Why you should prepare a clear written agreement

Why you should prepare a clear written agreement

It often happens that two parties will have a commercial relationship that has not been recorded in a written contract. Not having a properly drafted contract is risky, particularly when the good faith on which the relationship was built disappears, and the relationship ends. That is when a clear and concise written agreement, which sets out the rights and obligations of the parties, is invaluable.

In a recent case, Company A provided services to Company B for over 4 years, based on a relationship built on good faith. At a meeting between the executives of the two companies, it was suggested that the arrangement between them be formalised in a written contract. Company A sent a document entitled “Proposal”. The document included the following information:

“Contract Period: 12 month rolling. Cancellation will require at least 30 days written notice prior to the end of a given contract period.”

The document did not say when the contract period started. The document was undated. It was signed by Company B on 18 June and by Company A on 22 June.

A few months later, Company B was not happy with the services it was receiving and decided to give written notice terminating the contract after 30 days. Company B said the contract terminated at the end of April, based on the services commencing during April 4 years earlier.  Company A disputed the termination date and said the actual termination date was in July because the work under the “Proposal” commenced during July after the document was signed. The Court had to decide what the proper termination date was.

The Court said the default position is that a contract starts from the date that the last party signs it. To imply a term that the contract started in April, as argued by Company B, it must be so obvious from the contract that “it goes without saying”. In this case, it did not go without saying that the contract started before it was signed. Further, it was not necessary to give business efficacy to the document to imply an earlier commencement date. No reasonable person reading the document would consider that the commencement date was an earlier date.

Company B was liable to pay the fees for May to July.

The lesson to be learnt from this case is that the parties could have avoided costly litigation if the contract was carefully prepared, and the commencement and termination date of the contract was properly defined in the document.