Contracts with clients and suppliers are an important part of business. As an employee or business owner, you understand how important it is to make sure that you don’t do anything which might lead to your business breaching a contract. Did you know that the quality of your written communications can inadvertently lead to a breach of contract if you’re not careful?
At law, the terms of a contract don’t have to be formally documented on nice paper and with the signatures of each party. They can be the combination of a series of emails, a handwritten note and the actions of two or more parties. The terms of a contract can also be determined from the current actual conduct of the parties rather than an older formal contract that may have been sitting in a drawer.
Generally, the law requires that one party makes an offer which is accepted by the other party, the parties intended to create a legal relationship between them, the parties exchange some form of payment (whether monetary or otherwise), that both of the parties are legally able to enter into contracts, do so with consent and do not enter into an illegal contract, for a valid contract to exist. In most business situations, both parties are legally able to enter into contracts, do so with consent and they are not for illegal goods or services so the main focus is on the first three elements of a contract.
Sometimes formally documenting and signing every contract in business is not warranted, and that’s okay, as long as both parties are aware of their rights and responsibilities. However, formal contracts help to increase productivity and reduce misunderstandings by clearly set out the rights and responsibilities of each party. Let’s look at some of the more common scenarios that you might not realise that can lead to the existence of a contract and inadvertently breaching it.
We often use handwritten notes as records of our conversations with others. Most contracts don’t have to be in writing unless the law specifies it, such as for the sale of land. So, the combination of a conversation with a client offering goods or services and the client agreeing, the calculation of figures for payment in a handwritten note and a handshake (showing your intention to be bound to the promise) can be enough to create a contract.
This kind of contract can be easily breached when one party starts on providing the goods and services while expecting to be paid. When the other party refuses to pay, this can be a breach of the contract. The first party can be at a loss for the time and money already spent to provide the goods or services.
If you would like to enter into a formal contract, it is good business practice to make sure any handwritten notes, particularly those that are being kept by another party, are marked with words such as “Without Prejudice – Agreement Subject to Execution of Formal Contract”. This makes it clear to the reader that the parties do not intend to create a legal relationship until they sign a formal contract, and therefore an informal contract has not been created.
Text Messages or Instant Online Messages
With the rise in text messaging and instant online messages through social media, this form of communication has become a normal way to engage with potential clients. How often have you had a negotiation with a potential client only for the meeting or phone call to end without coming to an agreement? It is very possible for a quick follow up text message or online message to say “Thanks for the meeting, I accept your offer,” which creates a contract between the parties.
This kind of contract can be easily breached if the original party thinks that a contract hasn’t been entered into and makes an offer to sell the same goods to a second potential client. If they reach agreement with the second potential client before the first potential client replies with an acceptance of the original offer, hasn’t the original party entered into two contracts for the same goods? Inevitably, the original party will end up breaching one of the contracts.
If you would like to enter into a formal contract, it is a good idea to end the meeting with a clear understanding among the parties that there is no agreement until a formal contract is executed or set a time limit for accepting any offer after which there will be no agreement. This could be as simple as sending a quick follow up text message or online message yourself along the lines of “Thanks for the meeting, I look forward to further negotiating with you until we execute a formal contract,” or “Thanks for the meeting. If I don’t receive your acceptance by 5pm today then I withdraw my offer.” If you do not execute a formal agreement or have not received an acceptable by 5pm that day, then you’ll be confident that there is no contract and you’ll be free to offer the goods or services to another party.
We generally use email every single day in business and most of us will have used email to progress business deals. While emails are a way to communicate faster, it can often take a while to receive a response from someone if they are particularly busy. Then factor in all of the other emails and tasks we attend to ourselves while waiting for one particular email to arrive, and the disjointedness of a chain of one-liners emails. This can create a level of distraction and confusion in a business negotiation, leading to situations where one party believes they have reached an agreement whereas the other party is unclear on whether they’ve reached an agreement let alone what the exact terms are.
This kind of contract can be easily breached when both parties start to perform their responsibilities, but then come to a disagreement as to exactly what they are. One party will continue to perform thecontract based on their understanding of what their responsibilities are, and the other party disagrees and declares that the first party is breaching the terms of the agreement.
If you’d like to enter into a formal contract, it is essential to mark any emails that involve any discussions or negotiations about the terms of a business deal with “Without prejudice – Agreement Subject to Execution of Formal Contract”. Better yet, it is wise to get into the habit of using one document to include a single record of all of the terms that are currently being negotiated and are subject to a formal contract being executed. Often called a “Terms Sheet”, using these documents show that the parties are clearly negotiating and do not intend to form a contract until the agreement is made into a formal contract and executed.
Poorly Prepared Contracts
Sometimes you may be presented with a contract that has been written quickly or prepared by someone with little or no legal background. Other times, it may be a contract that has been used for another business deal and changed or had sections deleted to make it shorter.
It is very easy to inadvertently breach a poorly prepared contract because in these situations, it is generally not clear what the parties intended. Where the poorly written contract doesn’t clearly set out the rights and responsibilities of the parties, at law, you must look at other evidence to determine what the parties to the deal actually meant. This means that the contract in the situation can be a combination of the poorly written contract, some conversations and a series of email exchanges. Worse yet, if the parties didn’t discuss a specific aspect of the deal in an email exchange and the poorly written contract is actually clear on that point, then you could end up with a term in a contract that is clear but that you’re really not happy about.
The best thing you can do in this situation is actually read the contract. If it is difficult to understand, doesn’t accurately include what has been negotiated or doesn’t deal with important aspects such as the rights and responsibilities of each party and the processes for payments and termination, then it will need to be reviewed by a lawyer and amended. A good commercial lawyer will draft a contract that is easy to understand and make all of the rights and responsibilities of each party very clear. A well drafted contract will provide excellent guidance for a solid business relationship with your client or supplier and if the relationship should crumble, the contract will provide practical avenues for the parties to pursue to recover any losses.
Make It a Better Deal
There are actions you can implement to make every agreement a better deal. First, think about which business deals you are happy for informal agreements and which deals are important enough to document in a formal agreement. Second, for the deals that you’d like to formalise, get into the habit of making sure the words “Without Prejudice – Agreement Subject to Execution of Formal Contract” are included at the top of any emails or terms sheet documents, or this message is very clear in any meetings or text or online message conversations to make your intention clear that you do not intend to create a legal relationship for any agreement until a formal contract is drafted and executed. Third, ask your lawyer to draft an appropriate contract with accurately reflects eachelement of your deal. Your lawyer can also provide advice on what else may need to be included in the agreement and assist you with your negotiations.
* With over 10 years’ experience, Deborah practices in all aspects of property, commercial and related areas of law in both the Northern Territory and Queensland in Australia.
Deborah has significant experience in residential, commercial and retail property law assisting home owners, investors and developers to realise their desired outcomes with acquisitions, disposals, development, leasing and portfolio management. She also has very diverse experience in property and commercial law working with small businesses and as in-house lawyer for a large organisation (including working closely with government on projects).
Deborah is a trusted legal advisor who makes astute recommendations based on practical realities and good business sense. Importantly, she is able to realise desired outcomes in an efficient and effective manner. As a wife, mother and member of the Defence community, Deborah takes a proactive approach to managing legal matters and has an innate ability to find effective and achievable solutions to legal problems which may arise.
Qualifications – Bachelor of Laws (with Honours) (2005), Bachelor of Arts in Psychology (2005), Graduate Diploma in Legal Practice (2006), Master of Laws (2010), Wife and Mummy.
Memberships – Northern Territory Law Society, Queensland Law Society.
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