Good Contracts Prevent Disputes: A Practical Guide to Better Drafting

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

Many business disputes could have been avoided or mitigated with better drafted contracts.

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Today we're talking about why good contracts don't just protect you, they prevent disputes from happening in the first place.

To do that, I'm joined by Director Jess Hill.

Welcome back to the podcast, Jess.

Thanks, Andrew.

This is an interesting topic because all of the other topics we've talked about are subject matter specific.

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Now today what we're going to be going through is really more contractual drafting and perhaps, I guess, some of the principles to keep in mind, and then how those affect the actual day-to-day.

Yeah, it's an interesting topic because contracts as a group is so, so broad.

0:57
It's everything basically that's written down. And you know, that can be contracts for manufacturing agreements, distribution agreements, supplier agreements and a whole host of other contracts that exist in day-to-day business terms and conditions.

1:15
It's really very, very broad, but the same principles apply across all of those contracts.

So I'm going to start today by doing something a little bit different and going to, I guess, some frequently asked questions, or what I like to call a bit of a lightning round, because I think you would get these questions a lot as a contract lawyer.

1:36
Do I need a lawyer to review a contract?

Yes and no.

It depends on the complexity of the contract. It depends on how familiar you are with contracts.

There are lots of people who are in business who see these things day in, day out.

1:52
They're very familiar with them. They're very well equipped to review the contract themselves.

For smaller businesses or businesses who don't do these sorts of things as often, or if it's new or something different that they're doing, yes, you should always get the contract reviewed.

2:10
There is a cost to it of course, but it can often save you a lot of money in the long run getting that contract right in the first place.

Can I have a contract orally?

You can. Contracts exist orally.

2:26
Typically if you've got an oral contract, it will have some terms that are oral and some terms that are implied by law because you may not have discussed, and in fact, I'm guaranteed you won't have discussed every single clause in your oral contract.

2:46
And so there will be terms that get implied by law.

And typically when you're getting into what are those implied terms, that's where you've got a court who is deciding what are the implied terms that are included.

And then there's also things that are included by practice.

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You know, you may not have discussed it, but you've always done something a certain way that has become part of the contract.

The problem with oral contracts, of course, is that.

She said, she said, right?

That's exactly it.

And what everyone may have agreed and their memory can become faulty if there's a dispute.

Oh no, I never agreed that.

Oh, I don't remember that.

Oh no, that wasn't what we intended.

3:24
And then you're getting into a costly and, you know, long-running dispute in the court.

It's always preferable to put it into writing.

Even if it is a short contract, it's always preferable to put it into writing.

3:40
That segues into the next question.

Can I rely on emails as a contract?

Emails can form part of a contract, and if they're sufficiently robust, they may become a whole contract.

It's not necessarily great because obviously if things are in different emails, if some of the emails contradict what is in another email, then what were the actual intended terms?

4:11
We often see it with everyone has agreed on a certain set of terms and then there'll be another email that says, no, I want to do this thing.

And then it's like, well, which one prevails?

What are the parties doing in practice?

Again, you'll end up with implied terms because you won't have dealt with everything in your emails.

4:30
So they're better than an oral contract because at least you've got something in writing.

But again, it's not ideal.

And again, it will depend on how fulsome those emails are.

If you've got one email that's got four lines in it, it's probably not going to be that valuable.

4:47
If you've got a trail of emails that have hundreds of lines in them, maybe there's a full contract in that.

A thought struck me. Something someone said to me once about contracts was sometimes it's not what's in the contract, it's what is not in the contract. Would you say that's true?

5:03
100%.

A contract that has been either poorly drafted or with incomplete instructions, or it's just been forgotten about certain things.

You end up with a situation where the contract is silent on critical items.

5:20
And some of the things that we see around that is, you know, around terminating the contract.

Can you terminate it? Can't you terminate it? What does that look like?

What happens if a dispute arises, if there's no dispute resolution clauses in your contract?

And just practical things, does the contract contain all the commercial terms that the parties have agreed, or are there gaps in that?

5:45
Are there gaps in the process of how you order, how you invoice, things like that?

And then you've got ambiguity.

The whole purpose of having a contract is certainty.

That's really all that you are paying for.

6:01
You are paying for that certainty.

You are paying for everyone to understand what their rights and obligations are and making it as clear as possible.

And so a contract that doesn't deal with everything it needs to deal with is not that valuable.

Well, I guess there's two types of contractual disputes.

One would be in relation to the facts, you know, did A happen or didn't it happen?

6:26
And the parties dispute whether or not it happened in reality.

But the other type of dispute would be what does this clause actually do or does it apply?

As you said, all these different type of scenarios.

And your contract can't avoid a dispute over whether or not something happened in practice, in fact or not, but it can avoid that second category.

6:48
Yeah, it can avoid the category that talks about, you know, what was I obligated to do?

Was I obligated to do this thing or not?

Was I entitled to do this thing or not?

It's those kind of disputes that it prevents.

And yes, it can't change a factual scenario.

7:06
Either something happened or it didn't happen.

