Understanding Contracts

Every successful company or individual knows how important understanding and using contracts can be. Completing an important agreement with a new customer could increase a company’s value. Signing innovative contracts with large vendors may become the foundation for a new market advantage for your company.

The importance of understanding contracts can display itself in other ways. When you consider all the possible disputes businesses are confronted with, contract disputes are usually the most common. Considering their significance and potential for litigation, one should exercise both care and common sense when drafting and signing contracts.

Here are some suggestions to consider that may help you or your company execute more successful contracts:

Get Contracts in Writing: I'm always astonished to find out when one of my clients cannot provide me with a copy of their contract because they don’t have it in writing. Although it may be legal to have a verbal agreement as a contract, it’s a reckless practice that is almost always headed for trouble.

It does take a little time and money to convert your verbal agreement into writing. However, that time and money you spend pales by comparison to the time and money you will use dealing with a lawsuit because of an unclear verbal agreement. Software and attorney-drafted legal templates have greatly reduced the work required to complete an effective contract.

Consider developing standard contracts for your suppliers, customers, and any independent contractors you hire. These contracts should be easy to edit and change as the circumstances may require.

Customer Contracts: Occasionally you should review all contracts you have with customers and suppliers to make sure you are providing the right message. A complicated agreement that contains many exceptions and requirements might cause your customers to question if your company actually supports its products and services. It is in your best interest to balance the need to minimize liability with your need to get and keep customers.

There has been a notable trend towards using “plain English” in contracts for both businesses and individuals. Using plain English makes understanding contracts easier for all parties involved. An easy-to-understand contract will help the parties recognize and avoid potential problem areas ahead of time. And there will be less need for costly legal advice.

Contract Review: Don’t be “penny-wise and dollar foolish” always use an experienced attorney for you important transactions and regular contracts. Using an attorney who has drafted and given advice on many contracts will provide you with the right protection as well as helping you achieve your objectives. Consider the cost of using an attorney for your contract review and preparation as insurance against potential litigation and lawsuits.

Legal Provisions: It doesn't pay to win the fight over business provisions only to lose the fight over the legal provisions. If your business deal collapses, the business provisions won’t matter – the legal provisions will. Make sure plenty time is spent on developing good legal provisions.

Termination Provision: You should always be aware of the possibility that your business or personal transaction will not go well. There are many things that can go wrong after a contract is signed – bad service, inferior quality, financial troubles; the other party is purchased by one of your competitors.

A well drafted termination clause is the most important part of a contract as it gives an individual or business flexibility. Think beyond the “honeymoon” period and make sure your contract contains the correct language that will let your company legally exit from the business arrangement should it want or need to.

Equally, try to draft some protection language into the contract should the business arrangement go better than anticipated (renewal option, safeguards against price increases, and others that would be to your benefit).

ADR Clause: Litigation is costly and time-consuming. Think about incorporating an alternative dispute resolution clause (“ADR”) in your customer contracts. The ADR process is usually quicker and cheaper than going to court. These clauses are being used more often in customer contracts to reduce money spent on defending claims.

If you decide against an alternative dispute resolution clause, think about using a choice of forum provision choosing the courts in your county and state should any dispute result in a lawsuit. After all, if your company resides in New York, and you have to sue the other party in Arizona, it will be a very expensive lawsuit.


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