How Contracts Work. Or Don't.

I’m no lawyer. But from experience of negotiations and contracts I have evolved some theories about the way contracts work. And often don’t.

A contract is an agreement between parties. Often it provides for a ”worst case” scenario of provisions for what happens when things go wrong. More often it provides fees for lawyers drafting the contract, and then litigating it.

There was a time when parties had a discussion, came to an agreement, and concluded with a handshake. And that worked, in large part because the parties wanted the deal to work, but also because honour was at stake – “A man’s word is his bond“.

Now we often see agreements or contracts being drafted by one party to an arrangement – and often the party with all the power. So it’s not an agreement. It’s a set of rules imposed on one side by the other. There is no “give and take” as you may expect to see in a negotiated deal between willing parties. Instead it’s a “take it or leave it” position. The party with the power has spent vast sums marketing the product or service, but then they produce a one-sided, and often punitive, contract which is often almost impossible to enforce.

Often parties to that contract don’t even bother to read it! Which means that often they don’t know what their obligations and responsibilities are, which obviously can cause problems.

But of greater problem is the difficulty in enforcement of many contracts. The law is largely toothless in New Zealand. Not because it cannot produce a result, but because of the cost of producing a result, the difficulties of enforcement, and the time taken.

An example in property law: The tenant had no respect for the property and within months of entering a lease was ripping up carpets, pulling down walls and generally abusing the building. And other than the initial deposit, they paid no rent. It took several months to go through the legal process to evict, and in that time no rent was paid. Then it took a further 2+ years to go through the court system to get a judgement for the $100k+ owing; then a further 2+ years to attempt to enforce the judgement – all at a cost in legal fees of another $30k+. The result? The ex-tenant went bankrupt, with a recovery of exactly nothing. Which brings us back to How Contracts work. Or Don’t. Because so many contracts are difficult to enforce, it means that the best contracts are those entered into by willing parties, who have agreed terms to the benefit of all sides.

Even then those contracts can fall apart. We just have to witness Boris Johnson talking back the Brexit deal of less than a year ago. And it’s not just politicians. Our take on drafting a contract that works, is that contracts which have benefits for both parties – not just one – have more chance of working.

Our experience has taught us that when difficulties arise, getting the parties together to attempt resolution is far more likely (and at much less cost) to produce a positive result than hiring lawyers.

A note for agents: When you put an agency agreement in front of a potential client, be aware that all 3 or 13 pages of small type are in the agent’s favour. It’s a one sided “agreement” outlining all the responsibility the vendor will take, and almost never detailing what the agent will do. And yes, I know that agents don’t have the authority to draft a contract because someone who sits in a corner office told them they can’t. But at least do the client the courtesy of filling in the gaps!