Contracts: The devil is in the detail

Signing contracts with suppliers is an everyday occurrence in business. This article highlights the need to look carefully at each contract to ensure it leads to the outcome that is desired and avoids any unpleasant surprises further down the track.

All too often business people want to exita contract only to find that they have noright to terminate and they are tied into anexpensive and undesirable arrangementfor the next two, five, or even 10 years.

In the absence of a technical 'out', thelegal remedies can be limited, high riskand expensive.

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Sometimes the contractual terms are notable to be read at the time of signing. Forinstance a schedule may be presentedwhich refers to standard terms andconditions and it is all signed there andthen, without proper consideration ofapplicable documentation.

Always carefully read all the contract'sterms and conditions (T&Cs). Theseagreements may seem straightforwardand 'standard', but there can be costlyconsequences when things go wrong –

which could be avoided with an hour ortwo of professional advice at the start.

The standard T&Cs can sometimes berenegotiated. Any variations should berecorded in the agreement; do not relyon a verbal variation to a written contract.

Standard form contracts

Standard form contracts are usually writtenfor the benefit of the party presenting thecontract. For consumers, the ConsumerGuarantees Act 1993, which cannot becontracted out of, provides some degreeof protection. Commercial parties, on theother hand, are taken to understand theconsequences of everything they sign andcontracts will not, under that Act, be voidedbecause terms are believed to unfair oreven oppressive.

Common pitfalls

Some common pitfalls in standard formagreements are:

Breach of contract: Usually the breachclause provides a strong remedy for theother party if you breach the contract.

This, however, does not usually go bothways. Often you might find that you donot even have the product or are nolonger provided with the service, and yetyou may still be bound to pay some orall of the contract price.

Another common occurrence is thatthese contracts can limit the damagesthat could be claimed for the otherparty's breach. Consider the risk towhich your business could be exposedshould the other party not fulfil their sideof the deal? Are the damages providedfor in the contract sufficient?

Contract termination: Who has the rightto cancel the contract and on whatconditions? Often there is an initial termand a subsequent right to cancel therun-on contract. If this is the case, bevery careful to ensure that the initialterm is short. What seems like a goodprice today could be very expensivewhen paying for a service that you donot want for the next 10 years.

Another common pitfall can be that onlythe party that drafts the contract has theright to cancel, while the other party istied in until the term has run its course,

regardless of performance issues. If you cannot renegotiate this condition, thenensure that the term is short, perhapswith rights of renewal, rather thansigning up for a long-term commitment.

Negotiated terms and conditions: Manystandard form agreements have a clausethat specifically excludes anynegotiations or other agreements frombeing part of the contract. As notedabove, if special T&Cs are negotiatedensure that they are part of the writtenagreement. To avoid doubt, ensure thatthe written variations documenting thenegotiations are cross referenced to thisclause and vice versa.

This is by no means an exhaustive list, butdoes provide a useful starting point for thecritical analysis of a contract's T&Cs.

A contract may look favourable at the timeof signing, but a lot can happen in a coupleof years. We strongly recommend cautionabout committing to long term contracts,

particularly where the terms for remediesor exit could be one-sided. Legal advicebefore you sign can save a great deal ofmoney and anxiety later and/or give youthe information to renegotiate on betterterms. Remember, the devil is in the detail.

Source: By Kate Hay, Wilkinson Adams, Dunedin. This article first appeared in the Summer 2008 edition of Fineprint , client newsletter of NZ LAW Limited members www.nzlaw.co.nz

Posted: 18 Mar 2008