Contract disputes – common pitfalls

When considering contracts, most businesses immediately focus on the big-ticket items like multimillion pound deals and buying or selling entire companies. The reality is that most of a business’ day to day work with anyone outside of the business, will at some point involve a contract – even if that contract is just an email chain between the parties, or a phone call between the directors.

Whilst contracts do need to contain certain requirements: offer, acceptance, consideration, capacity and intention to be bound – these key contractual elements come to pass all too easily.

Take a telephone conversation between director A and B:

Director A: “We’ll provide you the materials you need at market rate, plus 10%”.

Director B: “Yes that works, make my life easy and please deliver them to site?”

All of the elements for a contract are present, but there are more questions than answers, such as:

• who is paying for delivery
• how long is it allowed to take for the materials to be delivered;
• when does the risk pass to the new owner;
• what is the exact quantity of materials – is it just the materials needed today, or for the next six months, or until the job is completed;
• to what standard do they need to be;
• does either party have the right to terminate this contract?

Or perhaps the facilities manager is looking to upgrade the phone system, which they do every couple of years, so meets with the communications company. After hearing their very polished pitch and presentation, the facilities manager signs up to their services on the communications company’s standard terms. The business then finds that the handsets in the pitch were the deluxe versions, which cost extra, and:

• the contract only provides for the standard models without touchscreen interface;
• the initial term is 2 years but auto renews for 5 years unless you give notice exactly 31 clear business days prior to the end of the initial term;
• and by the way, the annual fee increases each year by 10%.

As these examples show, contracts have a way of creeping up on businesses. This can result in contact disputes when companies find they’re tied into situations which have escalated far beyond what they originally envisaged.

The best time to get advice on a contract is always before you enter into it. Whilst this is sound legal advice, I  acknowledge that practically speaking it is not always possible. So here are some things to be on the lookout for.

Beware the click and tap

In this digital age, where everything is agreed on smartphones and tablets, it is easy to ‘click and tap’ through various dialogue boxes quickly to get to what you want to be looking at.

So, the first pitfall to avoid is not reading the terms you are agreeing to. Of course, we’ve all just signed up to contracts without reading because it’s easier, or we want what the supplier is selling to us. From little things like ‘I want this phone contract, so I’ll just sign’ to ‘these are their standard terms, so I guess I’ll just have to sign them if I want the goods’.

Reading the terms first means you make an informed decision – do I really want these goods/services; do I want them enough to agree to these specific terms. Sometimes, it’s not the initial price that makes something a bad deal for your business, but all of the extra terms that come with it – like auto-renewing if you do not cancel on a specific day of the year; annual increases to fees; or exit fees.

Knowing your rights under a contract before you enter into it, allows you to protect your business, and it also means that you know when to enforce your rights against the other party. A contract can be both a sword and a shield when protecting your business.

Term Length

I’ve already mentioned the dreaded auto-renew clause, extending the length of the contract beyond what was originally envisaged. This is part and parcel of the second pitfall to avoid – not knowing how long the contract is before signing up.

Again, seems simple, but one of the most common types of contract dispute is when parties aren’t aware of how long the contract will last for, and find out too late that they are tied into a long-term arrangement. Most often it’s clear whether something is a one-time deal or a long-term arrangement, but where many businesses get caught out is automatic renewal.

You may think you are signing up to a short-term contract, but it continues to renew automatically, extending the contract indefinitely unless specific action is taken. Some auto-renew clauses are very specific and only give you a small window in which to terminate the contract. If you don’t take the opportunity to cancel, then the contract automatically extends for another long period before that window appears again. If you don’t catch the automatic renewal provision in time, you can find yourself in for the long-haul with no way out except incurring heavy fees or being sued for breach of contract.

Termination

The third pitfall is not knowing how to terminate a contact before signing up to it. Many businesses assume that there is always a right to terminate any contract whenever they decide to. Regrettably, whilst there may be a common law right of termination, the contracts’ terms take precedence, and businesses often find themselves subject to termination provisions which favour the other party or only allow them to terminate for very specific reasons e.g. insolvency of one of the parties.

Depending on the termination clause within the contract, if you are just unhappy with the costs you are paying, simply want to move on, or in some cases even where you feel that the service provided is substandard, that may not be enough to allow you to terminate. It is therefore essential to make sure, before you sign a contract, that you have the right to terminate it, particularly when the goods or services provided are substandard.

Consequences of Termination

Closely linked with how to terminate, is not realising the consequences of doing so. Even when you’ve checked that you are not subject to overly onerous termination procedures or requirements, it is also worth checking that you are not held to anything post termination. This could be clauses which survive termination, meaning that you remain under continuing obligations, for example: confidentiality, non-compete or insurances clauses. It could also be clauses that, for example, require the terminating party to pay the other party a fee for terminating no matter the reason for the termination.

Negotiate

Negotiation, after a thorough reading of the contract, is the key to avoiding all of these pitfalls and ensuring that all the contracts you enter into are beneficial to your business. A careful reading of all of the terms allows you to understand the other party’s goals and so puts you in a position of strength to negotiate from. You know best what your business needs and what it can afford, and from there you can negotiate yourself into a better contract.

Very few contracts are set in stone and as old adage goes “if you don’t ask, you don’t get!” A considered and negotiated contract is far less likely to result in contract disputes further down the line, saving the business both time and money.

Whilst all businesses can, and should, negotiate their own contracts; the bigger the impact of the contract on your business, the more important it is to get legal advice before signing.

For expert legal advice on contracts and contractual disputes contact our Dispute Resolution Team.