Negotiating clever contracts
There’s a country music song by Adam Harvey that talks about Grandad coming by the office and being amazed by all the papers that need signing.
In the song, Grandad says it was different when he was young when the “shake of a hand” was all you needed and the strength of a man was in his word, and you could look him in the eye and know just where you stand.
Steven Brown, director with Lynn and Brown Lawyers, says a handshake can help with trust and integrity and in knowing the person you’re working with, “but when push comes to shove, money can make people do funny things,” he says.
“I’d always want the reassurance of a clear, well drafted contract, otherwise you could end up paying me or another lawyer a lot of money to resolve the dispute.”
The aim of a contract is to avoid a dispute. If you can clearly define both parties’ rights and obligations there’s less chance of conflict because the expectations of both parties and what they’ll receive out of the relationship is known from the start.
In the long-term, making things clear in a contract can lead to a better working relationship.
Brown says businesses need a contract when entering into any form of commercial arrangement where they’re looking to either get something out of it or refrain someone from doing something.
If someone is not willing to sign a contract “that would throw up alarm bells for me,” he says.
If you’re embarking on contract negotiations, Brown gives these tips based on the common problems that he sees:
It’s Important the contract works for both parties: A one sided contract does not promote a good, long-term working relationship. “There has to be give and take,” he says.
Risk: A good contract defines the risks to both parties. “You need to decide ‘am I willing to take that risk for the potential return, and/or can I insure (with an insurance policy) against that potential risk”. Alternatively, consider if it’s worthwhile taking on certain risks for the potential financial reward.
Compromise: Know what you are not willing to compromise on. There might be certain things regarding warrantees or future restraints (i.e. working with other businesses), or liability issues that you know beforehand that you won’t compromise on – perhaps it’s contrary to your business’s policies. Also, have your best-case scenarios but know what you will compromise to get the contract over the line.
Clarity: Brown sees many contracts that are vague and poorly drafted which makes it unclear about what’s been agreed. He says there is a growing trend to word contracts in simple English rather than legalese because the contracts need to be read by managers, operations officers, etc in their day to day work.
Stipulate “what if?”: A contract needs fallback for the “what if?” problems. A well drafted contract will say ‘if this happens, this is what will occur’ or ‘these are the rights around doing something about the problem’ or ‘how we will do something about it’.
How it’s signed (executed): You can accept a contract in many different ways but the best practice is to have it signed and witnessed, which the Corporations Act clarifies.
Ensure the person signing the contract has authority to sign because in many cases the wrong person signs. Contracts can be executed by email where terms and conditions are specifically accepted. Often this is in conjunction with a deposit being paid.
Some people have an online link for the other party to click on that says, “I accept”. Meanwhile, the words “I accept, please proceed” is also counted as making a contract valid.
Brown often sees problems when one party sends their terms and conditions to the other, and the other party sends theirs back and then both starts working with each other. In that case there’s a big question about whose terms and conditions apply because there is no signature.
Get advice: “What I do know from doing this job for 23 years is the cost of getting upfront advice is tenfold less than the cost of dealing with a problem after the issue arises,” Brown says. The time to cost to prepare or receive advice on a contract is much smaller than the stress, cost and down time to deal with a dispute.
Put resolution clauses in the contract: If there is a dispute, how will you resolve it? Will there be steps of action? Will you talk together to resolve it? Will you use an independent, experienced mediator to help you find a resolution? Will you go to arbitration and be bound by the final decision of the arbitrator? (You do have the ability to appeal the arbitrator’s decision). The Law Society of WA can direct you to accredited arbitrators and mediators.
Brown says most civil disputes are resolved through mediation or the next step which is arbitration. If your dispute ended up in court, you would need to go through a court process which involves mediation anyway.
“Only 1.2 per cent of the civil disputes that came before the District Court of WA in the financial year 2017/18 were resolved by a trial-based resolution. The other 98.8 per cent are resolved before trial, usually by the parties negotiating an outcome,” he says.