Contracting mistakes
Dr. John Murray, Jr. -- Purchasing, 4/1/2004 2:00:00 AM
Every year, U.S. courtrooms see countless cases involving contract issues, and those are only the tip of the iceberg. For every recorded case there are multiple cases which are settled through arbitration, where one party begins to sue another but settles the case before it is scheduled to go to trial. For every case that is started by the filing of a complaint, there are multiple controversies that never get to the complaint stage because they are settled, often in a lawyer's office. Together, these add up to thousands of contract disputes each year and the main question is why?
Contracts make the world go around. Beyond contracts between businesses, individuals make contracts about everything from procuring necessities such as food, clothing, shelter, utilities and the rest, to contracts with employers, investors, banks, service providers and anything else we need or desire including prenuptial agreements. In relation to the billions of contracts made every day, the number of contract disputes is very small.
Most of the recorded disputes (the official recorded cases) involve businesses. There are recurring disputes between employees and their employers, but they pale in comparison to the number of disputes between businesses. Since businesses have their own lawyers (house counsel) or access to lawyers or law firms, it would seem that disputes should be rare, but they are not rare. Something goes awry, typically because somebody is not paying attention. Consider a typical situation in which the lawyer (inside or outside) is paid to draft a standard contract. If the lawyer is competent, she understands her client's business and has examined all of the relevant law (judicial decisions, statutes and regulations) to provide the client with the maximum protection allowed by law. The contract is used by the purchasing department to buy the goods and services but the supplier, however, also has a lawyer who, if highly competent, drafts a contract with printed terms designed to protect his client. If the terms clash, we have the inevitable battle of the forms.
The problem is that those who are using the standard forms really have little idea of what their own forms mean, much less what the fine print in the seller's form means. An interesting experiment inserted a clause on thousands of forms summarizing the history of Donald Duck. Of course, nobody caught it.
Consider a situation where the buyer phones an order and the goods are shipped. Inside the box there are some printed terms. They are ignored. In some jurisdictions, much to the buyer's surprise, these terms will be enforceable. Where the buyer initiates the deal using a purchase order, the lawyer may have drafted the purchase order with a clause demanding that it be signed by the seller, or it may append an acknowledgment form requiring the seller to sign. The seller does not sign. The seller sends its own form containing terms favorable to the seller and ships the goods. The buyer's receiving department takes the goods and they are used-which means the goods have been accepted.
Sometimes, the parties made the deal in person. They shake hands. The buyer sends a purchase order. The seller sends nothing. Is there an enforceable contract? Suppose the seller sends its form after the oral deal in the office. Is there an enforceable contract? If the answer is yes, what are the terms of the contract? Suppose that after the oral contract in the office, both parties send forms containing different terms? Again, we have the battle of the forms. The use of electronic records does not cure this situation. Fine print on a screen is ignored as much as fine print on paper.
During the negotiations of a proposed deal, the seller may make statements about the product statements of fact that lawyers call "express warranties." The contract document that is later signed, however, does not include these statements that were important to the buyer. The document may also contain what lawyers call a "merger" or "integration" clause that emphasizes the parties' intentions that the document is the sole and exclusive statement of the contract between the parties. You should not be surprised if your lawyer later tells you that when one or more of those statements turns out not to be true, you will not be able to do anything about it because the evidence is inadmissible under something called the "parol evidence rule."
After the contract is formed, the buyer and seller may agree upon certain modifications. The "change order" is rampant in contracts today. Suppose the seller has agreed to perform additional duties or to change the product to provide more value at no cost to the buyer. Is that modification enforceable? Suppose you have a contract to buy 1,000 units and you call the seller to change the number of 2,000. The seller ships 1,000 and in the meantime the market price has risen and you want your additional 1,000. The only record of the contract (the purchase order and acknowledgment or other record) states 1,000. Are you entitled to the additional 1,000? The prevailing answer is no. You may now want to deal with that supplier in the future, but you have no legal claim.
There are thousands of other issues that can cause sleepless nights called litigation. Your lawyer or legal department should not only draft your contracts to protect you, but also provide you with basic legal education in contract law so that you have a much better idea of what you are doing legally. You need not become a lawyer, but you should be able to recognize basic dangers in the contracting process. If you avoid only one major piece of litigation, it is well worth the time and effort that allowed you to avoid it.
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