The Usual Suspects in Contractual Disputes

Whenever someone asks me if they can personally draft what they invariably term, “a simple, short contract” that will avoid the cost and time of formal drafting by attorneys, I always ask them the same question. I ask them if they have even been engaged in either litigation or arbitration concerning a contract.

If they proudly answer, “no,” I tell them that they should not attempt to draft their own.

They are usually surprised, thinking that their success in avoiding disputes in the past indicates skill on their part and demonstrates that they should be able to write up their own contracts.

The opposite is the case, of course. Until one’s drafting is tested by aggressive and skilled adversaries, one can not know what really matters, what terms are vital and how one’s own skills have avoided typical problems.

It is akin to a sailor who has always used the wrong knot to tie his boat to the dock feeling confident that he knows how to tie knots, forgetting that without a storm, he can not know if the knot really works.

Or, as one client put it after we finished a truly harrowing arbitration in which a contract was attacked in every conceivable way, and survived, “The contract is our suit of armor, isn’t it? Each word counts.”

Only if they have been tested can you know if your terms are the right ones and if you have anticipated the problems that can arise.

And form books, often written by unschooled beginners at the trade, and never adjusted to the precise problems confronting a particular transaction, are actually often harmful. See our story, Form Contracts Never Go to Trial.

Anyone who has been in this business long enough knows that certain themes keep recurring in contractual disputes. If one is tempted to write one’s own contract, it is important to recognize the typical “suspects” that seem to cause the most disputes when tested. This article shall outline those the writer has encountered most often. The reader should first read our article Binding Contracts and Legal Actions Predicated on Breach of Contract before proceeding further.

The Fundamental Things Apply As Time Goes By…

1. The Parties: One would think that this most basic issue…who is bound by the contract…would be a no brainer. It is not. First, you have the issue of corporations, partnerships, LLCs and other entities being often involved, often without assets in them to assure payment (thus requiring a guaranty) and confusion often as to what entity is doing precisely what. Many contractual parties are not even sure as to whether their entity or they, themselves, are the parties bound, often signing for a corporation without using the correct terminology so mistakenly signing for themselves, personally. At times two parties will execute an agreement and not realize that a third or even fourth party should be required to sign on to make the agreement work. (It does little good to sign for delivery of a product from abroad if the party abroad has not executed the agreement the distributor has put before you.) And successor liability is equally vital. Remember that the contract often ends if the party executing it ceases to exist…unless you have put in clauses indicating who remains bound even if the corporation or LLC ceases to be in business.
2. Unforeseen Duties and Problems: The old axiom, “No battle plan survives contact with the enemy” can be equated with the business maxim “Nothing ever goes precisely according to plan.” Delay in delivery, alteration in production or material cost, failure of third parties to perform, unavailability of parts or products, strikes, natural disasters, etc. all can alter the facts of the contract, some being serious enough to make the contract impossible or impractical to perform. What happens? Who assumes the risk? Sadly, amateur contracts quite often ignore these issues.
3. Timing Issues: Most amateurs know that a time for performance should be put in any contract but few realize that the clause must also indicate the significance of failure to meet that time table. Is a delay of a day enough to end the contract? An hour? Is it a breach of the contract or does the contract simply end? The term “time is of the essence” is a useful phrase to utilize if that is the case, but it is far better by far to provide in detail what happens if X occurs late and to define precisely what “late” means.
4. Changes In the Contract: This issue is a variation of number 2 above but involves the question as to how the contract is changed. Any formal contract will require an executed change and that is a very good idea. The alternative is a long and expensive dispute as to who said what when. Further, a good contract will have terms as to what happens to prior understandings of the parties as to the subject matter. One client found to his shock that his contractual partner considered the contract they were acting under an amendment to a year old agreement rather than a new agreement which superseded it.
5. Law That Applies: Nowadays, most contracts involve entities scattered about the world, often involving use of the internet and transport across other jurisdictions. Each country and many states have very different laws and often parties find to their shock that the law of the other party not only does not support their understanding of duties, but may actually prohibit duties undertaken. Federal law including but not limited to that involving hazardous waste can impose conditions on the contract that one or both parties do not even realize. The law of the locale and the choice of which locale’s law is important. And if one does not know what law applies, one cannot perform the task of confirming that the contract does not have duties and conditions imposed by the relevant government.
6. Enforcement Provisions: If it costs you a hundred thousand dollars to win thirty thousand dollars, how can you ever realistically consider your contract, however written, binding? The practical need to have affordable and fair enforcement provisions is as vital as any other aspect of the contract, but few amateurs put in the arbitration clauses that can save half the cost of the fight or provide for the prevailing party receiving reasonable attorney fees from the losing party which is both a great equalizer in the battle and can make the wronged party whole regardless of cost.
7. Right to Terminate: Life of Contract: When does the contract end? What ends it? What happens to unfinished duties if it ends? Can either party end the contract? Due to breach? At will? Is it a contract that automatically renews? When and why? And beware those contracts that indicate they are three year contracts that either party can terminate upon thirty days notice. They are thus thirty day contracts and the three years wording means…nothing.
8. Waiver: How to Do It? One can lose a right if one acts in a certain way or does not take certain proactive steps. A good contract will indicate what constitutes binding waiver.
9. Competition. Can the Parties engage in their own activities even if their own activities may injure the other? Such as competing against each other even during the contract? If you say no, does that violate anti trust laws? If you say yes, are you not helping your competitor by providing them with critical information? Related to this are the concepts of confidential information, trade secrets, and allowed disclosure of information. In a world in which intellectual property is becoming an increasingly vital aspect of all business, these clauses are becoming increasingly complex and important.
10. Confidentiality. What aspects of the agreement are confidential, if any? Pricing? Parties? Shared plans? What happens if a party violates it?
11. Ownership of Results. In any agreement involving creation of intellectual property of any kind…including copyright, patent, or trade secrets such as methods, customer lists, etc., who owns what? For how long? A restricted license back to the other party? For what consideration
12. Authority. Who is authorized to make changes or approve performance? Who is to inspect the results and is there a time limit on the report back? What is waived if the time limit is not adhered to?
13. Complaint Procedure. If a party objects to performance, how is that to be communicated and what are the time limits for cure before legal action can be taken? Is there a right to replace nonconforming goods? What criteria and inspection of the replacement goods is allowed?
14. Warranties. Warranties as to quality of product and services probably constitutes the single most litigated area of contract performance…and is subject to strict state and federal law as to the limitations that can be imposed. To limit a warranty requires specific wording which must be incorporated.
15. Contradictory Documents. Especially in a prolonged transaction there is a tendency either via emails, letters, purchase orders or invoices to have one party incorporate terms and conditions or requirements that are not in the underlying documents. A strict hierarchy of which documents control and what rights there are to alter them with contradictory confirming documents must be created.

The above list is merely introductory and represents those areas we see as sources for disputes most often. Any good attorney could list an additional twenty areas in which the contract drafting must be carefully honed.

But the lesson should be clear. Even a “simple contract” is rife with dangerous areas that must be considered before one signs on the dotted line.

Conclusion:

An elderly attorney had a comment he would always make when a client indicated he wished to save money by doing his own contract. “Go ahead. In the long run, it will make me far more money. Pay me now or pay me a lot more in court…”

Of course many people and businesses go for decades without having problems with their own contracts or with form created books of contracts. However, in a world becoming increasingly international and multi jurisdictional, and in which parties long trusted may suddenly have new owners or be in dire economic condition, it makes good sense to carefully consider if one has the expertise to gain maximum protection from the draft one is creating.