29 Nov Why business people don’t want to go to court!
“That contract’s not worth the paper its written on”. I understand that this is how people may feel, when they have taken the time to make a contract, yet a dispute arises anyway. Nevertheless this statement is rarely true, where a contract is properly drafted.
The point of a contract is to provide the parties to the contract, with a starting point, in case there is a disagreement. It is not the case that a White Knight will ride in, to put things right, when the terms of the contract are broken. If the agreement is properly drafted there will be a good number of matters on which it is more difficult to have an argument. Yet there will remain scope for an argument and it is up to you to enforce your rights. You will see below there are things that you can do to make a dispute less likely.
If a contract is not put in writing then it may be near impossible to say what the real agreement is. This will add an unacceptable level of cost and uncertainty to any attempt to enforce the terms.
If a contract is broken then it is still necessary for a court to enforce the contract. What is true, is that courts have limited powers. In many cases the best a court can do is issue a judgement. If you obtain a judgement then it needs to be enforced. If the person that you are dealing with has “nothing” then a court will not be able to extract “blood from a stone”
The first rule therefore in dealing with someone is to ensure that the person has some financial capacity. If you chose to enter into a partnership or an agreement with someone who has no assets or in the future, is expected to have no assets then no agreement will save you. These are matters that you should investigate with your accountants and advisors before the deal is done. Also note that the only asset that counts is real estate, as it is difficult to move about. If you obtain a judgement you may find that the other party suddenly says that everything that appears to be their’s, is in fact owned by someone else.
The next rule is do not start proceedings against someone who has no assets unless there is, some compelling reason. Not all arguments are about money. But take note that you are at a serious disadvantage in this situation.
It is also true that having been through court proceedings that an unsatisfied party may appeal. This means that the party with the deepest pockets has an advantage.
Having been through litigation you may get an award for costs. The legal costs can be as much as the amount of a claim. You will want to ensure that payment of the costs is made. This can itself be a difficult process. The party who lost may require you to explain every item of legal work completed and argue about whether each of these items is acceptable. This may require examination of every item of cost, phone call by phone call and letter by letter.
If you believe that a party has the capacity to pay the judgement that the court gave to you then, you may have to take the next step of bankrupting that party so that a trustee can investigate their affairs. This is likely to cost a minimum of $8000.00 on top of your other legal costs.
So don’t get yourself involved in litigation. Draft the agreements that relate to your business properly. Even simple litigation commonly costs in excess of $30,000.00
What to do.
1. If there is a disagreement after the contract is signed be prepared to give a little (even if you are in the right), be reasonable and take these steps at an early stage. Once trust is gone everything gets a lot harder.
2. Make sure that the people you are dealing with have assets, preferably real estate. Check the title deed. The name of the person you enter into the agreement with must be noted on the title of the property they claim to own. It is of no use whatsoever, if the property is in the name of a trust, a company or a spouse. Make sure that you the property is not mortgaged. If it is, then investigate.
3. Draft a contract that deals with all the important issues. This will discourage litigation in the first place and make it easier, faster and cheaper to have a legal battle if that is necessary.
4. The first thing a contract does is prove who you were dealing with. You would be surprised how often clients say that they had an agreement with John Smith but John Smith says that the agreement was instead with John Smith Pty. Ltd. So, were you dealing with John Smith, who owns a million dollar house or John Smith Pty. Ltd. the insolvent company. Don’t leave this to a court to decide.
5. A good contract will often be in the form of a deed and the start of the deed will tell the story of the circumstances and expectations of the parties, before the legal obligations are set out. This can be very helpful.
6. Even if you do not want a long agreement you should have a professional consider the most likely things to go wrong, and at least deal with these.
7. Any written agreement should require mediation before litigation. We are surprised how often a dispute can be resolved by mediation even when we thought this would be impossible.
8. Any written agreement should nominate the state that has jurisdiction so that you do not find yourself traveling interstate to a court hearing.