Steve Harms

Monday, April 18, 2011

Entering into Contracts: Make them complete and clear!

Business contracts are always the subject of much litigation. It seems that there is no such thing as a “bullet proof” contract or a contract which just can’t be interpreted more than one way.

So, when is this a problem? Well, to start with, any ambiguity in a contract is generally held to be the fault of the drafter (author) of that contract. Simply put, if there is a vague term in a contract, the courts will side against whoever wrote it!

That having been said, we can’t always adopt a philosophy of letting the “other guy” write up the business agreements we enter into for the simple reason he won’t include many of the terms or conditions we think are essential! So, we write contracts as best we can.

A recent Michigan case involved a contract between a manufacturer’s representative and the company he represented. The company made steel wheels for the automobile industry. Interestingly enough, the parties entered into a written contract which left out a very important term: how much commission the representative would earn on sales of the wheels!

After obtaining several lucrative contracts with Ford and Chrysler, the rep and the company couldn’t agree on a commission rate, and a law suit was started to establish one. Although the court did not leave the rep without a remedy, it did admonish both parties that this was really “an agreement to make an agreement” and therefore there was no contract!

The court did award damages in favor of the representative on other theories, but we are once again reminded to make sure our contracts are clear, easy to interpret, and contain the important terms!

One good thing the Uniform Commercial Code (UCC) does for us, is to fill in some essential terms such as delivery terms, and even a price term. Why wasn’t the UCC used by plaintiff manufacturer’s rep in the case cited above? Simple. The UCC only applies to the sale and leasing of goods, and a representative’s contract is really a service contract between a manufacturer and a representative.

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