Most businesses enter into contracts to provide goods or services in return for the payment of money. Some of these contracts can have important implications for the contracting party. Where such important contracts are presented for signature a business owner needs to decide whether or not to obtain legal advice on what he is about to sign.
There may be a number of considerations but if the potential financial impact of the contract on the business is high then it can be important for that person to understand what the contract means! It may be tempting to think that the contract means what it says. Here are four reasons why that may not be so!
1. The meaning of the words used
The main purpose of a written document is to ensure that both parties understand their contractual obligations in which they are about to enter so as to avoid confusion. However, it is easy to read a contract quickly and assume that it has the effect that you want it to have. It is surprising how many people who have entered into a contract are then surprised to find that the words used in the contract mean something quite different to what they had previously thought.
Where discussions have taken place beforehand, therefore, it is important to ensure that the written contract properly reflects the understanding of the contractual position that the parties may have had following previous discussions; nothing more, nothing less. The introduction of additional “standard” clauses may substantially change the balance of risk that the parties had intended to take. Do not assume that because the contract runs to several pages that all the provisions will operate in your favour.
2. Omissions from the contract – the default position
When reading a contract that is placed in front of you, it is much easier to make an attempt to interpret the words that are in the contract that has been produced than it is to identify the words that may be missing i.e. those areas which ought to have been provided for in the contract but are not in fact mentioned. When it comes to a later interpretation of the contractual position, the written contract may give no guidance on important matters whether or not they had previously been discussed. If the contract contains an “entire agreement” clause, it may be difficult to rely on representations which have been made unless they are referred to in the document.
In such circumstances, the court has to fall back on what might be termed the “default position”. It may or may not be necessary to include a clause to cover a situation which is not expressly referred to in the contract. It all depends on what the default position is and whether this needs to be changed. Therefore, it is important to identify the areas that the contract doesn’t cover to ensure that you understand what might happen if a problem arises in that area.
3. What a document is called may not be an indication of its effect.
There are certain situations in which a legal relationship could be construed in one of two or more different ways. A typical example relates to employment or consultancy arrangements.
If someone is regarded as an employee, they acquire a whole raft of statutory rights including the right not to be unfairly dismissed, paid holiday, sick leave and maternity pay. There can be circumstances where both parties may decide that they would prefer the arrangement to operate on a more informal “consultancy” arrangement i.e. where the individual is engaged as an independent contractor and will pay his own tax and national insurance.
These arrangements may work perfectly well whilst the parties are getting on, but if the relationship breaks down, the individual may try to argue that he has been an employee all along.
Whether the individual has become an employee or has remained an independent contractor will depend upon a variety of factors which may include
- The element of personal choice being exercised by the individual;
- The degree of control by the company;
- The manner in which payment is made;
- Who provided the individual’s work equipment
Almost invariably, the description applied to the contract (consultancy or employment) will be irrelevant.
4. Terms may be implied or affected by Statute
Even if the wording of the contract looks as though it is easy to interpret, proper note must be taken of the effect of the statutes or regulations which may restrict the way that the parties can contract with each other.
For example, the interpretation of any business to business contract may be affected by any one of the following
- Restrictions of the ability to exclude or limit liability imposed by the Unfair Contract Terms Act 1977;
- Terms implied by the Sale of Good Act 1979, the Sale of Good and Services Act 1982