But a contract that contains, for example, a good dispute resolution clause can help with that first dispute, because at least maybe the parties have to sit down and try and sort it out themselves.

It can help from a jurisdiction clause.

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Where are we having this fight?

Are we having it in Australia? Are we having it somewhere else?

So even though it can't resolve the first category of disputes, it can help with the first category of disputes.

But, you know, it's really those second ones that are critical.

7:41
What does the contract obligate me to do or not do?

And then has the party done or not done that thing?

And what's your sort of mindset or method about doing that? When you've got a contract on your desk, what's the process you go through to try to work out whether or not it's a good contract or not?

7:58
I mean, the first point is always to get instructions from the client about what they care about, what are the critical commercial terms, because that's what the contract has been formed upon, hopefully.

8:17
So what are the critical commercial terms?

What are they doing?

Is our client the vendor? Are they the customer?

What are they expecting to receive or to produce, or whatever it might be?

And then within the auspices of that, you know, what are the quirks about that deal?

8:39
Because every deal has different individual things that a boilerplate contract is not going to deal with.

And then it's really the things around apportionment of liability.

You know, where should the liability lie?

There's always going to be some tension about that.

8:55
But you can usually come to something that's pretty commercial and reasonable, depending on whether your client is, you know, selling something or buying something.

And then things around, you know, what happens if the supply doesn't go through, and what happens if it's the supplier's fault?

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What happens if it's not the supplier's fault?

Money is always critical.

You know, the only reason you're engaging in a contract is for some kind of commercial benefit.

So are the terms dealt with appropriately?

What happens if the customer doesn't pay?

9:31
What are your obligations around that?

And so getting that information from the client, what's important to them.

Sometimes the client will say to us, look, this is a really important contract for us.

I just want you to take a light touch, just focus on the things that put me at an unpalatable level of risk and don't worry about the rest.

9:53
Whereas some are like, no, I've got the bargaining power.

I actually want this contract to read a certain way, or we've been negotiating for a long time.

This is what it should all contain.

It depends on what the client's motivation is as to how we approach the contract.

10:10
There's not a one-size-fits-all.

You've got to keep in mind the commercial pragmatism of this is trying to document a deal that is going to come into real life.

And you don't want to sort of blow up the deal for your client because you're hung up on one clause and how it reads.

10:36
But equally, you want to make sure that the contract has certainty.

And that's probably the first thing that we really look at once we've got the instructions, is going through and saying, are there any clauses in this that give a huge amount of ambiguity that's going to cause issues in the future?

Yeah.

10:51
Is it reflective of the commercial terms?

Is the apportionment of liability appropriate?

Does it deal with all the things it needs to deal with?

And then we'll work back from there.

I wanted to ask you this question or get your views on it.

It's two sort of different, well at least two different ways of drafting.

One would be more of your principle-based approach, where you've got quite short clauses with quite subjective things like reasonable efforts or that type of thing.

11:16
And then the other way is more of a codification type, long form, set out all the different scenarios and what happens and dates and so forth.

What's your approach with those?

I guess it's probably going to depend on the situation, but what's your views on the principle-based drafting versus more of a codification approach?

11:37
It often depends on whether the contract's going to be used sort of across the board.

Is it going to become something that is embedded in the client's processes or is it a unique bespoke contract about a specific deal?

11:54
Things like terms and conditions, they're a contract, but they often need to be more broad principles because it's trying to capture a lot of different engagements.

Whereas if the deal has been heavily negotiated or there's a lot of risk around it, there's agreed processes, there's agreed timelines, things like that, then that's when we would take a more robust prescriptive approach in terms of that.

12:24
And so it will depend on, is it a template contract that the client is going to use multiple times, or is it something that's just going to be used for a single use and it needs to be very clear and prescriptive for that specific use?

Yeah.

I wanted to ask about what are the types of clauses or things that you could put in a contract?

12:45
Other than making things clear, what are the type of clauses that you would typically look to to prevent contractual disputes arising?

The first is always, is it clear about who is doing what when in terms of the supply that you're talking about?

What is the thing you're selling or buying, and does it have clear terms around that?

13:05
Does everyone understand when they're delivering and how title passes, when someone has to pay for that thing?

What are the invoice terms?

And they seem like very basic things, but making sure that the thing you're meant to be doing is clear and documented properly.

13:21
The next thing is that we look at liability typically, and that will be a combination of warranties, liability clauses and indemnities.

And it's usually a combination of all three of those things.

What are the parties warranting?

13:38
And of course, warranties are just effectively contractual promises.

One party is promising that certain things will happen or there'll be certain standard of the product, whatever it might be.

Are those warranties appropriate?

Are they fulsome enough?

Are they over the top?

13:55
And then, you know, that will then tie into liability because liability will, you know, typically a breach of a contract will attract some form of liability.

How is that liability dealt with?

Is it appropriately apportioned?

Does it deal with if both parties have contributed to the liability?

14:14
Is there a cap on that liability and working through with the client what that cap should be?

