Taking care with contracts

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MUCH of the conflict and heartache involving contracts can be easily avoided if the appropriate time and care is taken to get them right in the first place. Marcel Vaarzon-Morel explains why it is always dangerous to cut corners with contracts.

It is often said that the 'devil is in the detail' but when disputes arise out of transactions worth millions of dollars the failure to agree on even the smallest of details can result in a massive headache and an empty wallet. Re-negotiating existing contracts or litigating any dispute that arises can prove very costly. For this reason, putting in the time and effort to fine-tune an agreement from the start may save not only time and money but relationships as well in the long run.

It is common to get caught up in the moment, especially when dealing with the excitement of owning or using a yacht. However, this is all the more reason to get it right the first time. You do not want this excitement to turn into a costly and painful dispute over a simple misunderstanding about what should have been agreed to from the start.

VM Solicitors is frequently contacted by distraught clients who are the victims of circumstances that haven’t gone to plan and watered-down contracts that do not make allowances for these unplanned outcomes, unfortunately with the result being costly to resolve and with no certainty of outcome.

Reasons for uncertainty

The worst contracts are those that are so uncertain the entire contract is at risk of being declared void by the Court because of its vagueness or incompleteness. This can occur as a result of simple mistakes, being imprecise, misunderstanding the law surrounding the contract, or not following the client's instruction.

Parties might sometimes purposefully leave out detailed provisions providing for contingencies because they believe that it is extremely unlikely that they will be needed and therefore not worth the added labour and expense to draft them. It is also common that the parties intend on making a further, more detailed agreement down the road. Whatever the reason, there is inherent risk in making an agreement that lacks detail.

The real danger occurs once one or both of the parties start performing what they think was agreed. In the absence of a sufficiently detailed agreement, particularly a written one, the parties have effectively entered into a contract with few protections and certainty.

The reason for this is that the Court loathes holding contracts void for uncertainty and will do its best to read in their intentions of the parties of the agreement. However, this only occurs after the time and costs of proceeding to Court to have the details read in when it should have occurred much earlier. It also leaves the parties' true intentions up to the decision of the Court.

Case study: the cost of delays

Take, for example, the importation of a yacht from overseas on a demise charter agreement. This agreement may be worth millions of dollars. To save time, the rough and important details to get the vessel from A to B are made but the rest is left to work out while the vessel is on its journey.

The reason why parties do this is clear; the importation of a vessel can take a substantial amount of time so they mutually decide to start the journey immediately and work out the details of the agreement along the way.

Now, provided everything runs perfectly, this could work out really well and the parties have saved time by pushing through with the agreement as quickly as possible. However, more often than not, some unforeseen event occurs which casts doubt on the validity of the contract and perhaps more importantly, places strain on the parties’ relationship.

Say the vessel gets held up somewhere along the way. This can prove very costly when factoring in the wages of the crew on-board the vessel and the lost opportunity of operating the vessel on time. The fees you pay for an empty mooring at the delivery end can run into the thousands of dollars per week! Who pays these costs when it wasn’t decided in the original contract and neither party is actually at fault? Well, this will depend on many factors including where the vessel is registered. Without agreement, the only option is to start costly court proceedings to provide a legally standing answer.

The parties may live very far apart and have to travel to re-negotiate the contract and since one party typically has incurred greater costs than the other, the once-friendly commercial relationship starts to sour. Further, the party who has contributed the most at the time may find themselves more vulnerable in respect to bargaining and will want some form of benefit, whether it be in the form of payment or the changing of another term of the contract to be more favourable to them. Before you know it, the original agreement has changed entirely and both parties are left scratching their heads.

Had the contract been sufficiently detailed from the start, the answer to solve any problem that may occur would be in the original contract. The parties would not need to re-negotiate the contract and the issue could be solved in minimal amount of time.

This is not to say that every contingency must be included in the contract. But the contract must be sufficiently detailed to provide certainty between the parties should a dispute arise. This can be achieved through the inclusion of a dispute resolution clause whereby, if a dispute does arise between the parties, it is already agreed on how such a dispute will be handled.

Different disputes can have different methods of resolution. For example, in a contract where there is a option to buy the vessel at the end of the charter agreement, there should be a clause in the contract that provides for how the value of the vessel is to be calculated and the dispute resolution process should a dispute arise as to the cost.

Steps to follow

More often than not, disputes can be avoided prior to entering into a contract by following certain steps:

  • Perhaps the most important point - always have your entire contract in writing. Everything agreed to verbally between the parties should be in writing, signed and dated. Don’t only include the major details. More often than not it is the minor details that cause the major problems.
  • The written contract should be worded clearly so all parties can understand it. It’s better to deal with misunderstandings while both parties can still walk away without substantial loss, rather than after one party has invested a substantial amount of time or money.
  • The contract should be sufficiently detailed and should act as a guideline as to how things should happen. If it fails as a guideline then it is not sufficiently detailed.
  • Include a dispute resolution clause. You can avoid having to start court proceedings by having a clause that outlines the process of how disputes are to be managed.
  • Include a jurisdictional clause that suits both parties as to where the dispute is heard and what law applies.

At VM Solicitors we have developed a process of supporting our clients well before any money has been exchanged or commencement has taken place. This includes undertaking a process of due diligence on the other party, planning the process, drafting the required documents, ensuring all tax and registration processes are adhered to, and facilitating or negotiating as required with all key interested parties. However, often we are approached at some point in a negotiation and required to pull in the reins to get the process back on track. Either way, whatever the scenario is, in all of our processes we attempt to achieve certainty in the marine world where uncertainty is certain.

First published in the October-November 2015 issue of Marine Business magazine.

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