People all over the world enter into contracts every day. Contracts can come in many forms – they can be written, verbal, or even a combination of the two. Some contracts are prepared by lawyers, some are taken straight off the internet and some might even be scribbled on a napkin over lunch.
This article will touch on some famously bad contracts and also some of our top things to look out for when entering into a contract.
Famous bad contracts
There are some famous contracts that have been labelled as “bad” because of the effect the contract ended up having. These contracts were not necessarily drafted badly; they just ended up having poor outcomes for at least one party.
Apple Computers was founded in 1996 by Steve Jobs, Steve Wozniak and Ronald Wayne. Ronald Wayne had a 10% share in Apple Computers. Ronald was sceptical about whether Apple would succeed, so he sold his 10% share for $800 plus a further $1,500 to agree to never make any claims against Apple. Although there may not have been anything wrong with the drafting of this agreement, in hindsight, it turned out to be a less than ideal outcome for Ronald Wayne, as he ended up forfeiting his share in what turned out to be one of the most successful companies in the world.
- Chelsea Football Club
In the year 2000, a soccer player, Winston Bogarde, signed a contract with the Chelsea Football Club for £40,000 per week for four years. However, unfortunately for Bogarde, shortly after he signed the contract, the manager of the club was fired and the new manager was not the biggest fan of Bogarde. In his four years with the Chelsea Football Club, Bogarde only played 12 games. Bograde should have sought to have a clause in his contract that if he performed he could play a certain amount of games or he could move clubs without penalty.
- Star Wars
Most movie producers are paid a fee to direct a movie. In 1977, George Lucas famously forewent his US$500,000 fee to direct Star Wars – A New Hope in exchange for the rights to all sequels, merchandise, and licensing. In 2011, a year in which no Star Wars movie was released, merchandise sales were US$3 billion. At the time, Fox must not have had much faith in the franchise. Ultimately Lucas went on to sell Lucasfilm to Disney for a reported $4 billion. Fox could have sought to sell for less but with a right to ongoing royalties for sales of Star Wars products. This could have achieved a better result for them.
Contract mistakes to avoid
The above examples are examples of contracts that had a bad result but were not necessarily prepared badly, but of unforeseeable circumstances that unfolded after signing. A good lawyer, with experience, can often foresee things others could not. Sometimes there is nothing you can do about an unforeseeable event happening after you agree to a contract, but there are some things you can do to ensure your contract is as well drafted as possible.
It’s very important that all of the terms of the contract are written clearly and such that there is no ambiguity about what they could mean. For example, does a reference to “days” mean business days or calendar days? Does a reference to a dollar amount refer to Australian dollars or some other currency? Are all important words clearly defined?
Before signing a contract, you should read it carefully to ensure your rights and protected. Are there any rights the other part has that you don’t?
It is not possible to contract out of the law. A contract might say that the parties can, or can’t, do something, but if relevant legislation, common law, or other regulations say otherwise, they will prevail over the contract.
- No defined terms
All important terms should be defined. For example, if the contract is referring to a property, that property should be clearly defined.
- No due diligence
Although the events that occurred in the examples above may have been unforeseeable, sometimes some due diligence can go a long way to checking whether it’s a good idea to sign a contract.
Whilst contracts can be verbal, it is best practise to ensure your agreement is put in writing. If there is any dispute down the track, a written contract will greatly assist in proving what was agreed between the parties. Further, the act of putting your agreement in writing will identify whether you and the other party are on the same page and help to clear up any ambiguities.
- Internet template
Whilst it may be tempting to take a contract template straight off the internet to save costs on lawyers fees, it is not recommended. An internet template contract will not be tailored to you and may have unintended consequences. The template could be from a different country or state, meaning different laws apply, it could be one-sided, or any other number of poorly drafted clauses. The cost of paying for a properly drafted contract will be far less than the cost of arguing over a contract if it goes badly.
- No legal advice
Signing a contract without first obtaining legal advice can be risky, especially if there is a lot at stake. At Lynn & Brown Lawyers, we have a team of commercial lawyers with experience in preparing and reviewing contracts. We can review a contract you have been provided and help you to identify any parts of the contract that might be problematic and need changing.
If you need a contract prepared, or you have been given a contract that you would like reviewed, don’t hesitate to get in touch with Lynn & Brown Lawyers for expert legal advice.
About the authors: This article has been co-authored by Chelsea McNeill and Steven Brown. Chelsea is a lawyer that graduated from Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.