When bad contracts happen to good business people things get ugly. Tempers flare. Court fees escalate and no one’s happy with the end result. A bad contract generates disputes. It doesn’t reflect what’s agreed to or it ends up generating fights over what the parties expected of each other.
A good contract governs the rights and obligations of both parties. It can eliminate or reduce the complexity of any dispute, because people are less likely to fight over issues that are clearly spelled out in the contract. If they do fight, a court can quickly and easily enforce the obligations imposed by the good contract.
Too many times, contracts can’t do their job because of the way they are written or the way the parties do (or don’t) follow what they say. In truth, having a bad contract can be as destructive as not having a contract at all. Here are a few of the most common errors that we’ve seen spark contract disputes:
Provisions that don’t make sense– You’d be surprised at the number of contracts that come across my desk that have provisions which don’t make sense. They promise things that shouldn’t be promised, or impose obligations that shouldn’t be imposed. This is most common when someone takes a contract that was written for one transaction and repurposes it for another transaction without a detailed review of every provision. For example, an employment agreement for an employee who is being hired for a guaranteed term will likely have provisions governing how to terminate the contract for cause. These provisions may not work for what’s called an “at will employee” (i.e. one with an employment contract of indefinite duration that can be terminated by either the employer or the employee at any time for any reason). They may raise a question about whether the employee is truly at will, or can only be terminated for cause. I can tell you that courts don’t like to see contracts that include parts that are superfluous. A court will assume that every provision is there for a reason, and will struggle to come up with a plausible reason for the superfluous parts. If no reason makes sense, or if there are multiple reasons, then the court will order a trial to let a jury decide how to interpret the contract.
Contradictions between different parts of the contract – Everything has to work together in a contract, and all provisions have to be consistent. This can be challenging, because a contract is often the result of negotiations that generate a number of drafts. Each time a change is made, you need to review the rest of the contract to make sure it’s consistent throughout. For example, one part of a contract may that the seller will pay shipping costs, while a different part suggests that the buyer will be responsible. Which provision governs? Contradictions in the contract often will require a trial to resolve.
Actions don’t reflect what the contract says – When a contract says one thing but the parties involved simply ignore that and act differently, problems can arise. The question may be whether the parties’ actions show that they agreed to modify the contract.
One way or another, you can expect a dispute over what a contract says and means to result in more attorneys’ fees, more time in court, and less time to run your business.
A good contract is not easy to prepare, even for a professional. It is impossible for anyone to think of, and address in advance, every issue that might arise in the future. The best you can hope is that the contract is clear and consistent on the day you sign it. The bottom line is this: When you have a contract you want it to be clear. You don’t want any arguments about what you agreed to. And you want it to help your business avoid litigation or make litigation as efficient as possible.