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Why bother dotting i's and crossing t's

31 January 2015

As a commercial lawyer, I often get challenged by clients as to why agreements need to be documented in a particular way, or even at all. Sometimes it comes as a surprise to those clients to hear about the risk that they are exposed to if an agreement is documented poorly or not at all.

This risk, while dependent on the situation, usually boils down to a few key factors, including uncertainty of the agreement terms, implied terms that were not anticipated, words not meaning what the drafter intended them to mean and an understanding of the overall liability that a party faces.

The obvious benefit of recording agreements in writing is that the detail isn’t lost to faded memories and inconsistent recollection. Oral agreements do have binding effect, but it usually comes down to evidence to determine the terms of that agreement. Evidence credibility can be called into question, and it generally turns into a ‘he said, she said’ scenario. Memories fade with time, especially in relation to the more intricate detail. The exact nature of the contract terms can also be hard to pin down. Given that a claim in relation to a contract can be made up to 6 years after the event, the oral agreement unfortunately doesn’t stand the test of time.

Recording agreement terms in writing is the obvious solution to the issues in relation to oral agreements. But this brings a separate set of difficulties into play. Ensuring that the agreement terms are clear, concise and actually mean what they are intended to mean, are key requirements.

The Courts have the final say on agreement interpretation. They have developed a set of interpretation rules over time, to assist in determining what agreements mean. These rules prescribe specific meaning and legal effect to particular words and phrases.

Parliament enacted legislation and regulation can affect written agreements. They can imply mandatory terms into specific agreement types and allow you to exclude some in particular circumstances. Outright prohibitions can apply, as well as specific requirements for particular activities.

The ‘what if’s’ also need to be considered, so a party can understand what liability they face. What if there is an issue with the good or service that is being sold or purchased? Does the seller guarantee that things will work out, and if not, how will they put them right? Are they sold as is, and it is up to the purchaser to do their research to ensure what they are getting is suitable and of sufficient quality? In the worst case scenario, if there is a malfunction and burns the building down, who is responsible, and for how much?

Covering these ‘what ifs’ in the agreement means that there is less likelihood of any surprises in future. It will give the parties certainty as to the benefits and risk attaching to the agreement, and allow each party to calculate the price they are willing to accept. You may be willing to accept more risk, if the price reflects that. If the ‘what ifs’ are not covered off, you risk unforeseen liability and the risk of over paying.

There are a lot of factors to consider when you record your written agreement. Generally, seeking specialist advice from a commercial lawyer can assist you to ensure that the above requirements are met, and there are no surprises. Often the price associated with such advice is a fraction of the amount of risk that can be avoided by doing so.

Chris Steenstra

 

Chris Steenstra is an Associate in the Commercial Corporate team at Norris Ward McKinnon, specialising in IT and Commercial Corporate law.  Email Chris at:  chris.steenstra@nwm.co.nz