Contracts can sort out unmatched expectation issues

Wade Pearson

Contracts: the importance of hidden assumptions

 

I’d like you to think about the last contract you entered into.

Was it a tenancy agreement? Employment agreement? Maybe you bought or sold a house with a sale and purchase agreement?

Whatever it is, you’re probably thinking of a long document with small font and fancy words. That’s what a contract is, right?

Well, if you are enjoying reading the ODT with your morning tea, then there’s a chance you’ve just bought a coffee from a café. If so, then that was probably the last contract you entered into.

Yes, buying a coffee is a contract. A contract can be as simple as two people agreeing on something, without writing anything down.

So why does it take one sentence to order coffee, but 10,000 words to buy a house? There is more than just the difference in value between a coffee and a house.

In this article, we’re going to use the coffee example to explain some important concepts for negotiating contracts or agreeing transactions.

Let’s look at “buying a coffee” – you walk into a café, ask for a flat white and give four dollars to the barista. They make the coffee and hand it over. Simple, right? Well, there’s a little more to it than that.

You asked for a “flat white”. That would get you a blank look in other parts of the world, as it’s not a common term overseas. So we may need to specify what “flat white” means. Also, how do you know when to pay? Generally you pay before ordering, unless you’re dining in.

What else is part of the contract? Well, you would probably recoil in horror if the barista handed over a cold, week-old coffee. The coffee should be freshly-made, and hot (but not too hot of course). It should also be in a cup.

Already we can see that even a simple action like buying a coffee actually carries many hidden assumptions (many of which seem obvious).

One reason that you don’t need a written contract to buy coffee is because everyone understands each other, and everyone has the same assumptions and expectations. Every day, thousands of people buy thousands of coffees, so there’s no need to write everything down.

However, in commercial contracts, people don’t necessarily do the same thing every time, so most parties have different assumptions and expectations. This means that a written contract is often vital in a commercial context, as not everything is so obvious that it goes without saying.

So what can we learn from looking at the assumptions behind a contract? Let’s keep going with the coffee example.

What if you decide halfway through that you don’t like the barista and you’d prefer someone else to finish making the coffee? Can you transfer the part-made coffee to someone else to finish? Well, this might be impractical for a coffee – but it is common for an IT project, like building a website. Plenty of people have been caught out with a half-finished product that can’t be completed by another developer.

What about a bad-tasting coffee? You can probably get it remade, if you ask right away. But good luck with getting a refund if you wait a month to complain (or if you’ve already drunk the entire coffee). On this point, you have some protections under the Consumer Guarantees Act – if you’re a consumer. However, businesses don’t get those same protections. If your business is buying goods that turn out to be defective, you might find yourself with no way to get your money back.

What if you are buying that coffee to give to a friend? You are free to do so. But a software licence might be for your business only, meaning you can’t transfer (or sell) that licence to anyone else.

So what does this all mean? Well, it’s easy to think about contracts as boring legal documents, and they often are. But a good contract can sometimes help you in ways you might not have thought of before.

In business or in your personal life, when you are trying to agree with someone, remember to think about the assumptions and expectations you both have. Even if you don’t need to write it down, sometimes the act of reducing something to writing will help to draw out any hidden assumptions and expectations.

Wade Pearson is a Senior Solicitor in the commercial team, at law firm Gallaway Cook Allan. This article originally appeared in the Otago Daily Times on 20 January 2020.