Many business people are reasonably competent at reading a contract to understand the basic commercial terms, some obligations and liabilities – and some may, in their professional life, be responsible for amending contracts.
The same business people can sometimes be heard making the following statements, “I don’t need to pay a lawyer to do something this simple” or “I know my business more than any lawyer could” or “I have enough money to not worry about this one day going wrong (at the time the money is available)” or “lawyers are worse than sharks” (cue lawyer jokes).
Pride may come before a fall.
As per many seemingly mundane tasks in life, there is an inherent danger of additional exposure and risk embedded in complacency or overstretching a skill set into what can be a specialist field, internationally and domestically.
In order to support this proposition, I will set out some common misconceptions and some often unknown principles relating to contracts – and will set out how this can create financial and legal risk.
Beyond the Basics
Some basically educated lawyers and contract professionals have studied contract law to a certain level, which many business people will already understand. This is fine for some practitioners; not everybody needs to be a contract expert. The terms of a contract must be as certain as possible, the subject matter, price and parties must be clear and correct and it is convenient to place commercial information in annexes or schedules. Some even understand how to widen or narrow risk beyond deleting or inserting terms.
However, if a contract is material to your business or investment, then the framework governing the contract should not be guessed. It should be truly understood by the person assigned to draft and amend an agreement that will, for the most part, be intentionally binding between parties.
Which legal system governs the contract?
Lawyers who hold themselves and their firms to be ‘international’ law firms, must be able to grasp and deal with the interplay between multiple legal systems. This does not mean they need to be a qualified lawyer in every legal jurisdiction globally. Fortunately the communication systems in the world have changed so that isn’t necessary, and ‘local counsel’ can be sought on points of law, whilst a ‘leading lawyer’ can deal with the main features of legal advice on an investment.
For example, if a Hong Kong registered company joint ventures with a Singaporean company to invest as a minority shareholder in a Thai company, moving funds from global income from other jurisdictions by way of inter-company loans, to take equity and loan monies into a Thai company to develop a real estate project with a Thai investment group, which law will actually determine how the contracts in that structure
will be interepreted?
Understanding the boundaries and limitations of a contract
A common error of poor drafts persons is to regurgitate a literal agreement into a contract without being aware if the relevant law, such as Thai law, actually permits that term.
For example, in Thailand, there are many ‘Government controlled’ contracts, from which a deviation may or may not be permitted – for example condominium sale and purchase agreements. Furthermore, the ‘freedom’ of parties to strike a bargain may be regulated by a specific piece of legislation, a civil code with guiding case law or, in some jurisdictions, judge-made common law.
Finally, some contracts may only be made in the relevant language of a country’s official documents, such as Thai. Therefore, a very common mistake is for draftspersons to narrowly and pedantically focus on the English language of a contract, forgetting that the controlling language of a document, should there ever be a dispute, may be Thai. It is of course, possible, to supplement a Government controlled agreement or Thai language agreement, with other supplemental agreements and a larger framework of contractual relationship documents.
Remembering that contract perfection is illusory
A contract is formed at a specific point in time when a ‘state of affairs’ is known to the parties. The contract can then deal with matters relating to that which is already known. Further, contracts may provide for agreement about the future on an ‘ex ante’ basis, or may allow agreements to be made contractually subsequent to events having occurred ‘ex post’.
Why is this important? Well, the reason is that a normal commercial agreement will link to an investment, and is therefore mostly driven by economic considerations and will rely upon principles of economic efficiency, trade-offs between risk and obligation and the priority of hierarchy of ‘actors’ related to a contract – for example in lending arrangements there may be senior secured creditors, junior secured creditors, subordinated unsecured junior creditors, employees who are employed by a business fueled by debt, and suppliers dealing with a business with large debt obligations. All of this should be considered in relation to a relevant contract.
There is a deep and rich theoretical world of analysis relating to the relationship between contracts and aspects of our daily lives – trade, finance, consumer, invisible internet usage agreements and so on. In fact, some theories stipulate that it is better not to over elaborate a contract to try and predict too many unknowns, and to instead include principles as to how a contract dispute or issue will be resolved. Many drafts persons simply include a dispute resolution clause, and forget disputes can be resolved before reaching a court or an arbitral institute’s door.
For fear of stating the obvious, not all doctors are specialised in the relevant field you may need healthcare in. Not all architects are good at residential house designs but they might be good at designing a tower. Similarly, not all lawyers have international and domestic expertise in understanding contracts and how contract theory and practice may relate to your business objectives and applicable laws. Next time you are tempted to voice the over-used phrase “Don’t lawyers just cut and paste these things anyway?” maybe take a moment to wonder why many cut and paste jobs end up in litigation or unexpected disagreement between the parties.
This article was written by Desmond Hughes and first appeared in Window on Phuket.