Untidy Contracts

Untidy Contracts Can Lead to Disaster

They’re intrinsic to business, but smaller operators may fail to recognise that they’re a vital means of allocating risk.

When a local company importing millions of dollars worth of goods from China to sell to a Brisbane organisation ran into problems getting paid, it turned to its legal representatives for help.

The lawyers soon realised they had a problem with deciding who to sue to recover the money. The client had prepared the contract himself and the party listed on the contract was not a registered business name. “Therefore even before the game had started we were on the back foot,” says Jo Kafrouni of Kafrouni Lawyers.

Uneven business contracts are common, Kafrouni says. And “holes” in untidy contracts often relate to issues the parties don’t want to talk about. A common hole relates to the clauses dealing with termination – or “what happens if things go pear-shaped?”

“For instance if you’re in business with an associate or partner and they get in trouble with the law. They should be clear about the reasons they want a particular clause or amendment inserted – criminal charges which are public and nasty – you want to part ways with these people for your own reputation,” says Kafrouni. “But obviously that can’t be done unless there are provisions to that effect in the contract.”

To avoid such problems, businesses should view contracts as tools with which they allocate risks with respect to transactions they enter into. And before entering them business people should list all risks they can foresee. Once they’ve done that they can then determine how to deal with them. This can often be as simple as inserting an appropriate clause.

Making everything “watertight” on both sides of a contract requires attention to detail, yet there’s currently a push in the legal community towards simpler contracts, which starts with avoiding the over-use of words.

“If you can say something in ten words, don’t say it in fifty. Also, if there are instances or risks you’re trying to protect that are highly unlikely to occur and which require lengthy provisions, consider leaving them out of the contract for the sake of simplicity – and making it more attractive to the other party.”

Lawyers should ‘absolutely’ be involved with both sides in setting up contracts, Kafrouni asserts, because often it’s not what’s in a contract that’s a problem, it’s what’s not in. “Lawyers should be involved simply because of their ability to see information that should be in contracts that potentially their clients can’t see,” he says.

Small business operators commonly find that bigger businesses are not interested in inserting extra clauses when a contract is being drawn up. But they should go back again and again and be clear about the reasons they want a particular clause or amendment inserted.

“I’ve had instances where small businesses have been in the best bargaining position and achieved the outcomes they want,” Kafrouni says. When you’re in a situation where you’re disadvantaged because you’re dealing with a larger company and you want the work, it’s important to ask for the changes to the contract you require. Give it a go.

“You’d be surprised at the number of organisations that have a blanket policy initially to reject all requests for additional clauses or amendments, so go back a second time, a third time, and justify your reasons for the amendment or change. Do your best to make the other party seem unreasonable because nobody likes to appear unreasonable in business.”

This will admittedly mean the legal meter is running, Kafrouni says, but if you don’t pay now you may well pay later. It’s better to avoid the risk altogether of incurring additional legal costs down the track, along with the nuisance and time involved in cleaning up the mess.

What if the relationship between two businesses has been friendly and longstanding? Most business relationships start off being friendly, Kafrouni points out.

“Many businesses start between friends or family members. We’ve all heard the stories about friends falling out and the saying that you should never get into a business with family or friends.”

Successful business relationships of any kind are about meeting people’s expectations. Problems occur in transactions because expectations are not met. The process of entering into a contract allows the parties to set out clearly and establish for themselves what expectations are.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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