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What’s the use of contracts?

By on May 8, 2012

In this guest post from John Halton of Cripps Law, we look further at contracts, specifically for managing business relationships. Don’t forget to check out the recent Dear Jas post on contracts from the perspective of EULAs.

Shared under a creative commons license by Victor1558

During April, rumours swirled that the Prey 2 first-person shooter had been cancelled by Bethesda Softworks due to a contract dispute with the developer, Human Head – who were said to have downed tools on the project in November 2011. Bethesda subsequently announced that the game had not been cancelled, but delayed beyond 2012 as it “does not currently meet our quality standards”.

If the delay is indeed down to a contractual dispute, it will not be the first time that a developer and its client have fallen out in this way. This is a particular risk on projects – such as the development of video games – where the exact scope of the project is not clear from the outset. The client can become frustrated at the apparent lack of progress, while the developer can feel trapped by a fee structure that no longer reflects the scale of the work.

As the problems mount, sooner or later someone decides it’s time to pull the contract out of the bottom drawer and see what their legal options are.

The first thing they may discover is that the bottom drawer is empty: there either never was a contract (“let’s just get started and worry about the legal stuff later”), or the contract was never signed.

Or they may find the contract is there, but doesn’t help them. It may leave ownership of intellectual property unclear, resulting in an impasse in which neither party is able to use or sell the finished product. Or it may bear no resemblance to reality – either because it was a generic document which ticked the box marked “contract” but never reflected what was actually intended, or because it failed to take into account changes as the project went ahead.

Uncertainty abounds, tempers rise, lawyers are called in, the relationship collapses, and – most important of all – a great commercial opportunity is lost for everyone.

Given all this, the obvious question is: “What’s the point of having a contract in the first place?”

As I see it, in most circumstances there are only two main reasons for having a contract, and for caring about what it says. The most important is this: to make the parties think about things before the contract is signed. As a general rule, if the contract doesn’t mention something, that probably means the parties haven’t thought about it – or they’ve each thought about it, but haven’t talked about it to one another, and have signed the contract with very different expectations about what happens next.

A good contract will flush out issues that the parties may not have thought about, but which they then realise matter to them. Intellectual property use and ownership is a classic example; service levels, timescales and change management are another. This gives them the opportunity to reach an agreed position before the contract is signed – or, at worst, to walk away from the deal before it’s too late.

This in turn helps to build the commercial relationship: each party has a better idea of what they want and of what the other party wants, and so there’s a basis for trust and an avoidance of misunderstanding and uncertainty later.

The second reason for having a good contract is so that you never have to worry what a court will say about it. The vast majority of commercial disputes are resolved without ever darkening the doors of a court, and those that do reach court usually do so because the contract leaves things unclear (and because there’s a lot of money at stake – but that’s another story). A good contract gives the parties a clear basis for negotiation, which increases the chances of a deal.

Business relationships are like any other relationship: things will go wrong, arguments will happen. But they are also like any other relationship in this: prevention is better than cure. Better to understand where the other person is coming from, and leave as little as possible to chance or misunderstanding.

John Halton is a partner in the Advertising, Technology and Media group at Cripps Harries Hall LLP. He blogs at Law in the Cloud@johnhalton

About John Halton