Debunking 6 Contract Myths

Virtually all businesses will enter into all sorts of commercial arrangements and money-making ventures on a day to day basis but too often fail to consider the underlying contractual implications.

Here, we debunk a few myths which often contribute to a business’ neglect of its own legal security and commercial liability.

1. I don’t need a written contract

No business wants to spend money unnecessarily but written contracts are often mistakenly seen as a wasted expense. One common sentiment is that “nothing has gone wrong so far” so a business decides to operate on a hand-shake or one page document, trusting that nothing will go wrong this time either.

Things quickly change if something does go wrong. What if the other party tries to terminate your agreement, or isn’t performing as you want them to, or fails to pay you, or complains that you have breached the terms of your deal and tries to claim money from you? Without anything in writing, you will struggle to determine what your position should be and what you can do about it.

Those are just a few examples of the sorts of issues and disputes which a written contract will normally anticipate and legislate for but there are many more.

The fundamental question to ask is “what is the business risk?” related to the contract. One-off, low value, deals may not involve too much risk but even the supply of one piece of equipment throws up numerous issues (for example, the law implies that you give certain warranties (promises) in relation to such equipment) and the liability you might have if something goes wrong. Longer term arrangements, or contracts or deals with a higher value, are likely to involve more risk and it therefore becomes even more important to have a robust written contract to protect you and your business investment.

2. DIY contracts do the trick

The second most common myth is that there is no need to get lawyers involved for a contract and that a business can draw one up itself, often taking ‘inspiration’ (i.e. copying and pasting), from others it has come across or finds online.

This is a serious mistake. A business’ first instinct is to agree the commercial details of a deal and make sure it is getting good value. That is clearly important but a business can do a very good commercial deal but completely wipe out the value by signing up to inappropriate legal terms or not having any at all.

Non-existent or inappropriate legal terms, and focusing simply on what the has been agreed from commercially, exposes a business to potential risks and liabilities. We have a common law system whereby certain legal principles (and liabilities) may apply to a contract even if they’re not mentioned in it. This is the stuff that gets missed in DIY contracts but that lawyers are trained to spot.

Even worse, a business may transpose legal terms from other contracts it has entered into, or seen elsewhere, without fully understanding what they mean or whether they are relevant.

Contract drafting is a skill, which needs to be learnt and which involves knowledge of a bank of case law, statute and, increasingly, EU regulations. A commercial solicitor will have this knowledge and the experience to apply it to your specific business situation.

Without this knowledge and experience, a written contract may well be worth nothing – or even potentially expose you to more liability than if you didn’t have a written contract at all. It is no good, once the wording of a contract needs to be relied upon, to say that it was supposed to mean, or do, something which in reality it doesn’t.

3. One size fits all

Businesses which do go to the trouble of having a contract drawn up, sometimes think that they can change a few words and it will work for other situations and deals but this is not the case.

There may well be some contracts which can be made as versatile as possible for use day-to-day and a commercial solicitor should always try to help you achieve this. Standard terms & conditions and a wide range of goods, services, licencing and business agreements, can be made capable of being adapted and used time and time again. However, a good commercial solicitor will clearly highlight the terms which should, could, and should not, be changed and provide instructions on making changes.

Without this guidance, or with some contracts which are negotiated and/or prepared for a particular business deal or set of circumstances, re-using a contract is dangerous. These will often be the more important business contracts that are only entered into from time to time and it is therefore risky to try and use them in other circumstances without seeking legal advice.

Likewise, businesses sometimes think they can accept another party’s contract terms without much scrutiny, on the basis that it looks like a contract should look and surely couldn’t contain anything too bad. Putting aside the risk that the other party is guilty of falling for one of these myths, the reality is that contracts are very easily skewed to favour one party or the other and you may well be signing up to very onerous terms. In the worst case scenario, the contract may contain something truly oppressive or inappropriate, whether intentionally or not.

4. My terms apply to the contract

Getting terms & conditions drawn up is all well and good but they are worthless if they are not properly incorporated into contracts. Too often, a business will go through the trouble of having terms prepared, and then put them in a drawer never to be seen again.

The rules on the incorporation of terms into a contract can be complex but the basic requirement is that the terms are brought to the other party’s attention before the contract is formed. This will normally mean providing a copy of the terms, or referring to them in whatever order form/quotation/booking or other document you use to record the key details of the contract.

This should be straightforward but things become more difficult when the so-called “battle of the forms” happens, where the other party is trying to impose their own terms on the contract. In this case, it is the terms which were imposed last (at the point at which the contract is made) which prevail.

Simply having a sentence in the terms saying that they apply to the exclusion of any others is not enough, particularly as the other party’s terms will most likely have something similar. In this case, it is important to establish which terms should and do apply to avoid any nasty surprises later on.

5. Nothing in writing, or no signature, means no contract

Some businesses think the opposite of myth #1, that if there is nothing on paper, there is no contract to worry about. They may think they don’t have to perform their obligations, or can get out of paying, or terminate the arrangement immediately and without any liability.

This is not the case. Contracts may be formed orally, as well as in writing, so a contract can be formed by having a discussion. This is one of the key reasons that a comprehensive written contract can be so important as it avoids the risk of disagreements arising over what was discussed and agreed.

Another common mistake is to think that, just because a contract which was prepared or handed over wasn’t signed, it never came into effect. Just as you can enter into a contract orally, you can also do so by writing the terms down, but there is no legal requirement that the document is signed.

It is the intention of the parties that matter, so if a business was to receive a contract from a supplier/customer, and then began to perform its obligations under it (albeit without signing the document), it could be deemed to have accepted the contract.

6. The lawyers are just trying to generate fees – it’s an unnecessary expense

Clearly solicitors need to earn a living and are trying to generate business – but it’s genuinely in the interests of our clients. Without exception, it’s always more difficult to sort out a subsequent problem than it is to do the contract properly in the first place.

Contact us

If you have any queries regarding the contents of this note, or would like advice and assistance with your commercial contracts, we are happy to help. Please feel free to contact Ian Grimley at ian.grimley@roxburghmilkins.com or on 0845 2419500.