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Why Bother With Contracts? Part 3

October 12, 2018

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Why Bother With Contracts? Part 3

October 12, 2018

As the director-owner of a small (but, I like to think, beautiful) business myself, I completely understand that feeling that there aren’t enough hours in the week to do everything that received wisdom says I “ought” to do.  Heck, even people I know in bigger organisations often feel like that.

 

Plus, it’s basic nature to put off the things we don’t enjoy – which, when added to the fact that there aren’t many people out there masochistic enough to actually enjoy dealing with contracts, probably explains why so many organisations fail to put in place proper contracts.

 

Which is absolutely fine… until it’s not.

 

This is the last of a trilogy of articles about some common misconceptions around how worthwhile (or not) contracts are in business dealings.

 

Way back in May, 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.

 

I looked at the first two points above in this previous article and this one.  Now it’s time to ask if contracts are a waste of time for smaller organisations which only deal with other organisations of a similar size.

 

“my operation’s just a small one…”

 

I have to bite back the temptation to respond to this along the lines of: “Well, with that attitude, it won’t be getting any bigger.”  I firmly believe that small is a matter of mindset and perception as anything else.  (Those who have met me in person will be quietly sniggering by now – let’s just say that my career could easily have gone down the path of bonsai lumberjack instead of law.)

 

It’s easy to forget when looking at today’s global conglomerates, but pretty much all successful businesses started small.  Some of them have stayed small, at least by some measures – size of staff, premises, geographical reach or even balance sheet doesn’t necessarily equate to success (although size of turnover and profit margin do, together, still form one of the main yardsticks for business success).  But no business ever gained success by locking itself into a small mindset.

 

What do I mean by a “small mindset”?  I mean a mindset that is part victim mentality, part failure to dream bigger; a mindset that uses “small” as an excuse for not striving for more.  Using the justification “my operation’s just a small one” to explain away the fact of not having proper contracts in place is evidence of a small mindset.

 

What’s more, it also speaks of a willingness to be perceived as amateurish.  Of course, I’m not saying that big equals professional, or vice versa – but when an organisation hides behind its smallness as an excuse for not doing things properly, it projects and perpetuates an image of (at best) bumbling enthusiasm.  And, given the choice, would you rather work with pros or bumblers?

 

To turn this on its head: projecting an air of confidence and professionalism, and quality in everything you do, is a great way to be noticed and taken (more) seriously by the sort of people and organisations you want to do business with.  Since an exchange of contract terms (even if it’s just a confidentiality agreement) may well be one of the first serious interactions your organisation has with others, having decent contracts at your disposal is a great way to start punching above your weight – or gain the upper hand when sparring with someone in the same weight class.

 

More fundamentally, your operation was presumably set up to do business of some sort.  (Even non-profits do business – just not with a view to returning value to shareholders or other investors.)  Like it or not, the vast majority of business involves contracts: simple or complex, written or unwritten, short or long, negotiated or not, but contracts nonetheless.  Yes, time and resources are short for smaller organisations, and you have to prioritise accordingly – but given how fundamental contracts are to the business of staying in business, why would you not include them amongst your priorities?

 

“…I’m not dealing with the sort of big people who rip you off…”

 

Leaving aside the small mindset and lack of foresight this comment shows (one might as well say, “I’m only dealing with small players and that’s how it’s going to stay”), what’s most concerning about this statement is its lack of grounding in reality.

 

Recently I’ve been fortunate to be working with one of the biggest companies in the world – a household name which you will probably see several times today, and which definitely has the power to bully (or rip off) pretty much whomever they want.  But they don't.  Even though I like to think the best of people and organisations until proven wrong, I was still pleasantly surprised by the fact that their internal negotiating guidelines expressly detailed a number of points along the lines of, “We don’t do X, because it wouldn’t be right,” or “Taking position Y isn’t our policy, because it wouldn’t be fair to throw our weight around like that.”

 

Conversely, once of the more unscrupulous, deal-denying, goalpost-shifting companies I ever encountered was a small, father-and-son-led manufacturer in the UK.  They thought nothing of unilaterally changing the specification of what they’d been asked to produce and then denying liability for non-conforming (and possibly unsafe) products, of holding their customers’ own stock and raw materials to ransom, and of generally doubling-back on any commitment they’d previously agreed to.  (The last I heard, the company was struggling financially.)

 

My point is that whilst big organisations have more power to rip you off, they’re no more likely to do that than smaller organisations are.  In fact, I’d say they’re less likely to.

 

Bigger organisations:

 

  • Have more of a reputation to protect.

 

  • Probably wouldn’t have become big by treating their suppliers and business partners badly – see my last article here for some insights into why this is true.

 

  • Are more likely to be externally regulated.

 

  • Are more likely to have the resources to devote to internal governance structures, which are unlikely to enshrine, legitimise or promote illegal behaviour or sharp practice (quite the opposite, in fact).

 

  • Have to tread more carefully around competition / anti-trust law, which (depending on the countries involved) often constrains bad behaviours by dominant companies.

 

Perhaps more importantly, bigger organisations are more likely to be aware of (and have direct experience of) the time, resource, reputation and financial costs of getting involved in litigation – and so are less likely to take a chance on becoming embroiled in disputes if it can be avoided.  Yes, they may well be more geared-up to fight those fights if and when they arise, but that’s not the same thing as being motivated to seek them out.

 

The simple fact is: if someone’s going to rip you off, they’ll rip you off – whether they’re large or small.

 

The other simple fact is: a proper contract can make organisations – of all shapes and sizes – less likely to rip you off in the first place.  Sure, there will always be some people out there willing to screw you over regardless of any contract (until they go out of business), and in those (thankfully rare) cases how good your contract is doesn’t have much bearing on how they will behave – but is that any reason to choose not to have decent contracts in place to cover deals with the other, more scrupulous 90-plus per cent. of people?

 

“…so I don’t need as much protection anyway”

 

Here we come back to one of the points I made in the second article of this trilogy: a good contract makes itself less likely to be needed.  Contracts are about more than just dealing with the fall-out when one party rips off the other; they provide certainty about everyone’s expectations, making it more likely that you’ll avoid innocent errors (let alone people ripping you off) and end up with what you want.

 

There’s also the point that contracts aren’t just about protection against being ripped off – sometimes you need to enforce them in other ways (for example, getting the other party to respect an exclusivity clause or other restriction), and sometimes you need them to defend claims against you, to show that you aren’t the one doing the ripping-off.

 

To say that, because you won’t get ripped off (however true that may or may not be), you don’t need protection is to misunderstand the full range of things you may need protection from – and the role a decent contract can play in giving you that full protection.

 

conclusions

 

I could go on, but risk sounding like a broken record.  Hopefully, over this whole trilogy of articles, I’ve made a good case for why using proper contracts is plain common sense, and any rationalisation to the contrary is just a false comfort or a fig-leaf for laziness or ignorance.

 

Hopefully I’ve also dispelled some misconceptions about what contracts have to look like, and when they can be useful – it’s not all about besuited lawyers, impenetrable legalese and expensive court proceedings.

 

But, returning to the theme of this particular article: think small, stay small – and your approach to contracting is very much a part of that.

 

Understanding and harnessing the power of decent contracts is a key plank in any organisation’s platform for success.

 

© 2018 Candid Commercial Limited

 

I'm not a bonsai lumberjack and I'm OK.

 

 

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