Given their experience of dealing with the fall out when things go wrong, litigators are well-placed to advise on what and what not to do when entering into contractual arrangements. Karen Hutchinson and Francesca Berry set out some top tips to consider when entering into a contract to avoid a contractual dispute.
Litigators see the worst examples of contract drafting. Clients come to us when things have gone wrong, relationships have soured, and there is no obvious solution. If agreements had been documented in clear, coherent and unequivocal terms, our services would usually not be required. Points of difference between the contracting parties would be easy to resolve. Despite the risks, a shocking number of sophisticated business people enter into agreements, often worth significant sums of money, based on ill-considered, poorly documented or, worse still, undocumented arrangements. The repercussions can be costly. At any given time, countless disputes are going through the courts that centre on the construction of badly drafted contracts.
Our seven top tips to avoid contractual disputes
1. Document your agreement
Nothing is more disheartening than being told by a client that an agreement was made on trust, a handshake or under a “gentleman’s agreement”. Trying to enforce an oral, undocumented, or partially documented agreement is far from an optimal starting point for successful litigation, yet it occurs all too often. It is easy to understand why it may seem acceptable in certain circumstances not to formally document your contractual arrangements, for instance, where there is a longstanding relationship of trust or the arrangements appear straightforward. However, it is important to remember that even the best relationships can turn sour. Someone you trust implicitly may not prove honourable when things do not go to plan.
In the simplest terms, a written contract is a strategic tool that can assist with risk management, forward planning and the safeguarding of valuable businesses assets. In contrast, oral agreements are inherently uncertain and present an unacceptable risk that most sensible businesses should not take. An efficient business should not leave it to trust or chance that services or goods will be received or payments made. There must be an effective tool to ensure these things happen on time and provides a roadmap for resolving matters if they don’t.
A significant amount of litigation is borne out of oral agreements. While you may believe it was clear what was agreed when the contract was entered, you can be sure that there will be two starkly different accounts once a contentious situation has arisen. Without clear written terms, difficulties will arise if the other party to the contract reneges on what was agreed or denies certain contractual rights or obligations. How will it be possible for you to evidence what was agreed if this has not been documented in writing?
While inherently uncertain and difficult to evidence, oral agreements or agreements through the course of conduct will still usually be binding in the absence of written terms (with some exceptions, such as contracts relating to the sale of interests in land). As such, failing to document an agreement could lead to you unintentionally entering into binding terms that go beyond what was envisaged. Comments made in conversation or correspondence or certain acts may be construed as evidence of an intention to be legally bound. To prevent this, it is important to:
- clearly mark negotiating correspondence as ‘non-binding’ or ‘subject to contract’
- ensure any oral agreements you make are documented and agreed between the parties, and
- incorporate ‘entire agreement’ or ‘non-reliance’ clauses in the written contract to ensure that any pre-contractual statements are not inadvertently included as part of the contract
2. Ensure your contract is properly drafted
Although any attempt to record contractual terms usually offers more protection than an undocumented agreement, it is important to ensure you have a well written and properly executed contract.
You may believe that what you are trying to achieve is straightforward and doesn’t require professional input, but this is not the time to scrimp. The cost of getting your contracts drawn up by an experienced lawyer will almost certainly be significantly less than the costs of future litigation. It would be money well spent. Corporate and commercial lawyers are experienced in the technicalities of drafting contracts and can help you navigate the pitfalls. Often, they will also be able to secure you more favourable terms. For specific industries, it may help to involve a legal practitioner familiar with the complexities and peculiarities associated with that industry.
Although there is no such thing as a ‘litigation proof’ contract, getting input from a litigator at the drafting stage never hurts. Litigators are well placed to offer a different perspective and stress test the wording of your contract for ambiguity and uncertainty.
It is important to use plain English; a contract should be written in clear, coherent and unequivocal terms. The courts do not readily accept that people have made linguistic mistakes in formal written documents. While the commercial context in which an agreement was formed will have some bearing, the natural and ordinary meaning of the language used is likely to be the main determining factor in its interpretation. Ask yourself whether an independent third party would easily understand the key rights and obligations under the agreement. If the answer is no, then you need to rethink your drafting.
The court cannot usually look at external factors such as the parties’ intentions, prior negotiations and the circumstances around the contract’s formation to interpret the words in the contract. What counts are the written terms themselves. Therefore, some parties may seek to capitalise on poor drafting to escape a liability even when they are aware this is not what was intended at the time.
It helps to clearly structure your agreements, in particular:
- Use recitals to set out a summary of the parties’ intentions
- Define technical terms or terms that are used repeatedly in the contract to keep the contract concise and consistent and help with interpretation
- Avoid trying to deal with multiple issues in one clause
3. Take care of and know your documents
Although the risk of misplacing an important contract is less of an issue in the modern digitalised world, disputes still arise because contracts are lost, improperly executed, incomplete or misfiled. The need to take care of essential documents remains crucial.
