Contracts can be Tactfully Dangerous

Contracts can be tactfully dangerous because of the binding nature and the administrative responsibility that a contract generally requires. Under normal conditions contracts are made and only used when something goes wrong.

However, the damage that a prudent and litigiously driven contract party can cause upon an unsuspecting and insecure party is potentially insurmountable (both with business reputation and financial health).

I have been through what I feel has been my fair share of litigious battles, the biggest battle took me through 18 months of solitude and depression while I worked tirelessly to accommodate creditors, lending institutions and trade through a customers legacy of unpaid debt.

I have not fully recovered, but I have learnt a lot about contract rights, roles, responsibilities and the processes that proceed contracts when a litigious action is made in court.

For those people in business, I will try and explain some key points about contracts so as to promote your understanding and attentiveness to how contracts can be tactfully dangerous

What is a Contract?

Contracts are binding agreements, a “promise”, between parties for acknowledging the predetermined rules that each of the parties must abide by whilst reaching an agreed outcome for the duration the contract is on foot (when the contract is under affect).

The contract agreement sets out the ‘rules of engagement’ and what it means if one of the parties fail to deliver to their promise.

In construction contracts, A contract will have the principle (party writing the contract) and the supplier (party agreeing to the contract).

Who is in Control?

Contract law and case law around the world are somewhat similar, every time a case is passed down in court, it sets a precedence ‘case law’ for those similar cases going forward.

While it may always feel that court is a protector of liberty and righteousness, that is heavily debatable when it comes to contract law…..this is because contract law (at least in Australia) has some significant ethical flaws.

The general nature of forming a contract is:

• A contract is usually written by the receiver (principal party to the contract)
• The contract is accepted by the seller (supplying party to the contract)
• There is a general debate on what is deemed fair, the boundaries for achieving what the contract (promise) says will be delivered, how is will be achieved and whilst the contract is underway what parameters will be adhered to that affect the contract conditions.
• The contract is agreed and signed by the statutory parties tot he contract.

This all seems really great at this stage, but contracts come with significant flaws and potential risks for each party. Those risks and flaws are what scrupulous contract administrators know all too well, they understand and normally take complete advantage of them when administering the contract tactfully against the opposing party.

Contract Flaws?

The greatest flaw with contract agreements are:

• There are no independent umpires to regulate whether or not the contract is actually fair.
• A cash strapped business is more inclined to accept contract conditions that are unfavourable just to win a contract.
• There is no statute ‘due diligence’ process for the principal to undertake when deciding whether or not a supplier are capable of supplying the contract services.
  • Even if a due diligence process of some nature is undertaken (a pre-qualification to contract or similar), that process is not legislatively questioned when a business is sent into liquidation or a person is made bankrupt due to a contract related payment dispute.
• The legally binding nature of contracts require prudent administration, contract nous and stringent adherence to things like time, cost, penalty, security and payment conditions to avoid being in breach of contract. (many small businesses are unlikely to understand the strict requirements, and, this is not monitored, regulated or statutorily disclosed)

The Unwritten Rules

General Contract Administration

The party in control, is normally the party that administers the contract best “contract is king”.

• They have the most documentation to describe clearly and concisely how the contract has been administered.
• They have a documented time line of events and correspondence that complies with the contract terms and conditions.
• They raise contract notices in the correct form in accordance with the contract requirements.

A litigiously tactful party, in this instance the principle, will use there financial strength and contract nous to overcome poor administration by doing the following:

• Because contracts are ‘black and white’ with strict terms and conditions, these party’s will utilise the ‘get out’ clauses within the contract to create as many ‘grey’ areas as possible (‘grey’ area means an event that is challengeable through a litigious application).
  • safety, quality, environmental, industrial relations; are all areas that contracts can be bound under and these areas are easily targeted before litigation begins to strengthen a party’s position
    • the way these are targeted is by finding issues, building a correspondence around the issue and transversing the issue with repeat problems. When documented correctly these can cause the contract to be tested/terminated or made into an action.
  • using the same person for valuing (superintending) the work completed, whilst being the impartial contract representative has 2 different roles. This is tactfully dangerous for the supplying party.
  • customers determining for itself what is a fair payment and what is determined unfair is also hard upon the supplying party.
  • how defective work is catalogued, assessed and scrutinised under the contract are also areas that can become difficult for the supplying party.
• Once a grey area has been developed, the party will continue to create as many unique ‘grey area’ occurrences whilst the contract remains on foot.
• They will create an opportunity for the supplier to put forward an action as the claimant. Using that approach the supplier is normally to pay into court a suspected sum for court costs before the action will proceed.
• The principle, now appellant, will stack up as many grey areas as possible to defend their position. Their aim is to make each grey area a triable action and an action that can be drawn out for a long as possible.
• By drawing out an action, the cost of legal proceedings can be long and expensive.

This approach works well for the party with financial health but is terrible for a business that needs to pay its creditors but is cashflow poor because of the pending action and the lack of funds…..

Duress

A party may be singing under under ‘duress’ when the other party to the contract has put pressure on them to agree (the example above).

I have been in this situation before and let me say, this is NOT where you want to be…..

As a supplier to a large litigious and well financed publicly listed company, i did not realise how tactfully dangerous they were for me when i started the project.

My situation left me with 2 choices (1) to either ‘fight us in court’, or (2) ‘agree to our conditions’.

I was handed a deed of release which entitled the principle to a huge upside for its poor administration of the contract and in return I was offered a moderate sum for which I could pay a considerable number of creditors. I was told “if the deal is not done by this afternoon you can forget it”….. what do you do? say no?

 

Written by Geoff Pike, Entrepreneur, Speaker & Business Mentor

LinkedIn: https://www.linkedin.com/in/geoff-pike-australia

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ABOUT GEOFF

Geoff founded a sole trader plumbing business in a remotely located and vastly underpopulated location in outback Australia. Starting business with only enough money to pay 4 weeks wages, Geoff persisted by growing the business into a multi-disciplined trade services company. Over a period of 12 years, the company Geoff established grew to employ a workforce of over 300 personnel covering an area almost half the size of Europe, receiving international award recognition with an annual revenue of over $30mil. Geoff knows what it takes to overcome adversity.