The Value of a written contract

What is the real benefit of a written contract? 

 I have written before about “paper trails” -- making sure you keep notes of important conversations and / or decisions and why I believe this is useful from a business- as well as a legal- point of view. ( see the huge on going spat between Henry Staunton and Kemi Badenoch.

In the same way, I suggest that although many contractual arrangements don’t need to be in written form, there are many benefits in writing them down and many possible disasters in not doing so.

 Writing down even the most basic terms of a contract will, hopefully, deal with some or all of these:

 Avoid confusion and, if well written (which is another point entirely), make clear to each party not what they think they might have agreed, but what they have actually agreed. So, for example, key points might be; who is meant to do what, by when, for what amount of money and what happens if one of the parties doesn't comply;

 Set out other matters which the parties (and, where relevant, their advisors) think are important and encourage the parties to consider properly what is important to them and what isn’t;

 Set out a process for dealing with possible disputes;

 Show, even as perhaps a smaller business, you are treating the matter seriously; and

 Offer some protection should the other party try and sue you for possible breach.      

 You can see several of these points try and deal with matters of clarity and communication.  A contract may also have a “value or benefit”, in acting as a moral (don’t laugh), as well as a legal deterrent to each party not to break it. That is how I wish it always worked, but let's look at one form of reality.

 You are a UK widget manufacturer... you make widgets at prices ranging from £500 to £1,000. You have been asked to show them (and perhaps sell them) at a shop somewhere in Europe, invited to do so by people there who you know well. You have agreed a very short set of written terms and conditions with the owners of the shop. This includes normal matters such as insurance / payment terms / no passing of ownership until you are paid / safekeeping of items etc.

 Your widgets have a total value of about £50,000. You have little money to get this project properly checked out, but you really want to do it as these sorts of opportunities are rare.

 You ask the following:

 What are my legal risks?

What are my commercial risks?

How, if at all, can I improve my position?

Can I rely on my contract if it all goes wrong?

Can I sue?

Would it be worthwhile?

 ……………..what is the real value of a contract in this case? Without writing a book for an answer perhaps we should consider the following.

 Some companies and people still work on a handshake or similar basis of trust, although I am not sure how much that works in practice today. As society gets more litigious, much is changing. It is also the case that when money is tight people argue more about everything and trust tends to break down.

 The costs of enforcing most small (whatever that means in the particular circumstances) and these days much larger, claims is prohibitive, particularly in the example I have given. So, if someone breaches a contract particularly outside the UK the other party has some hard thinking to do. There will be many steps to take starting from finding out there is a breach, to bringing a claim somewhere and getting what is, or might, be due to you.

 Other than for the simplest of claims (so maybe for non-payment for goods), even the UK court system is very hard for most people to cope with, in terms of both time and fees.  It is also worth remembering the time you need to spend in sorting out these sorts of disputes will be time you aren't spending dealing with other things which might make you money—making and selling your widgets.

 Although it seems as if most people use lawyers etc., to draft or review their contracts the converse is true and very few do. Why? Costs are often prohibitive; it would take too much time and many people don’t like going to lawyers! Most people and companies get on with it and hope for the best. Alternatively, they have a go at preparing a first draft and then ask their advisors to review and point out key issues, rather than rewrite the whole contract.

 Returning to my specific facts, I would suggest realistically it would be almost impossible for my UK manufacturer to successfully claim against the owners of the shop, if something went wrong. I suggest that they might have a legal remedy but not at a price they could afford, in the context of this arrangement. They could think about obtaining some insurance cover but, again, the cost may well be prohibitive.

 My most useful piece of practical advice is always try and make sure you know your contractual counterparty. Like many legal problems, it is often about people and their relationships. Don't make any assumptions; don't assume anyone is actually out to get you, but equally don't assume, friend or not, that they will necessarily roll over if it comes to an argument. Written terms can, in fact, be particularly useful where there is a personal relationship between the parties to prevent any misunderstanding which could later jeopardise that relationship.

So, after all that it is still better to have something/anything, written down; just be aware of the limits of its legal effectiveness. As I have written elsewhere, common sense and indeed the “smell test” are perhaps / almost of equal importance.

 And this cautionary tale may assist:

One day a farmer saw a snake in his field. He grabbed the snake by the throat and was about to cut off its head with a knife.

Said the snake “if you let me live, I promise that every day I will give you a piece of gold.”

Said the farmer “can I trust you”?

Said the snake “I am ready to sign a contract.”

They signed a contract and each morning the farmer came to the snake and collected one piece of gold.

One morning when the farmer was taking his piece of gold, according to the contract, the snake bit him.

Said the farmer “we have a contract.”

Said the snake “next time don’t sign a contract with a snake.”