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Should you expect your legal agreement to be “bullet-proof”?
by Startacus Admin
Legal eagle Thomas Taylor writes for Startacus on a number of important UK business legal issues. Following on nicely from his previous article on What makes a legal agreement binding, Thomas returns with a great follow up consideration - Should you expect your legal agreement to be bullet-proof?
UK Startup Founders’ pens at the ready...
Many people expect that because an agreement is legally binding, it can be relied upon if it is broken to force the other side to fulfil his or her side of the bargain, or to compensate them for their loss.
When you are drawing up an agreement in writing, you should make sure it is legally binding (you might want to read my previous post on what makes an agreement binding), but you also need to consider the scope it covers – what each side is committing to (or not) – and whether that is enough or too much.
The following is a simple example.
You and I agree that you will pay me a fixed sum in advance, and in return I will deliver 10 of your letters to any addresses in the UK. One of the 10 letters you give me is to an address in Germany so I refuse to take it. I would hope that most people would say that I was entitled to refuse to deliver the letter because it was outside the scope of the agreement. My obligations wouldn’t be met though, so you could still expect me to deliver one more letter to the UK in its place (so fulfilling the contract).
Now consider whether I would be right to refuse to deliver one an item addressed to someone in the UK but with cardboard wrapping, weighing a kilo and with physical dimensions of 30cm by 20cm by 10cm? We haven’t agreed on what a letter is. So whether I am breaking the contract or not depends on the subjective definition of what is a letter.
If we wanted a “watertight” agreement, we would have to define what a letter is exactly. We would also have to define every other possibly obscure word, such as an address.
You can write a very thorough agreement, but it isn’t practical to cover every possible aspect of the deal. For example, the above simple agreement does not cover timing, which perhaps you haven’t considered until I mention it now, but which you would agree might be important to you. What about whether I have to deliver the letters in person? A complex contract could require thousands of points to be covered, and that would come at a high price.
So it isn’t really black and white whether a particular document is legally binding. There are different shades of grey depending on the circumstances.
Grey areas caused by a lack of scope can be advantageous to you. If you want to avoid an obligation (such as having to deliver the letters within a short timeframe), make sure that it is not mentioned in the contract. You can do this by volunteering to be the party that gets the agreement written up. If you do that, it will be unlikely that other side will even notice your omission, unless they employ a lawyer with a particularly keen eye for detail.
Another grey area comes about through misleading the other side. If a term isn’t legally enforceable, it usually doesn’t invalidate the whole contract – just that term. Statute law, passed by parliament, often gives rights to one party that cannot be reduced in a contract. However, not many people know their rights. It is common for a legal draftsman to try to benefit his client in a contract by including terms that “grant” reduced rights to the other side, hoping that the other side complies with them. They aren’t legally binding and they don’t invalidate the rest of the contract.
In summary so far, a good contract is useful to have, but it’s not a failsafe.
You don’t really ever want to have to test an agreement in court. Going to court is expensive in time, money and stress, and takes you away from running your business. You also aren’t guaranteed that you will obtain the compensation you think you are due (for example, you might not receive a reimbursement for your costs if the other side is bankrupt).
Better is to make sure the scope of the contract addresses as many of your risks as possible, and then reduce them further in other ways outside of the contract. For example: you might buy insurance; or contract with a number of delivery partners with surplus capacity so that if any individual one failed another could pick up the work; or split a large project into smaller, distinct phases and link payment to the completion of each phase. Exactly what you could do depends on the circumstances. The point is that with planning, you can reduce many of the same risks that you are relying on your legally binding contract to protect you from.
Thomas Taylor is a director of Net Lawman, an alternative for small and growing businesses to using a solicitor to obtain legal documents. He is a qualified accountant (FCCA, FPA/FIPA).
If you like this post from Thomas, you might also like some of his other posts including: