The days of doing business by handshake have long since come and gone. In not creating legally enforceable obligations a business opens itself up to the creation of financial and reputational risk, which risks could ultimately lead to litigation and/or huge financial losses.
In the food industry the delivery of one end-product typically requires the interaction of several suppliers, logistics companies and contract manufacturers. To manage or regulate these interactions, businesses rely on agreements between the parties involved. However, not all agreements are necessarily binding contracts. To create a binding contract between two or more parties, all parties need to have a serious intention to create legally enforceable obligations.
Written contract is preferable
A contract does not necessarily have to be in writing. However, in a business environment where non-fulfilment of an obligation could impact on delivery of a service or product, resulting in financial loss, it is always preferable to have a written contract in place. Concluding a written contract with your business partners will minimise the chances of a misunderstanding between the parties as to the terms agreed upon. The practice of concluding written contracts, and the periodic revision of these contracts to ensure that anychange in the terms agreed between the parties or in law are accounted for, is a critical part of business and risk management.
What makes a good contract?
A good contract is one that is not overly complicated, yet still sets out clearly the obligations and rights of the parties to the contract. The author of a contract must take into consideration, if not all, then the most likely risks involved in the relationship between the parties. The contract should set out the consequences if any of these risks materialise. For example, in the case of contract manufacturing; who is responsible for ensuring that the necessary ingredients are supplied on time for manufacturing? In the case of interrupted or delayed supply, what are the rights and obligations of the parties? If such a delayed supply leads to financial consequences, who will be liable? And in what proportions are the parties to be held liable?
Unforeseen risks
It may sometimes occur that the business is under pressure to deliver a product, for instance a promotional product or new flavour. One may think that the current contracts will cater for the new product, but if no consideration was given to putting the correct contractual variations in place at the initialisation of a project, you may later find yourself in a position where the project timelines do not allow for the drafting or negotiation of contractual terms. In essence, it can be said that in such circumstances the parties opt to use a “standard manufacturing contract”, which may not consider the risks involved in this specific project and/or with this specific business partner. As unforeseen risks surface, the parties could verbally agree to certain variations or liabilities. Alternatively, parties may simply choose to enter into verbal agreements from the start, if they have a good relationship with that specific business partner. In instances like these, parties exponentially increase the risk of a misunderstanding as to the agreed terms or they could completely omit to consider the impact of certain variables. This could ultimately lead to litigation, should the relationship between the parties turn sour.
The relationship between one business and its various individual business partners will vary, depending on the deliverables and the specific risks involved in the relationship between the parties. There is, unfortunately, no such thing as a standard contract. Any business would be well advised to ensure that it not only has the necessary contracts in place, but that it also takes into consideration the individual relationships it will have with its business partners. Ensuring that these contracts are in place minimises the risk of a breakdown in the relationship between business partners and saves a lot of money and time for all parties concerned.
In conclusion, one can equate a business contract to an antenuptial contract; as long as partners are in love, cognisance is not taken thereof. But if the relationship breaks down, each party will certainly rely on their rights and obligations in terms of the contract.