If the agreement is signed in hard copy, ensure it is scanned after signing and keep the original filed safely. It is no good having a well-drafted, fully executed contract but then not being able to locate it when it matters.
If your documents are managed electronically, ensure they are filed where they can be accessed and reviewed by everyone in the business who needs to adhere to them. Certain contractual obligations (such as non-compete and confidentiality clauses) will typically have wide reach across an organisation and will not only impact those directly involved in the performance of the contract. Consider whether you need a central database or contract management system to log agreements or key terms to ensure compliance and avoid inadvertent breaches. This is particularly true in large organisations where different divisions may not always be aware of contractual obligations created by one another.
Unless you anticipate all parties to the contract signing one document, it is best practice to include an express counterpart clause to ensure that each party can sign separate copies of the agreement. Ensure that signature pages are collated, and you have a complete, fully signed version of the agreement on record.
4. Know your standard terms
Many organisations benefit from repeat business or engage with several different clients on fundamentally the same terms. For this reason, it is often efficient to rely on standardised terms and conditions or to top and tail the same precedent contracts for each new client. While there are efficiencies in not reinventing the wheel every time you enter into a new agreement, it can lead to complacency. Disputes often arise due to parties failing to properly review, understand or update their standard terms.
It is essential to know what is in your standard terms and conditions. Businesses evolve, and the regulatory regimes and laws that govern them can also change. It is not sensible to rely on the same standard terms for a significant time without getting them reviewed periodically by a professional.
Don’t simply adapt old agreements or cut and paste from other documents without proper critical review. This is likely to lead to inconsistencies in language and the use of defined terms. In the worst cases, it will leave you with a contract that does not make sense.
Don’t skip over the non-substantive or ‘boilerplate’ provisions (eg, notice, termination and assignment). Such clauses may not be so hotly negotiated, but disputes are as likely to arise in relation to these clauses as they are to the principal terms in the contract.
5. Include clear mechanisms to help resolve disputes
Even with the best drafted contract, disputes may still arise. The inclusion of dispute resolution, governing law and jurisdiction provisions will clarify where and how points of conflict between the parties are to be resolved.
Governing law clauses allow parties to specify which legal system will determine questions on the interpretation of rights and obligations, enforceability and termination, etc. A jurisdiction or dispute resolution clause will identify which courts will have jurisdiction to resolve disputes or set out an alternative procedure, for example, arbitration, expert determination or mediation.
If a contract has no choice of law or jurisdiction clauses, significant time and money could be wasted on jurisdictional challenges and dealing with arguments over which substantive law will be applied. It is not unheard of for jurisdictional battles to run on for years, delaying resolving the underlying dispute. It is better to agree these provisions in the contract than wait until a conflict arises.
Finally, it is worth flagging that whatever the choice of governing law, the parties should seek advice from a lawyer qualified in the relevant jurisdiction on the drafting of the contract.
6. Be aware of your timeframes
Parties are usually aware of when their primary contractual obligations need to be fulfilled. However, for effective contract management, there is usually a myriad of additional dates that should be logged and tracked. Failure to comply with contractual timeframes is a frequent cause of disputes.
Certain contractual terms may only remain valid for a fixed time. For example, it is usual to include periodic price increases in contracts for goods and services. And, there is usually a time limit on certain representations and warranties so that they cannot be relied upon indefinitely.
It is essential to understand when and how a contract can be terminated and the timing and length of any notice periods. Parties should ensure there is a commercially viable exit route, and they are not tied into a contract for an unrealistically long time.
Many standard contractual clauses impose secondary obligations, which survive termination and run beyond the contract’s life. Exclusivity and confidentiality provisions, in particular, can impose strict restrictions that prevent specified activities for lengthy periods. If a business is considering terminating a contract, it should note which clauses will survive termination and take steps to ensure it understands, logs and complies with ongoing contractual obligations.
7. Varying an agreement
The above advice applies equally, if not more, to variations of a contract. It is not uncommon to see parties go to great lengths to take proper advice when preparing and drafting principal agreements but then attempt to vary them in an ad hoc, informal or careless manner. This can result in a series of inconsistent agreements that do not work together and with no clarity as to which should take priority.
- Core agreements should clearly state how any changes can be effective. Best practice is for changes to be in writing and signed by all parties to avoid variations inadvertently arising through oral agreement or via the parties’ conduct.
- A critical review should be undertaken to ensure that any side agreements are harmonised with the principal agreement, and there is consistent use of defined terms and language. In the drafting of any variations, care needs to be taken to understand the effect of the proposed variation on other provisions of the contract, not just those that the parties are seeking to vary.
- While the objective should always be to avoid inconsistencies, where the contractual arrangements are made up of different documents, it is sensible to include a ‘priority clause’ clarifying which agreement should take precedence in the event of ambiguity.
Karen Hutchinson and Francesca Berry have a wealth of experience in dealing with complex contractual disputes. They can offer advice on contract drafting and formation from a litigator’s perspective or guide you through any contentious situations arising from contractual uncertainty.