Short post today on the ethics of commercial contracts, enforcement, and wisely choosing with whom you do business. Those who have heard me speak at events and the seminars I host on business liability probably heard me say at one point, “Contracts keep honest people honest.”
It’s a simple idea, and what it means is that well-written commercial contracts exist to remind the parties to the contract what they agreed to do in the relationship with the other contractor. They are memos of the deal: price, payment terms, specifications, warranties, relevant dates, that sort of thing. These are the basics of any contract. Everything else is usually some kind of damage assessment mechanism.
What Should Be In All Commercial Contracts
The purpose of commercial contracts is to set out the agreement between the parties, so that when a dispute arises, the parties can look at the agreement and say, “Oh, yes, we agreed I would sell you x units for the price of y dollars. I forgot, and I will correct that.” Or, “you agreed you would provide those units by this date, and by not doing so, my own business was harmed because I could not meet my own deadlines, and I am entitled to the penalty we agreed on.” Price, dates, damage assessment.
Back to the expression, “Contracts keep honest people honest”. commercial contracts should be used to remind parties of the specifics of the agreement. Business owners are busy, and often juggle multiple complex commercial contracts that they have to fulfill. This is why one of the most important parts of the contract are the specifications – what, with as much precision as we can draft, is being given from one party to the other. “Units” versus, “72 units, color blue, size medium, catalog item #xyz.”
Project Specifications are part of commercial contracts
Construction contracts incorporate the “project specifications” which are the actual architecture/engineering drawings. There’s lots of specificity in those (or at least there should be). My clients will have me sending back drafts to get them to put together more clear, precise, specifications; or similarly, payment terms.
“Tony, these units are yellow, we agreed to blue.” An honest business man will make good, “Oh you’re right, I see here in the specifications it calls for blue units. Sorry man, I’m doing fifty of these right now, all different colors. We’ll ship out the correct ones today.” “Specifications”, “Scope of Work”, “Work Order”, whatever you call it.
A well drafted contract allows the parties to reference the specific terms of the agreement. This in my experience, are the most likely part of the agreement to result in a dispute if poorly drafted. Even a warranty claim is ultimately a claim about the failure to meet the contract specifications.
Bad Actors Must Face The Wheel
Conversely, no amount of me drafting a hyper-detailed commercial contract will stop an unscrupulous person from cheating. No exceptions. I don’t care how specific the contract describes the deliverable, if a business owner is dishonest, s/he will be dishonest when administering the contract. If they’re inclined to cheat and steal, they’re going to cheat and steal. Choosing honest people to do business with is equally as important as having a properly drafted contract. An honest businessman will correct his mistakes in performing the contract when shown those mistakes. A dishonest businessman will use the contract as a cudgel to avoid responsibility.
Conclusion To My Post On Commercial Contracts
That is what I mean when I say commercial contracts “keep honest people honest.”
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