“Is This Contract OK?”

This is a question which anyone who advises on contracts or terms and conditions is frequently asked. It seems quite reasonable at first – but then, what does ‘OK’ mean?

There are several things which may stand out as being ‘not OK’ or unacceptable in a contract – unreasonable liability provisions, restrictive covenants etc – but these can sometimes pale into (almost) insignificance, if we ask a different and wholly more important question: “Does this contract achieve what I want it to?”

In the last few days, I have looked at three separate contracts in relation to which the anser to the first question was ‘yes’, but the answer to the second question was a loud and definite ‘NO!’

In 2 of the 3 cases, whilst in totally different industries, the agreements effectively involved the clients setting up supply chain arrangements under short-term agreements. On the face of it, whilst there were some drafting issues, these could easily have been resolved. However, on digging deeper into what the clients actually believed they were signing up to, I found that in both cases, they were expecting long term, exclusive, product supply agreements – with a long term income stream to match. They were therefore quite shocked when I explained what their contracts actually meant and how limited their rights would be.

In the third case, I was being asked to review terms and conditions, and these were generally ‘OK’ in relation to the products which the client sells. However, the client’s greatest source of income comes from the provision of services – and these were not even mentioned.

As well as creating a huge amount of uncertaintly, the above examples highlight a common problem – which is the tendency to focus upon what a contract contains, rather than what is omitted. This is an especially easy trap for lawyers with no practical commerical experience, and business people with no legal experience, to fall into. It is also a serious side-effect of cut and paste drafting (as to which, see my earlier article: The Cut and Paste Trap.)

So, when reviewing or constructing a contract or a set of terms and conditions, what is the best approach?

Firstly, put any drafts on one side, and get a blank piece of paper!

Write down your own understanding of the arrangement (in English, not ‘legalese’), and try to think chronologically. Then ask how long the arrangement will last, and what each party hopes to get out of it. Finally, think about what the other party (or their successors!) could do which would make the arrangement less profitable or acceptable to you – for example, using your ideas to create a product of their own, or not providing you with the information you need to be able to provide your services on time.

Once you have a clear structure, it is much easier for your or your advisors to answer that all-important question: Does this contact achieve my objectives?’ – and to suggest amendments based upon ensuring that the opportunities for misunderstandings are minimised.

This approach results in a win-win situation and is the basis for building great business relationships – which is the objective of all of us in business!