One of the key problems with contracts is knowing how and when to use them effectively.
This decision should be part of a clear contract strategy. Even if you don’t have a mature contract strategy [read more], any strategy is better than hope! As fellow speaker and internet marketing expert, Ian Brodie, tells me:
Hope is NOT a strategy
No strategy? No problem!
Let me tell you a story, from a case about a popcorn factory, which I tell regularly when discussing contracts with my talk audiences.
Once upon a time, a buyer approached a seller and asked the seller to provide a fire suppression system for a new popcorn factory in Pontefract. The contract discussions progressed nicely, a price was agreed, a standard specification sent and other relevant terms bandied around…
They hit a metaphorical brick wall: neither the seller nor the buyer had any clear contract strategy. Instead of knowing how to record their agreed terms and what further terms needed discussing/agreeing/recording, they adopted a haphazard approach.
The seller sent their quote which referred to their own T&C, but forgot to send those T&C to the buyer.
The buyer sent their confirmation which referred to their T&C, but did not send those T&C to the seller.
What was missing?
Neither of the companies seemed to know:
- how to create a contract
- how to record their agreement with precision – instead of relying on standard T&C
- what terms they ideally wanted in a contract including scope, aims, risks
- how to negotiate between competing T&C
- which aims took priority
- which risks should be taken into account (eg catastrophic fire) & who should bear those risks
- how to manage the contract process
- how to self-audit their contract process to spot mistakes
The result was that when a dispute occurred (and a multi-million pound claim was raised), they had first to determine the terms of the contract between the parties.
And the difference?
- If the seller’s T&C has been part of the contract, and correctly drafted, the seller might have limited its liability to mere thousands of pounds.
- If the buyer’s T&C had been part of the contract and correctly drafted, the buyer might have recovered its full £110m claim.
Instead a mere (!) £34m was paid by the seller (or its insurers) to the buyer. Both suffered hugely from their respective failures to have a coherent, clear contract strategy.
What should you do?
If this story has made you want to do better next time, then you could:
- audit and simplify your contract processes to meet your needs
- agree all relevant terms
- create fair terms to build trust
- agree the key aim for your projects and ensure your T&C reflect that aim
- exclude supplier liability for losses that the buyer can reasonably be expected to insure against (see Goodlife v Hall )
Cases: Trebor Bassett Holdings Ltd (2) The Cadbury UK Partnership v ADT Fire and Security plc  EWCA Civ 1158; Goodlife Foods Ltd v Hall Fire Protection Ltd  EWHC 767