What Is a Distressed Contract and Why Should You Seek Help with It?
The world is in constant flux – a fact that 2020 has shown to be true perhaps more than any other year. Things change, and we must change with them.
Contracts aren’t built for change, however. They’re set in stone, and for good reason; it’s their job to put hard rules in place, and to ensure that no part of an agreement is up for debate or interpretation.
But what happens when a contract no longer reflects the world in which it’s supposed to function? To get the answer, you’ll need to consult a contract lawyer. Welcome to the world of distressed contracts.
What is a distressed contract?
A distressed contract is a contract that – due to changes in circumstance, but through no fault of the parties involved – is either deviating from its original intention or is incapable of being performed.
These contracts are usually one or two years old and have slowly gone ‘off the rails’. The reasons for this can be many and varied, including:
- Certain functions of the contract can no longer be performed or no longer apply.
- The original scope was not properly defined.
- One or both parties have since gone in different directions to that which the contract was built around.
- The original parties who signed the contract are no longer actively involved, perhaps due to company buyout or staff turnover/promotion.
- Any number of other legitimate and unavoidable reasons.
Because the contract is no longer fit for purpose it stops being honoured, which can cause mounting stress between the parties.
In a fast-moving world where things can change in an instant, distressed contracts are becoming increasingly common. But while contracts are designed to be the exact opposite of flexible, there are ways that you can ensure your contracts keep up with our evolving world.
Amending vs revising a distressed contract
Anyone with a distressed contract in Australia has two ways to fix it – amend or revise. The best path forward will depend on the reason behind the distress, the level of that distress, and the complexity of the contract.
If the contract is relatively new and the cause of concern is relatively minor, amending it will often be the best cause of action. If the contract is quite old and is riddled with issues, it may require a more complete revision.
The complexity of the contract will be perhaps the major factor in this decision. If the contract is complex, a full revision won’t often make sense, as much of the contract will probably still apply, no matter how distressed it is. If the contract is quite simple, a fully revised contract could almost be as quick and simple to produce as an amended one.
The process of fixing a distressed contract
Once you’ve identified a potentially distressed contract, the first step is to speak to a contract lawyer. Contract law is a sprawling and complex field, so specialist professionals are best placed to guide you through the maze.
A contract lawyer will generally follow a similar procedure to this one when resolving your issue:
- First, a forensic examination of the contract is conducted. It will be analysed as it was entered into on the effective date.
- The next step is to determine the major reasons behind the current distress; why the intentions of the parties are now deviating, why circumstances have changed, and/or why the original scope was perhaps not properly defined. This step involves an analysis of the conduct of both parties and reasoning behind those motives to ensure that the contract is genuinely distressed, rather than an individual party is at fault.
- Once a complete, detailed view of the situation is formed, the contract lawyer will formulate a way forward to resolve the issue, either through amendment or revision.
- Where applicable the contract lawyer will oversee a negotiation between the parties to create the amended or revised contract.
- Once all parties agree to the amended or revised contract, the agreement will be documented and signed and will commence under the new terms.
The length and complexity of this process will reflect the length and complexity of the contract under review, but with the help of a contract lawyer you can expect that it will be completed as efficiently and in as painless a way as possible.
Almost every business will encounter a distressed contract at some point, and with the world evolving faster and becoming more complex, these documents will only become more common.
At the Contract Company, we specialise in amending and revising distressed contracts. While it’s often complex work, we find it particularly rewarding, especially when we can help two distressed parties work better together.