Diary of a Commercial Lawyer Part 1 – The Pitfalls of Oral Contracts
Reflecting on some 35 years of experience as a commercial lawyer, one thing in particular stands out: variety. The extraordinary scope of the issues presented by clients to resolve.
Apart from the fact there is nothing better than variety to keep your daily job interesting, 35 years of variables presented to you to deal with adds up to experience. Experience makes you better equipped generally to deal with the multitude of matters that hit the desk of a commercial lawyer within his / her area of practice.
Just what is the area of practice of a commercial lawyer is best described by stating what, for this commercial lawyer, falls outside it: family law (except to the extent to which tax advice or advice concerning some associated commercial matters is involved), personal injuries, workers compensation, criminal law (except certain tax related offences).
The purpose of this series of articles is to describe some of the multitude of matters I have dealt with as, hopefully, an instructive and informative representative sample of the issues generated by interactions between people (including the various entities and arrangements that people establish to use in their interactions, for example, companies, trusts, partnerships, clubs and other associations sometimes incorporated, sometimes unincorporated) and with government authorities and institutions, including but not limited to, “business” transactions.
I hope each reader will find something of interest in at least one of the case notes in this series.
All the best
The Pitfalls of Oral Contracts
“The only way to get the best of an argument is to avoid it” – Dale Carnegie
He was a clever, experienced and highly entrepreneurial businessman. He was a very “can-do” type of person. He had developed a highly innovative product, which he was seeking to commercialise. He found an, apparently, highly experienced manufacturer for his product. He obtained a patent to protect the intellectual property in his product. He was an excellent salesman and lined up substantial contracts for the sale and installation of his product – some actual executed contracts and many prospective contracts.
However, he was disinterested in spending money on a lawyer to document the arrangement under which he engaged the manufacturer to manufacture his product. Instead, he relied on what he considered to be the terms that he had agreed with the manufacturer during a series of face to face meetings.
The manufacturer failed to manufacture the product to specifications. This was not discovered until installation of the product under several contracts had been completed and the product failed.
We were instructed to sue the manufacturer for breach of contract, negligence and misleading and / or deceptive conduct in breach of the Australian Consumer Law. The writ was prepared and issued.
After some 12 months of expensive effort in the litigation, the matter went to a Court appointed mediation and was settled. Our client accepted a substantial payment, but less than what he considered to be the value of his lost opportunity, in terms of contracts / profits lost or forgone, during the period from the installation failures to the client being able to find another manufacturer capable of manufacturing to specifications.
The failure to spend money up front to get a lawyer to prepare an adequate written contract between client and manufacturer was a major and expensive error.
While, in the client’s favour, he had a record of emails that supported his case and had the benefit of video evidence regarding his method of installation of the product, which negated one of the key aspects of the manufacturer’s defence, in a crucial respect the dispute came down to his word against the manufacturer’s word as to what was said and agreed at a particular meeting between them.
Therefore, the risk of loss at trial was high – because the ultimate outcome would depend very much on who the judge believed. That can be a very risky matter indeed. It is possible for a truthful witness to, because of the way they give their evidence, for example be too assertive / argumentative / vague / forgetful in the witness box, come across badly and be disbelieved, or found to be insufficiently credible to establish their case – particularly if their opponent is a smooth and experienced liar.
Why would you risk your entire commercial enterprise on a battle between yourself and the person you are dealing with as to who is more believable when put under pressure in a witness box? It is commercially nonsensical to take such a risk.
The matter was also very factually complicated. The obligation on each of the parties to give “discovery” i.e. disclose and make available every “document”, which includes electronic records, which is relevant to any of the matters in issue in the dispute, can be an extraordinarily time consuming and expensive exercise.
For your lawyer to gather together all of the facts that are material to your case and analyse the legal implications and produce a statement setting out, in the necessary detail, exactly what is your claim (i.e. your “statement of claim”), will involve expense that is in proportion to the factual and legal complications. You might think that it is all very straight forward. The reality is often drastically different.
The whole idea of carefully and sufficiently documenting a commercial transaction at the outset is to avoid, as far as possible, any dispute as to what the terms of the deal are, including what are the obligations of each of the contracting parties. Reducing the prospect of any dispute between the parties is not only obviously vital to avoiding wasting an enormous amount of your commercial time on unproductive argument, but essential in order to keep yourself out of the hands of the Courts / arbitrators / your litigation lawyers.
Any other approach to a commercial transaction can, usually, be accurately described as the opposite of smart.