Contracts: The devil is in the detail

Negotiating and entering into contracts is all part of a day’s work for executives and business owners. Nevertheless, there can be a lot at stake financially and the decisions made at the contract stage can have long-term and wide-ranging impacts. For most contract arrangements ‘the devil is in the detail’ and it’s often the seemingly insignificant or ‘agreements to agree’ later that end up being the catalyst for dispute.

Watertight contracts aim to fully and clearly describe conditions and outcomes of interactions between two or more parties. While the premise is straightforward enough, contracts usually require careful and considered drafting and review.

Contracts that cover issues such as enterprise bargaining agreements, supply contracts and contracts of sale can be complex and fraught with ambiguity.

Overview
The fundamental purpose of a contract is to apportion risk and liability. It’s therefore important to understand your contractual obligations so you can avoid situations where you become liable for matters that are not your fault or you end up not being paid for provision of products and services.

Protecting yourself and your business starts with implementing standard terms and conditions. These are best developed in conjunction with your legal adviser and often with input from your insurer.

Equally, it’s important that your contracts are accurate and refrain from overpromising, particularly on matters such as scope of works, delivery or completion timeframe(s) and costs.

However, there are circumstances when ‘standard’ contract making processes require even closer consideration, such as when dealing with larger organisations that have significant bargaining power or in some tendering situations where a ‘form of contract’ is dictated.

Regardless, all contracts need to be carefully vetted to ensure the terms of agreement are fair and workable.

#1 Payment risk
To avoid issues that put payment for products and services at risk, contracts can, and should, indicate clear payment terms. These can include requirements for payment up front or scheduled payments, such as a deposit followed by progress payments (noting there are circumstances where this may constitute an instalment contract and you may wish to avoid that also) as alternatives to the riskier circumstances of completing the job and waiting for a lump sum payment.

These considerations must also be taken in context of realistic timeframes for the other party. Unachievable payment terms could result in you not being paid or potentially paying back significant liquidated damages.

Further, wherever possible, forms of security against non-payment should be written into contracts. Identifying any contractual barriers to payment such as the need for approvals or acceptances at key junctures, testing and certifications will also help alleviate any propensity for disputing your contract and its payment milestones and terms.

#2 Information risk
They often look innocuous, but information clauses can place you in an unreasonable or impossible position. Incorrect information provided by the client or another contractor can carry risk that could leave you liable if you failed to check or query that information.

To avoid information risks, it is important for the contact to clearly spell out where the liability sits, especially when you are not at fault.

#3 Warranties and Standard of Works
Generally speaking, contractual warranties should only be offered on past or current work, not future works. Further, it is important to list and provide written descriptions of every warranty that applies to the work.

Contracts also need to articulate standards and deliverables. These clauses should indicate a ‘reasonable’ standard of work completed by an appropriately skilled person performing the work, rather than promising perfection.

#4 Indemnities
As a general rule, any indemnity (which is a contractual agreement to cover a loss suffered by someone else) should reflect an appropriate and accurate assumption of risk. Offering too broad an indemnity provides the risk of being held liable for something that is out of your control or the fault of someone else.

Preferably, your offer of indemnity should cover situations that would most likely be liable according to common law. This would usually include matters of misconduct or negligence.

#5 Insurance
And this is where it is important to garner input from your insurer… Generally, if you accept liability by contract that is over and above what the liability would be at common law, your insurer will not provide cover for you.

Further, contract requirements for insurance cover or policy extensions that you do not currently have need to be sought and agreed upon with your insurer prior to signing a contract.

However, it is often possible to share draft contracts with insurers for advice and amendments that can improve your risk position, or for implementing special insurance arrangements as required in the contract.

#6 Generally
Indefinite timeframes, incomplete details and vague conditions or clauses that provide for “agreements to agree”, where the parties leave material decisions to be agreed at a later stage, commonly result in contractual disputes.

Avoiding ambiguity is the key and this is not easily achieved in complex matters. When entering into contracts, you will be well served to review each of the matters indicated here. Then, if you are unable to satisfy one or more of these fundamentals contract requirements, consider it a red flag and seek legal advice.

For assistance and advice for identifying risks, avoiding adverse outcomes and protecting your interests when drafting or entering into contracts, please contact Zac Herps on (07) 3007 2080 or email contact@executivestrategies.com.au

Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.

The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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