The standard contract

Part of risk management for a logistics company is to understand its contractual obligations and the allocation of risks and liabilities between it and the other contracting party or parties

Proper risk management extends to the mundane contracts that logistics companies encounter on a day-to-day basis. In many instances, it is the “standard” contract, which gives rise to disputes between contracting parties.

In law there are two important rules for interpreting contracts. If the language is ambiguous, and if one interpretation renders a contract valid, while another invalidates it, the court will interpret the contract so as to keep it valid.

Ambiguous words or clauses may be interpreted against a party in whose favour, or at whose request, they were inserted (contra preferentum rule – “interpretation against the draftsman”).

Contractual terms must clearly set out the nature and details of the performance due by the parties; the manner, time and place of the performance, and any other relevant term that the contracting parties may agree upon.

In setting out the contractual terms, the golden rules to drafting a contract must be appreciated. Use plain language, avoid redundant words and be precise to avoid ambiguity, vagueness or generality.

Before signing any contract, understand each term. One should always ask: “What does this mean?” The answer should be clearly evident from the wording of the contract. If that is not the case, then risks have not been properly managed in the draft contract.

A case in point is a lease agreement between a logistics company and a warehouse service provider for the lease of a warehouse. It contained a clause which required the lessee to pay the pro-rate share of the rates and municipal charges as assessed by the local authority, and which were payable by the lessor. Elsewhere in the agreement, reference was made to the “proportionate share in rates as charged from time to time by the local authority”.

The confusion in this lease agreement arose from the fact that, on several occasions, it set out the current rate and charges levied by the local authority. The term “pro-rate share” was also poorly defined.

When the local authority revalued the leased property and increased the municipal rates and charges by a substantial amount, the lessor lodged an objection in terms of the prescribed procedure.

However, the lessor did not give the lessee notice of this increase in the municipal rate. Around the time of the expiry of the lease, the lessee was then presented with an invoice for this pro-rate share of the municipal fees and charges.

The lessee argued that had the company known of the increase timeously, it would have given the lessor notice to terminate the lease within the contracted one-month notice period.

The difficulty that the lessee found itself in arose from the fact that it did not understand its contractual obligations and risks in respect of the municipal rates and charges; and failed to appreciate that the it was not protected by the early termination clause in the lease agreement.

Further, the lessor did not know whether or not it had to give the lessee notice of the increase in the municipal rates and charges. All this uncertainty in the agreement gives rise to disputes between contracting parties – which defeats the very purpose of the parties entering into a written contractual agreement in the first place.

Proper risk management requires that the lessee understands its contractual obligations and the risks (in this case, the risk of local authorities increasing rates); that these obligations be clearly set out in plain language; and to ensure that the lease agreement contains a mechanism that can mitigate against that identified risk (for example: proper notice by the lessor when the local authority increases rates).