Why Bother With Contracts? Part 2
I’m writing this at a time when there’s a lot of press coverage of the imminent coming-together of two people from very different backgrounds but with similar mindsets, attributes and values.
Yes, alongside the items about some wedding of an actress and an ex-soldier in Berkshire, it’s hard to avoid stories about whether or not the historic summit between Donald Trump of the US and Kim Jong-un of North Korea will go ahead. At the heart of the issue is the goal of denuclearisation of North Korea. Which – and bear with me here – got me thinking about how nuclear weapons and contracts have a lot in common.
This is the second in a trilogy of articles about some common misconceptions around how worthwhile (or not) contracts are in business dealings.
A couple of weeks ago I described some views expressed to me (by an intelligent and articulate person whom I’ve quickly come to respect) which went something like this:
I know my home-made one-page contract may not cut the mustard, legally speaking, but I understand it, it’s never let me down before, and look – it’s only one page!
“Proper” contracts aren’t really worth the effort – if things go wrong, it’s too expensive, difficult and time-consuming to go to court, so what’s the point in having a “proper” contract that I’ll never enforce?
My operation’s just a small one and I’m not dealing with the sort of big people who rip you off, so I don’t need as much protection anyway.
In my previous article, I looked at the first point above. Now it’s time to ask if contracts are a waste of time because they’ll never be enforced.
“proper contracts aren’t really worth the effort…”
I guess the first point to make is to repeat an argument made in my previous article: if it’s worth having a contract at all, it’s worth getting it right; if it’s not worth getting it right, it’s not worth having a contract.
The concern that putting in place a “proper” contract takes effort is a fair one – doing anything properly can take time, effort and, yes, maybe money. But, much like pitching to win new work, when it comes to contracts putting in a half-hearted effort is highly likely to be a complete waste – in other words, unless you put in all the effort etc that’s needed to do it properly, all the effort etc that you DO put in will probably be wasted. All other things being equal, you’d be better off not bothering at all.
Except not bothering at all runs a real risk of losing you a lot more than just a bit of wasted effort. Yes, you could well be exposed to liabilities that don’t have sensible limits put on them, or face a situation where you have no remedy when someone screws you over. Even where that’s not the case, though, believe me when I say that it takes a lot more time, effort and money to resolve a dispute between parties to a deal when there is no clear contract in place than it would to have put that contract in place to start with.
To put it in money terms, deciding not to do a “proper” job on your contracts on the grounds of the effort it would take is akin to saving pennies (or cents) to spend pounds (or dollars).
Or, to put it in Kim Jong-un terms, it’s a bit like deciding to develop nuclear weapons, but only in the form of bows and arrows, and then picking a fight with a nuclear power.
“it’s too expensive, difficult and time-consuming to go to court”
Yes, going to court is often expensive, difficult and / or time-consuming – anyone who would deny that surely has no credibility.
However, using this as an argument against bothering with contracts reveals a fundamental misconception that, if something goes wrong in a relationship that’s governed by a contract, the only solution is to go to court. That’s no more the case than the idea that a country with nuclear weapons which finds itself embroiled in military conflict has no option beyond pushing that big, red button.
From personal experience I can confidently say that neither party to a dispute is likely to want to end up in court, however much in the right they may feel themselves to be, and it is this very fact which helps to drive other ways of settling contract disputes. It’s not quite a Mutually Assured Destruction scenario, but the threat of the nuclear option is remarkably good at keeping people focused on finding an acceptable solution.
Often a formal and strongly-worded letter (whether or not on a lawyer’s letterhead) which refers to the other party’s breach of clause x, y or z of the contract will be enough to get you the result you want.
Sometimes, though, you have to threaten – or even issue – a formal court claim to make the other party sit up and pay attention, but it’s important to note that this is just the first step in a process and doesn’t lock you into having your day(s) in court. The most recent set of statistics I’ve been able to find state that, for the civil (i.e. non-criminal and non-family) courts in England and Wales, just 2.6% to 3.5% of claims issued between 2009 and 2013 went on to a full court hearing. Obviously some claims will have been abandoned along the way, but even so it’s clear that issuing a claim is, in fact, often an effective way of forcing a resolution of a contract dispute without having to go all the way to court.