Do there need to be carve outs around that for fraud or misconduct or sort of wilful actions from the clients?

And then working through indemnities.

Is it going to be a general indemnity where one party indemnifies the other for all liability, or is it going to be something that's very specific?

14:43
You know, you're indemnifying me for this one thing because I need to make sure that that's captured.

Then we would look at things like IP clauses, confidentiality clauses, things like that.

They should be in every contract.

14:59
It's very rare these days that IP won't attach to a product or a service or anything else.

Is that dealt with appropriately, particularly if it's a contract for services?

How is IP dealt with in that circumstance?

Who does he know?

15:14
Who owns what? Is there a licence in place?

Often contracts are silent about those things, but that can be really important.

If I'm paying for a service, do I own the product in the end or am I just licensing it?

Because that has quite significant consequences for the client.

15:33
And then things like termination clauses.

Who can terminate? When can they terminate? What reasons can they terminate for? And what is the outcome of that termination?

Is there a termination fee?

Do you have to pay for the services up until that point?

15:49
Is there a window in which you need to terminate?

And that ties into dispute resolution clauses.

If there's a dispute about it, what happens?

Who needs to do what when?

And then we look at what some people call sort of the boilerplate clauses.

16:04
I was going to ask about the boilerplate clauses.

These are kind of the ones that, you know, you open the document, you've got your parties, you've got your definitions, you start scrolling a bit, get into the meat of it, and then at some point your eyes start to glaze and you skip down to the execution, but they are really important.

16:22
They are. They can be really, really critical.

Things around assignment.

Can I assign this contract to someone else?

Do I need the other person's permission to do that?

When do I have to give notices? When do I need to give notices? Where do I give notices?

And jurisdiction.

Where is this contract going to be fought if it needs to be fought over?

16:44
And when you've got international contracts, that becomes really critical.

We often see where one party is not domiciled in Australia, they're working from somewhere else, and then is it the jurisdiction in Australia?

Is the jurisdiction where the other party is, or is it some other third-party jurisdiction where everyone can agree?

Because it can have a huge impact on the enforceability of that contract, but also the likelihood of you being able to successfully resolve a dispute if it arises.

17:19
You know, we're obviously very familiar with the Australian jurisdiction.

All of the states have similar rights, and so it doesn't necessarily matter that much within Australia, albeit there may be a preference for one state over another.

But if you've got a contract that's in Pakistan, you know, what are the laws in Pakistan about these types of contracts?

17:40
We wouldn't have the first clue.

And if it's going to have a clause around that, does the client need to get some legal advice about that and how that would practically work?

We had one the other day that was in Japan, and it was really important for the other side that it was the jurisdiction of Japan.

18:00
And our client understood that there were risks around that, but was comfortable having that fight in Japan if it needed to be had because it was really critical for the other side that it was in Japan.

So that's the sort of commercial considerations, but working through, have you even looked at what jurisdiction is it in?

The amount of times that we get a contract and nobody's looked at it and it's some obscure place or it's some state that makes no sense or some area that makes no sense.

18:31
And it's like, did anyone have a look at this?

And it becomes important if there is a dispute.

Another question I had was around, I guess, the use of formulas.

You know, there might be in a contract there's some calculation to be done.

18:48
One thing that I've seen that I want to get your view on is the use of examples.

For example, no pun intended, but that type of really well fleshed out formula together with an example.

Is that a common approach? Do you recommend that approach?

19:04
For a more bespoke contract, it can be really useful as a tool, particularly if the formula has some complexity to it.

Putting an example so that everyone has a live working, this is what the consequences of this formula are.

19:22
Even from a lawyer's perspective, doing those examples is a really useful tool when we're drafting the contract to say, does this make sense?

Yes, I've put it into words and I've written it all down and it looks great, but does it actually work in practice?

And putting together that example, it's like, okay, actually I need to tweak that.

19:38
Or yes, it makes sense in practice.

As to whether we put an example in will depend a bit on the style of contract, the language, sort of the commerciality of the parties.

But it's quite often a useful tool to have in place to make sure that everyone understands what they're meant to be doing.

20:00
One of the other things that formula can be useful for is around termination of the contract and liquidated damages.

Sometimes the parties might want to agree on what the cost for breaking that contract is or what is the cost for not delivering on time, and liquidated damages.

20:20
Are really the parties trying to quantify upfront what that loss will be and having a formula that makes it very clear that that is, one, reasonable in the circumstances and not a penalty, because of course you can't have penalties in contracts in Australia.

20:38
But also just making sure that that formula is fleshed out and clear so that both parties understand, okay, if we break this contract, that's what we'll have to pay at the other end.

Today we've talked about some of the practical things about when you should engage a lawyer, oral contracts, emails, and getting into some of the key things to think about and clauses that exist in contracts.

21:04
If you're relying on handshake deals, recycled templates, vague contractual terms, perhaps it's time for a contractual health check.

Contact Jess Hill and our Commercial Law team at Velocity Legal to make sure your contracts work for you and not against you.

Thanks, Andrew.

21:19
Thanks, Jess.