Chapter 9

In the contract

Doing it the easy way

Of course the easiest way to manage contractual relationships is to exercise your rights and perform your obligations precisely in the terms of the contract. The best contractual relationships are always those where both parties perform to the letter. Contractual observance like this develops a sense of trust and respect between the contracting parties. What may create warfare in other contracts becomes only a small distraction that is fixed by both parties working together in a healthy relationship. They work together because they see the other side doing its absolute best and because of this want to help make the contract work.

This is easier said than done. There are many reasons, both fair and foul, why contractual relationships break down.

Know your product

If the relationship between you and your contracting party becomes troubled, it is essential that you understand the contract.

Your strategy in dealing with a prospective issue (which should of course be planned well ahead of any problem arising) is contingent upon knowing the document and what it says. If you have followed the recommendations earlier in this book, your rights and obligations are largely set out in the document. Knowing these means you know the landscape of any future battles. If common sense cannot prevail and the dispute cannot be resolved, it is the contract that the court will look at closely in working out who is in the right and who is in the wrong.

The following steps will help you in any issue you have. It may be a breach. It may be a request for a variation. It may be an assignment.

A useful means of identifying your rights and obligations can be to prepare a short document that summarises them. Of course it is only necessary to identify the contractual terms that relate to the dispute. A document that sets out your obligations may be of great assistance to you in working out which are the relevant contractual terms and what they mean.

Tables 9.1 and 9.2 (on page 170) are possible versions of the ‘cheat sheet’ for both the airline and designer in analysing their positions and knowing the product.

Table 9.1: ‘know your product’ cheat sheet for the airline (the party alleged to be in breach)

Table 9.2: ‘know your product’ cheat sheet for the designer (alleging the breach)

This sort of analysis is equally effective when you are claiming breach or breach is being claimed against you whether you want the variations or assignment or not.

This example is written in a dispute context. However, a document like this can be used just as well when you simply want to know what the contract says for working out resourcing or simply what you have to do as a term of it.

The contract is the rules of the game between you and the other party. As in any game you need to know those rules so as to play effectively.

Contracts should not be lawyers’ documents. They are for you. If you do not understand the terms of the contract, have them rewritten. You cannot perform a contract if you do not know what it says!

Know who you are dealing with

Their commercial position

This is extremely important at all times of a negotiation of a contract. Internet search engines can be a remarkably fruitful research tool. Talk to people who know the counterparty. How do they do their business? The more you know the better negotiator you will be.

When considering strategy in relation to any dispute under a contract it is useful to get a sense, to the best of your ability, of the business context and style of the other party. If they are trading badly or are in commercial difficulty, this may cause you to adopt a strategy that superficially helps them resolve their commercial issues but also serves your needs. This may open up many more avenues to resolve the issue than if you are dealing with a commercially successful party. A prosperous and strongly trading counterparty is more likely to want to hold you to the strict letter and terms and conditions of the contract. They want what they want and no less. You will ordinarily have less room to move. All other parts of their business are travelling well. If your relationship is causing them angst they are likely not to be flexible.

Agenda

As a part of understanding the commercial context of your counterparty, are you aware of any agendas they have? This applies for both the general management of the relationship and disputes. What is their contract position? Are they looking to grow? What are the factors that impact on their profit? In a dispute context, are they fishing for a basis to terminate the contract or do they think they can do a better deal elsewhere? Are they looking to move operations offshore? Are they looking to engineer a circumstance where you are in breach and therefore they can terminate the agreement?

If on the other hand they are simply and transparently complaining about the breach, this is also important to know. Can remedying the breach in the immediate future cause them to cancel the notice of termination and restore the equilibrium?

Generally speaking, if the other party is merely unhappy about the breach this may be enough. However, if this is one of a sequence of breaches and the straw that breaks the camel’s back, it is unlikely you will be able to use this technique again. In this context the relationship has soured and any goodwill you had with them may have disappeared.

Leverage

This is held by the party with the most negotiating flexibility and influence. Who can use their position to greatest advantage? This generally depends on what the subject of the contract is and who the parties are. Is the contract a meeting of equals or does one benefit from it more than the other?

Who holds the greater control in the negotiations? Who will be hurt the most if the contract is terminated? This is an important consideration. It will be a very useful judgement to make to help you with deciding your strategy as to how to resolve any dispute.

Form a view about this early and be objective. Vanity is an evil to be avoided. You will disadvantage yourself if you are unwilling to see that your competitor has all of the leverage. This blindness stops you using strategies to right the imbalance. You can only fix a situation like this when you realise it is lopsided with you closer to the ground on the scales of position.

Scorched earther or a relationship developer?

One of the important aspects of contractual relationships is the interpersonal dimension between you and those with whom you deal. If there is a residual degree of trust and amity, it is likely that minor breaches will be more easily managed. If the relationship is more distant and austere, minor breaches could be taken very seriously and create problems for you that otherwise would not arise in a different type of relationship.

There are certain types of contracting parties who implement a ‘scorched earth’ policy. By that I mean they don’t care about personal relationships. They want exactly and absolutely what they have contracted for. They insist upon it with religious vigour. They are inflexible in the face of being provided with good alternatives and options as to the performance of the contract. They regularly threaten court proceedings and are insistent that your failure to honour the contract will cause them to suffer significant damages.

You will get a sense of who you are dealing with in the negotiations. The skilled scorched earther may initially project sweetness and light. Once they have the position they want they show their real modus operandi later.

