Some Basic Contract Tips ...

About the Author:

Steven Dukeson

Commercial Lawyer at Dukesons Business Law
Auckland commercial lawyer, Steve acts only for business clients in matters of Commercial and Contract Law, Company or Corporate Law, Employment Law, and Intellectual Property Law (mainly name protection, including trade marks).

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Agreement vs Contract

A contract is always an agreement but an agreement may not be a contract e.g. it may be a non binding agreement or for some technical legal reason, it may not amount to a contract.

Contract vs Deed

A Deed is an ancient legal creation, which has often been used to get around technical legal requirements to form a contract. It would take time to explain this. Deeds are often contracts, but not all Deeds are contracts.

Oral vs Written Contracts

I’ve lost count of the number of times that a client says that "we don’t have a contract", just a verbal arrangement.

You can have an oral contract unless the law requires it to be in writing. The law requires written contracts in relation to dealings with real property (land, land and buldings, leases, etc) and guarantees. It’s also advisable to have customers assent in writing (email is OK) to any situation where goods are supplied on credit or secure finance.

Example:

if you want your Terms of Trade to be fully enforceable against all comers, your customers should assent to them in writing.

Even where the law requires that an agreement be in writing, and it isn’t, it doesn’t necessarily mean that there’s no contract. For example, if an employer fails to provide a written employment agreement, there will be a contract – the employee is working and getting paid. But ascertaining just what the terms of the contract are may be difficult.

Heads of Agreement

They can be a curse.

Business people understandably want to get things done and to try to do this as simply as possible. The problem with Heads of Agreement and other similar documents is that they are often put together as short-cut agreements, without sufficient thought, and if they’re binding, the parties are stuck with them. It’s worse where the parties do this on their own, without lawyers. For example, a common misconception is that there’s no problem in stating that a matter will be as agreed. What if the parties don’t agree and no mechanism is included to resolve the failure to agree?

Often, it's better to think things through and prepare the real deal i.e. a fully fledged, well thought out contract.

Contracting with Companies

Except where there’s only one director, you can’t assume that just one director has authority to bind the company. Ideally, you should have at least two directors assent to the contract – this is the way in which the Companies Act assumes that the company would sign a Deed, and it would be less likely that the company could assert that two of its directors had no authority to bind the company.

If you aren’t dealing with a director, ideally, you should ask for confirmation from at least a director that the person you’re dealing with has authority to bind the company. You could assume that a CEO or MD would have authority, possibly also a national or company manager, but otherwise, you take the risk that the company asserts at some stage that it isn’t bound by the contract.

Contracting with Partnerships and Trusts

As a general rule, get all partners or trustees to assent/sign. It’s the safest approach.

Nothing is ever perfect

You can have the best contract in the world but still be left disappointed.

If a party breaches a contract, you may have to sue them. This may involve significant time and cost and not everyone has the money to incur significant legal costs in suing another party. If a party is overseas, that can create difficulties. If the governing law isn’t NZ law, that may create difficulties. If you are suing for damages and the other party doesn’t pay, you may have to sue again to enforce the judgement.

None of those matters are good reasons not to have the best contract that you can. Some contracts will have self help remedies e.g. to sell goods where they’ve been supplied on credit or they secure finance. Many contracts will involve NZ parties, governed by NZ law. If you do have to sue, you want the best contract possible.

Steven Dukeson
Commercial Lawyer
Dukesons Business Law
09 379 4556
www.dukesons.co.nz

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