How Businesses Torpedo Their Own Contracts

Many businesses spend big bucks preparing standard terms and conditions which they can add to all ?their contracts.

Ts & Cs cover always-applicable issues: limiting liability; currency of payment; problem resolution process, force majeure, etc. ?

Yet some businesses squander such hard work. Don't be one of them. Follow these three golden rules:

1.?????? Know when your contract is formed

A contract is formed when the parties intend to form a legally binding agreement (i.e., a contract) and have agreed sufficient terms to enable the contract to work.

Their negotiating already constitutes the necessary intention, so that just leaves the requirement that they agreed sufficient terms. ‘Sufficient terms’ is open to argument, but generally means those clauses necessary for the contract to be workable, core topics like what, where, when, how, and how much.

There are frequent disputes about whether or not (and if/when) sufficient terms were agreed during a series of phone calls/meetings/emails so allowing a contract to be formed. One side says ‘yes’. The other, usually dazed and confused, think they are still negotiating. No wonder lawyers write ‘subject to contract’ everywhere, like over-zealous graffiti taggers.

2.?????? Declare your terms before the contract is formed

The terms and conditions applicable to a contract are those made known to each side and agreed (or at least not refused) at the time the contract is formed.

I often encounter deals concluded by phone, email or in person, following which one side sends a purchase order with terms and conditions on the back.

If the contract was indeed struck over the phone, etc., then the purchase order is no more than a written confirmation/admin step. As such, the terms and conditions on the back are irrelevant - because they were introduced after the contract had been formed. Imagine buying patio lights from a garden centre. You open the box when you get home, and out falls the garden centre’s sheet of terms and conditions, specific to the lights. The Ts & Cs are worthless - because they were not drawn to your attention prior to the contract being entered into (at the checkout).

A contract is somebody making an offer and somebody else accepting it, with both having the intention to create a legally enforceable agreement (which, by the way, is what separates contracts from arrangements between friends, voluntary obligations - and illegal agreements: an agreement to assassinate somebody isn’t a contract as it is not legally enforceable.

What’s called a ‘battle of the forms’ sometimes occurs, when one party makes an offer and that offer contains its terms and conditions (e.g., on the back of a purchase order or via a web-link).

But the other side does not accept the offer.

Instead, they reply that they are still willing to sell, but only using their own document which contains their own terms and conditions: so the initial offer is met by a counter-proposal. But for there to be a contact, there needs to be an offer which is accepted. A counter-proposal is not an acceptance.

This sparing continues until the deadlock is broken, normally by the side under most pressure going ahead with the deal regardless. They’re acting in response to the latest proposal from…. whichever.

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A contract is then formed - either at time of shipment or, if shipped without approval, then at the time the recipient accepts the goods (if they reject them upon delivery, then there is no contract).

Should a problem arise, it is then for the parties to unpick what, if any, terms were agreed at the time the contract was formed, and whose terms and conditions were on the table at that time. This is not always an easy or amicable process…

3.?????? Know what constitutes your contract

A typical contract format is:

·???????? An order specific front sheet(s)

·???????? Standard terms and conditions

·???????? The schedules (aka appendices/annexes) e.g., manufacturing specifications, KPIs etc.

This format usually works well UNTIL they incorporate into the contract, often by passing reference, other documents such as ‘the staff handbook’, or XYZ’s Code of Conduct’, or (my particular favourite) ‘standard industry terms of business’.? The first two are problematic: incorporating entire documents written for a different purpose, with whole chunks probably contradictory and/or irrelevant. Such documents are not written ‘contract style’ (i.e., where literally every word may affect the interpretation of the clause). But at least they are actual documents which can be identified and reviewed ahead of signing.

The latter example (standard industry terms….) is impossible to pin down. It's pretty much the same as having a schedule added to your contract saying, ‘Yeah, whatever’.

And if those documents reference other documents, are they part of the contract too?

Don’t work hard to make great soup just to serve it in a leaking bowl.