Knowing that someone is of this character or type is important. In order to avoid wasted time and energy, it is often easier to simply do your level best to keep the contract on foot and not look to any solution other than performance of the contract to the letter. They are just not up for it. They are inflexible. After all, the only thing they should ask for is strictly performing.

On the other hand if you have a counterparty who is a relationship developer and wants to have a long-term connection with you and your business, you may be in a position to negotiate resolutions to problems or disputes that are more flexible in all the circumstances and are more commercially acceptable to both parties.

The history of the relationship is fundamental to the way in which it is likely the parties will deal with each other.

If your counterparty has been consistently in breach of the contract and has annoyed you with phoney excuses and clumsy solutions, you are unlikely to want to give them another opportunity.

However if, on the other hand, they have been genuine in all of their attempts to fix problems and advance the mutual interests of the parties, then you will be more disposed to them.

It is also useful to consider the corporate personality on the other side. While you may be dealing with someone who is charm personified, the corporate attitude of the company may be more hard-edged. These apparent contradictions are quite regular in commercial relationships. The key is to work out what the bottom line is going to be. Preserving your friendship with your contact is valuable and important, but if that friendship prevails at the cost of being joined in court proceedings for breach of a contract that you could have otherwise remedied by doing a deal with the hard-nosed CEO, commercially speaking the option is clear.

Communication

In most contracts communication is the key to the happiness of the parties. If the contract is for a good or commodity, there may not be much need for it. Delivery on time of what was asked for may be enough.

In contracts for services, communication is essential. Even if the parties are model contractors and there is no need to adjust to changed circumstances, they will still need to talk.

The importance and skill with which you communicate is magnified with an impending dispute. Knowing the contract terms, understanding where the leverage sits and who you are dealing with are all important to deciding your communication strategy.

It is important to bear in mind that there is no general legal obligation to advise your counterparty when you may be coming across difficulties in honouring the terms of your contract. You have to perform your obligations. That is all. There is often no benefit to disclosing that there may be a problem in honouring your obligations. It may cause undue concern on the other side. It may prompt termination of the contract on the basis of an anticipated breach or alternatively to cause an injunction to be sought against you for specific performance.

There is nothing wrong at law with not disclosing difficulties you have with performing your obligations under the contract. If you meet these obligations, that is all your counterparty is, and should be, legally concerned about.

However, when a problem has manifested and is unavoidable, communication can often be the best tool in seeking to avoid an ultimate problem.

The risk in communicating a prospective breach of the contract to your counterparty is that it may arouse legal rights with them. Depending on whether the relationship is generally good or bad, this may have beneficial or negative consequences.

As in any relationship, communication is important.

However, there can be too much communication and it is important to make a decision on when to talk. This can be very finely balanced and you need to consider factors like the following in making your decision:

• How serious is the problem or potential breach?
• Is it an ultimate breach in that there will not merely be a delay in the delivery of the service or product. A fundamental problem in being able to perform the contract will need to be closely considered and on different terms.
• What are the general circumstances of the relationship like — are they hostile or friendly?
• Is it likely the other party will seek to terminate? If they are a ‘scorched earther’ there is a real risk they will.
• What are the likely consequences for your counterparty of the breach? Will it cripple their business or merely act as a commercial and professional annoyance?
• What will happen to you? Consider all commercial and intra-business aspects of this.
• Are there general business reputation issues you need to manage?

The anticipated outcomes of early communication need to be a crucial part of your decision-making process. Only you can understand:

• the types of consequences you may have
• the commercial impact
• what you can live with commercially — what is a learning experience as opposed to apocalyptic and disastrous.

It is a big decision and should only be made when you have considered these points. It will generally commit you to a course of action in the future. Your first moves are important in charting the course ahead.

Tears on the pillow: without prejudice — secret but effective

As set out above, any disclosure of a likely breach of the contract may arouse rights in your counterparty to terminate or sue for breach. You want to be very careful as to when you make a disclosure in these terms.

One very useful way of doing it is to do it on a ‘without-prejudice’ basis. Without prejudice is a term used by lawyers to describe a secret communication. It is a communication that does not come to the notice of the court, tribunal or arbitration if there are any subsequent court proceedings. A full and proper without-prejudice communication is not admissible to the court as evidence of an admission of breach of contract.

However, the term ‘without prejudice’ is regularly misused. It must be in relation to the settlement of a dispute to have this protection. You will need to be quite skilled in your use of the term and speak to your lawyers about developing a greater understanding of what this principle is and how it works in practice.

However, if well used, it can be an excellent means of advising your counterparty of a problem under the contract without necessarily causing an ultimate breach.

Options — keeping the balls in the air

If a problem arises the best way to deal with it if there is no short-term solution is to look at all options.

Ask yourself: What steps can I take in order to fix the problem that I may have unintentionally created?

This has three primary benefits:

So when do I tell them there is a problem?

There is no right or wrong answer to this question. It depends on all of the above factors and the general contractual relationship. If you are uncertain, it may be appropriate to obtain legal advice so as to form a view with your lawyers as to whether you disclose a prospective or possible breach or not.

If you want to disclose, there may be ways you can do it deftly so you can be insulated against allegations of breach or damages claimed.

Every contract is different. Every contracting party has different commercial pressures, agendas and desires. On this basis there is no rule of thumb or prescription as to when a breach of a contract or a prospective breach should be disclosed.

However, it has been my experience that many a contractual dispute has been resolved by honest and open communication between contracting parties with a mutual goodwill to put the parties in exactly the same position as if a breach had never occurred. If both parties want to fix it there is very little reason why they can’t.