Do We Really Need A Contract?

17 June, 2022 | Bret Gower

Many small- to medium-sized business owners in New Zealand question the need for a formal contract with their customers or suppliers. Effectively what these business owners are relying on is an informal arrangement — in law, a verbal contract. That is understandable when all business transactions rely on trust to a large degree — that the goods will arrive on time; that the services will be as quoted; that the other party will do what they say they’ll do (and let’s face it, even if there is a written contract there is still an element of trust required).

There is nothing wrong with taking that approach, and some business people feel more comfortable relying on their business experience, their instincts about people and a firm handshake.

However, as the stakes increase, the certainty of a written contract helps to reduce the risks associated with the other party’s potential non-performance. For example, will the non-performance of a supplier prevent you from completing what you have contracted to provide to your customers – potentially leaving you liable to the customer’s claim.

In the event you need to enforce your agreement, having a contract in writing enables you to enforce your rights far more easily, and will support any claim you need to make far better than relying on the other person’s integrity and/or honesty. With the recent increase in the Disputes Tribunal claim threshold to $30,000 it doesn’t take many successful (self-enforced) claims to justify the legal fees associated with getting good advice and contract drafting before a dispute arises.

Written contracts with your customers and suppliers will also provide evidence of the ongoing performance of your business — to justify the value of your business when seeking finance, or on the future sale of your business.

Depending on the type of business, a contract with customers can be as simple as a set of standard terms and conditions, or as specific as a bespoke contract drafted for each customer.

A well drafted contract will provide clear terms including:

• how the price of goods and services are set;
• when payment is due; when does title (ownership) in the goods change hands;
• who is responsible to insure the goods; what type of warranty or returns policy applies;
• what are the obligations of each of the parties; how long the agreement will last;
• how disputes will be resolved; how the agreement can or will be terminated;
• how confidential information and intellectual property will be treated by the parties;
• whether the parties are liable to each other or indemnify each other for any breach of the agreement – and any limitations to that liability that apply; and
• a host of other terms and conditions particular to the circumstances of the business.

One of the main reasons we find clients are resistant to using written contracts is the perceived reluctance of the other party to enter into a formal arrangement. Often this can be simply because the other party does not want to engage their own legal advice. In some circumstances that can be a reasonable position to take, but we urge clients to be wary of entering into a serious business arrangement with anybody who is not prepared to invest in their own risk mitigation (which is what a written contract effectively is). Our preference is to make the process (and the language used) simple and commercially sound — without any unnecessary complexity — so that clients and their customers or suppliers can determine for themselves whether it seems reasonable or not.

Whether you need your own written contracts, or review of a contract you have been asked to sign, you need a commercial contracts lawyer who is happy to explain the basis for their advice, has your interests at heart and takes the time to understand your business risks and concerns. Arrange a no-obligation chat with Bret Gower, Commercial Director at Smith and Partners by emailing bret.gower@smithpartners.co.nz or call him on DDI 09 837 6893.