Legalese: August 2012

Contracts come up in the business world every day. Whether you are leasing property or equipment, setting up employment agreements (as discussed in my last column), or creating an agreement with a supplier, contracts are everywhere and they are relied upon when disputes arise between parties. But what happens if your contract won’t hold up in court? This month we’ll look at some common mistakes in contracts and discuss some steps you might take to avoid some of the more common pitfalls.

Quite simply, does the contract clearly outline what the parties are agreeing to? Using broad, undefined language, such as, “The parties agree to do business with one another,” can be found to be too vague and a court may find that the contract fails for lack of certainty. The contract should outline exactly what actions are being performed by each party to the contract, in what period of time are they being performed and what sort of consideration (payment or something in lieu of payment) is being provided in exchange.

On a business level, it probably makes good sense for you to have well-defined business terms with other parties. When everyone knows their roles and responsibilities, there is less room for interpretation and therefore less opportunity for disputes to arise.

Sometimes parties will draw up a contract to exchange property or service in exchange for something that has happened previously. This is another common flaw. It is a rule of common law that past consideration is no consideration at all. If Jack helped Dave with some drywalling on Saturday, Jack cannot come into Dave’s office on Monday and ask Dave to sign a contract exchanging future services of Dave’s for Jack’s help with the drywall. Things that have happened in the past cannot be used as payment for future goods or services. If Jack wanted payment for his help, he should have had a contract in place before he helped with the drywall.

Another tip for individuals wishing to better define their agreements is to send confirmatory written communications. You may be out in the field and agree with a client that a certain thing will happen or agree on a certain price for a piece of equipment. As soon as you get back to the office, send an e-mail or write a letter to the person confirming your discussion and the terms as you understand them. That way, if you get into a dispute down the road, your timely communication will be most helpful in getting your way in court.

Many contracts include “exclusion clauses” to help people or companies avoid liability if certain situations should arise. People may suffer if their property is damaged or services are inadequately provided, as there will be no compensation due to an operative exclusion clause. It is imperative for both parties to a contract to be aware of what they are signing or agreeing to. If you are the party intending to rely upon an exclusion clause in one of your contracts, make sure the other party has specific notice of the clause and what it means, or you may not be able to rely on it down the road.

Another common pitfall is that occasionally courts will decline to uphold a contract because the person who signed the contract on behalf of a company was not authorized to do so. For example, you might get the secretary at a company to sign for receiving a package delivery without any problems, as it is part of the normal duties of a secretary. But what if that secretary signed an employment contract to hire a new salesperson? Or a purchase agreement with a supplier? Those contracts would typically fall outside of the role of a secretary in the company. Some transactions require that an executive sign for the company. Make sure that you have the right person signing for the contract. If you are in doubt as to who is authorized to sign on behalf of a particular company, you can ask the party with whom you are dealing, and you can also perform a search of the company at your Provincial Corporations Branch. You can also seek the input of your legal counsel, to determine whether the person you are dealing with has the authority to sign.

This article is not intended as legal advice for you, for any particular fact situation you face.If in doubt, consult with a lawyer entitled to practise in your jurisdiction.