up time which negates one of the benefits of using standard terms and conditions in the first place. It also means that both parties will have to compromise their positions. However, it does mean that there is certainty as to what has been agreed between them.
Despite your best efforts, when you’re in business mistakes can and will happen from time to time. When you discover a mistake, you need to act fast and try to put it right, but first you need to check the terms of your contract as there may be a procedure to follow.
If you have misunderstood your client’s requirements, but otherwise have a legally binding agreement, you may be stuck with the deal you have agreed. In these circumstances it will be down to your client’s goodwill to allow you to either cancel the contract or renegotiate its terms.
However, it is possible to build protection into your contract so if, say, you make an honest pricing mistake you are not obliged to fulfil the order. This is very common in ecommerce contracts and can protect a business where, for example, they have offered a new TV for sale for just 3.
So, if you do find you have a contractual problem, whatever it is, start by looking at the terms of your contract to see if there is a process to follow to resolve it. Then act fast and communicate with your client.
Preventing contractual problems
When it comes to contractual problems, prevention is always better than cure so take the time to think about the terms of your contract, what might go wrong and then put in place procedures to eliminate as many potential issues as possible.
If a problem does arise, communication is the key to resolving it. In my experience as a solicitor, many contractual problems I have dealt with could have been resolved quickly and easily if the parties had taken a more pro-active approach to finding a solution and had taken the time to speak to each other.
Miss the first articles in the series? Catch up on David Walker’s essential advice for small business owners.