You have a contract with a business partner…and you made sure you covered all the important points…and everyone had their lawyer look at it.  Everything should be fine, right?  Unfortunately not.  When it comes to actual problems, contracts provide a framework for dealing with the problem but they rarely prevent or solve issues.  That’s because problems are usually caused by a situational change, and a contract can’t include a clause for every possible occurrence.

When a contract is written and signed, a certain state of the world exists as the foundation.  All parties agree to specific terms and timeframes, otherwise the contract will not be executed (signed).  At the moment of execution, a well-written contract will appear to address the challenging situations expected to occur.  When unexpected situations arise, however, the terms of the contract may no longer seem fair to one or more parties involved.  This is where a contract becomes a point of contention instead of a problem solver.

The way two parties handle difficulties can be determined more by the personalities and attitudes of the people involved than by the terms of the agreement.  Those who want to fight with litigation (or arbitration if stated in the contract) will do so.  Period.  You can’t convince a person to come to the negotiating table if they are unwilling.  You may try to point out the large expense of litigation, and how easily things can be solved by revisiting the terms of the contract.  I hope it works…but what if it doesn’t?

Let’s explore this problem with a fake contract between a transportation company and a dog toy manufacturer.  Suppose the contract states that the transport firm will charge the dog toy maker a total fee of $100.00 to move newly made toys from the factory to the distributor in the next city.  When the contract is signed, the dog toy company agrees to ship a truckload of products each day and the transporter agrees to charge the same fee for each shipment.  Both parties are comfortable with the terms, because the amounts are within the range of expected changes.  Then the price of fuel unexpectedly skyrockets and the shipping firm can’t make money on the original $100.00 fee.

Since the dog toy company is still holding up its end of the deal, it’s too bad for the shipping company, right?  Well, yes…according to the contract.  But the transport firm will have a strong reason to break the contract, or renegotiate the terms.  Who wants to lose money?!  If the two companies used to be better off when working together, then a disruption in the relationship is more serious than just a few dollars.

The companies can get their lawyers and start spending money fighting.  The toy maker can stick to the rules of the agreement and fight the shipper on the grounds that it has not honored the contracted price.  The shipper can start poking around the contract and transaction history, trying to identify a term that the manufacturer has violated.  This is not a pretty process for anyone involved.  Is there a better way to solve it?  Sure, if both parties are willing to work on the problem collaboratively.

Collaboration won’t take place unless the people behind the contracts put forth the effort, though.

Perhaps an increase in the shipping fee will be acceptable to the manufacturer if the required volume of shipments is relaxed?  Or could the fee be changed to a price that fluctuates with the market price of fuel, so the toy maker benefits from a drop and suffers from an increase?  Many solutions are likely possible, but only fighting can take place without the right perspective from both sides.

When writing or entering contracts, get to know the people on the other side, if possible.  The way the group handles the unexpected but eventual problems down the road will be greatly influenced by the human beings, not the pieces of paper.

Tagged with:

Comments are closed.