It is, of course, possible to threaten or to start court proceedings without a “proper” written contract, but it’s harder to prove exactly what ought to have happened between the parties, and therefore harder to prove that what actually happened was wrong. The trouble is, everybody knows this, which is why a “see you in court” threat is far less credible without a contract to back it up – and, without that credibility, is less likely to work.
Bottom line: you don’t have to actually launch the nuclear weapons to get the other side to see things your way, but the fact that you could (and that the big, red button is actually and credibly connected to something) goes a long way to getting the results you want.
“what’s the point in having a “proper” contract that I’ll never enforce?”
Again, consideration of this point partly comes down to what you mean by “enforce”. If you would never take any steps of any sort whatsoever against someone who’d reneged on your deal, then it’s probably fair to say that having a contract to support enforcement that will never happen is indeed pointless. Then again, if you’re that passive, you’re probably already out of business.
Similarly, you might have a view that you’ll never go to court unless it’s a slam-dunk case – and because, as any seasoned litigator will tell you, there’s no such thing as a slam-dunk case, you know you’ll never go to court. If you then allow that to pervade your thinking when deciding how to handle things when a contractual relationship goes wrong, you may end up throwing in the towel on enforcement before you’ve even begun – in other words, you call your own bluff before even engaging with the other side. I’ve worked with an organisation that took this approach, with the result that they got walked all over by virtually everyone, when showing some teeth might have won them a better outcome.
(We’ll never know whether or not Trump’s “fire and fury” rhetoric had a hand in bringing Kim Jong-un to the negotiating table, but historians pretty much agree that Nixon’s “mad man diplomacy” probably helped the US to play a stronger hand with the then-USSR than might have been the case if the Soviets had been surer that the US would sit by and let the USSR get away with whatever it wanted.)
Otherwise, the argument that contracts are pointless because you’ll never enforce them ignores three important points:
As described above, “enforcement” is not a binary thing – there are lots of things you can do to enforce a contract which don’t entail going all the way to court.
A good contract makes itself less likely to be needed.
It won’t always be you doing the enforcing.
That second point probably needs some explaining. What I mean is that, by going through the process of agreeing clear boundaries of responsibility, and what happens in the event of x, y or z, the parties to a contract make it less likely that they’ll end up in a dispute over those things. A good contract sits on the shelf, never being looked at because it never needs to be looked at – everyone knows what they have to do because they’ve taken the time and trouble to thrash it out in advance, rather than argue it after the fact.
Even when a potential dispute does still materialise, a “proper” contract should make it easier to resolve in the majority of cases – if the contract clearly says “black”, it’s much harder for one party to argue that it says “white”. (Of course, there are plenty of bad, over-complex, linguistically-opaque contracts out there masquerading as “proper” contracts, but that doesn’t invalidate my point here – it just means that we should be more careful about what we see as a “proper” contract.)
And then there’s the point that you might not always be holding the non-stabby end of the sword. One of the many things a “proper” contract can do for you is to limit your exposure if something goes wrong. Just because you’ll never enforce the contract doesn’t mean the other person won’t and when they come gunning for you you’ll probably wish you had something “proper” to shield you. Most nuclear nations developed nuclear weapons as a deterrent, not because they wanted to go round nuking others.
Saving the effort entailed by putting a “proper” contract in place is likely to be a false economy.
Yes, court is expensive, difficult and time-consuming, but going all the way to court isn’t the only way to enforce contracts – most contract disputes settle way before then.
Having a “proper” contract in place to back you up makes it more likely that any settlement will deliver what you want.
Be careful to avoid damaging your chances of a good outcome by calling your own bluff before even engaging with the other side.
Good contracts make it less likely you’ll have to take any enforcement action in the first place.
It’s not all about what enforcement action YOU would take – a “proper” contract can be a real blessing when the other party starts coming after you.
Tune in a few weeks from now for the final instalment in this trilogy – when we might also know whether or not we’re living in a world where Donald Trump is a credible Nobel Peace Prize candidate. Now that’s M.A.D.
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