Some Practical Contract Law Advice for Business

 

by Michael V. Coyle, JD*

The law of contract is to business what air is to a human being. You can’t live without it. The whole business world is based on contract law.

For the purposes of this short article, there are essentially two kinds of business contracts.

First, there are routine, pre-printed contracts that we all sign, sometimes on a daily basis, for things like sending a parcel (yes, that is a contract you are signing) or a photocopier lease or a software license agreement, and even insurance policies. These are prepared by the vendor, for the vendor, and they often have pages of “fine print” containing terms that are for all practical purposes “non-negotiable”. You can’t negotiate better contract terms for your parcel delivery with the FedEx guy who comes to pick it up. It’s basically “take it or leave it”.

Most people don’t actually read these contracts before signing them and are content to assume that they must be “standard”. They trust that competition for their business in the marketplace must mean that these contracts are “all the same” among competing vendors. That may or may not be true and, while I would be remiss if I didn’t say “be careful what you sign”, the fact is you don’t really have much choice if you want the product or service. Most people understand – and are willing to accept – that if there is ever a dispute under one of these “agreements” you probably won’t have the proverbial leg to stand on. That’s just how it is.

Then there are the contracts – often much more critical to the success of your business – like premises leases, major sales or supplier contracts – where you do have more control over “the deal”. Most business people understand that there is some kind of role for a lawyer with these contracts, but many, in my experience, seem to have little idea what that is. All they really know is that seeing a lawyer will cost them money and that is to be avoided as much as possible.

In the typical scenario, “the deal” is negotiated by the business people and one will announce (magnanimously) that he will have his lawyer “write it up” and that the other party can have her own lawyer “look it over”, followed by smiles and handshakes all around. Done deal, right?

Wrong. What a lot of people don’t seem to understand is that, in the eyes of the law, “the deal” is actually the written contract, not what the parties promised each other during negotiations.

It seems that we’ve gotten so used to signing whatever document is put in front of us that some people now think that it literally doesn’t matter what the contract actually says. I can’t tell you how many times I’ve had a business person tell me, “I know what the contract means because I was there when the deal was done.”

Many people genuinely believe that that when a dispute arises they can just come into court and tell the judge what “the deal” was and the judge will then ignore the written contract (and, presumably, the competing evidence of the other party) and will go with that person’s version of “the deal” as the contract.  These folks will say that their version of “the deal” is far more credible than the other party’s because, as they always put it, “I would never have agreed to that!”

They are often very surprised to learn that it is the written contract that governs in court, not what the parties said to each other during negotiations. With very few exceptions, any evidence of what the parties said to each other, or about what they believed in their own minds during negotiations leading up to a signed contract, is strictly prohibited in court. It is well established that that the judge is confined by what the contract actually says, and will not consider what one party later says “the deal” was supposed to be.

The reason for that is simple: commercial certainty. If one party’s understanding of what the contract meant to them took precedence over the words used in a written agreement, that would mean that no contract would be safe. Every contract could be overturned and nobody could be sure if any contract could be enforced. Without contractual certainty there could be no commerce.

Put another way, if a person could avoid their contracts just by saying “I would never have agreed to that!” there would be no contract worth having.

So it is the lawyer’s job, whether they are hired to draft the document or to review it for their client, to make sure that the contract would be interpreted by a judge in the way their client understood “the deal”.

That means, of course, that you have to tell the lawyer what you understand “the deal” to be. Many times over the years a business client has sent me a contract to “look over” without saying a word about what they think it means or what they want it to accomplish. It is as though their own intentions for the contract should be completely obvious to me just from reading a document prepared by the other party.

The truth is that, for most people, the thought that there might ever be a disagreement over the contract or that it would ever have to be legally enforced is the farthest thing from their minds. As far as they are concerned, they have just done a fantastic deal and they shook hands on it and now they just “want to get it signed”. The last thing they want to hear about is the possibility that some unknown dispute might arise in the future. “That won’t happen,” they say.

And they might just be right. It could be that no dispute will ever arise and things will go exactly as they hoped for the entire life of the contract. That can happen.

Or they could be wrong. A dispute could arise that might be disastrous for their business. They could be very glad indeed they saw a lawyer who took the time to understand “the deal” from their perspective and who made sure their interests were legally protected.

*Michael Coyle is an experienced lawyer and a neutral mediator and arbitrator based in Kentville, Nova Scotia. Information expressed in this article is meant for general interest only and is not a substitute for legal advice about your own situation. 

©Michael V. Coyle, 2012

 

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