Contracts are crucial building blocks for business relationships. For business to get done, the parties to a transaction need to agree on certain essential terms that govern their business relationship. Contracts are the way parties to an agreement define those terms and make promises enforceable.
In a utopian world based on complete trust, perhaps there would be no need to formalize agreements in this way. For better or worse, however, that is not the world we live in. Even if your agreement is with a person or business you trust, it makes sense to protect your interests by entering into a valid contract.
This article examines some of the key elements involved in negotiating and drafting business contracts.
Negotiation of Business Contracts
In theory, a simple business contract may result with a quick offer and immediate acceptance with no counter-offers or quibbles. But very few business agreements arise so effortlessly.
For most transactions, a process of negotiation is often critical to the construction of a deal that is fair to all parties. This is especially true when the terms of the agreement become complex.
Sometimes parties who do not know each other well may benefit from learning more about each other. As important as it is to formalize contract terms, those terms need to be the result of a transparent process. Each party needs to know enough about the other's business to make sound business decisions that are then clearly memorialized in a written contract.
Importance of Written Agreements
Technically, most contracts do not have to be in writing. There are certain exceptions to this rule, such as real estate sales. Nonetheless, a party who seeks to protect its interests should put the agreement in writing. If any problem arises with the performance of the transaction, you want to be able to clearly prove what was agreed upon. A clear, unambiguous, written contract is the best way to do that.
Insisting that a contract be in writing does not indicate a lack of trust in the other party. It is just a matter of sound business practice, to guard against a scenario where the parties have different understandings of what was agreed upon, or in the event something unforeseen (such as the death or disability of someone) occurs.
Contract Drafting
Contracts should be clear and concise to avoid possible misunderstandings down the road. When the stakes are high there can be a tendency to get too technical and too verbose. This can often introduce more mistakes rather than prevent them. An experienced commercial law attorney can help businesses draft contracts with the necessary amount of comprehensiveness without going overboard and becoming unmanageable. The key is KISS, or "keep it simple, stupid". The more complex the matter, the greater the challenge to make sure things are spelled out in a clear, concise fashion. Assuming all parties are acting in good faith, and not looking for ways to get out of the contract, the best practice is to make sure that no two people can reasonably disagree as to what a particular sentence or clause means.
In order to keep the language clear and the contract length manageable, drafters should resist trying to anticipate every conceivable contingency that may lead to business litigation. A better approach is to insert a mediation or arbitration clause, specifying how disagreements about contract terms (as opposed to dealing with an alleged breach of the contract itself) are to be resolved.
Summary
Overall, there are a few prudent steps you can take to use business contracts most effectively. On the front end, don't overlook the importance of negotiation in reaching a fair deal that makes good business sense. Once that deal is in place, be sure to get it in writing and drafted in as clear and concise of language as possible.
A commercial law attorney can provide further guidance and assist you in drafting and executing a valid and effective business contract.
