Six ways to make your company’s contracts more effective

Contracts are the lifeblood of any company, whether those contracts are with clients, vendors, service providers, or independent contractors. It is critical that your company have effective, enforceable contracts, and there are steps you can take to ensure that. This applies to startups and small companies as well as larger ones. Following are a few things I have seen in working with clients.

1. Get it in writing!

Many companies do business on a handshake, and oral agreements are considered contracts.  They can be difficult to enforce, however, for a number of reasons. The parties may disagree on what they contracted for, or one of the parties may have moved on (or died). With a written agreement, or written terms & conditions, the parties know what they agreed to and who has what rights and responsibilities.

2. Avoid too much “legalese”

As a lawyer, I like to help my clients create or revise contracts, but I am with them when it comes to overly complicated language, endless sentences, and lots of legal jargon (think “notwithstanding” or “hereinbefore”). If your contract has shorter, clearer language, good organization, with informative headings, but still sets out the obligations and rights of the parties, then everyone benefits.

3. Include key rights and obligations

Someone once asked Abraham Lincoln, who was not only a lawyer but well over six feet tall, “how long should a man’s legs be?” Lincoln’s answer: “Long enough to reach the ground.” While a contract does not have to be incredibly long, it should be long enough, and detailed enough, to include all of the key aspects of the agreement: price (including when and how paid), quantities, deadlines, quality, who does what, etc. These points should be in the contract and not left to a judge to try and determine what else the parties meant. The contract can always be added to or amended if both parties agree—again, do that in writing!

4. What if there is a dispute?

If the parties get into a dispute over the contract or their relationship that they cannot resolve through informal negotiations, the contract should have some method of dispute resolution spelled out. That can be a staged process, such as requiring mediation before resorting to litigation. It might require binding arbitration, in order to stay out of court and keep any dispute private, or it might just allow the parties to go to court. Each has its advantages and disadvantages.  Arbitration and litigation are both expensive and have some uncertainty, as the parties are appealing to an outsider—judge, jury, or arbitrator—to decide the issue for them.  Your contract should address this process, including the state and city where dispute resolution will take place.

5. What is the contract’s term and how does it terminate?

Another important issue to address is how long the contract lasts. For some agreements, one party is buying a product or service, and once they have received that and paid, the contract is over. Others may go on for much longer, and some even renew automatically unless one party notifies the other within a certain time frame that they want to terminate. It is always helpful to include how long the contract lasts, how the parties may terminate it early, and the parties’ obligations on termination, such as paying a balance, returning some items, etc.

6. Warranties and limitations of liability

I have seen many contracts that do not include language limiting the scope of warranties that the seller is giving, which can open the seller up to many expensive warranty claims. Limiting warranties is important. Related to this is a provision limiting liability.  For example, suppose a consultant sells services that should improve a client company’s sales. If the client believes that its sales will go up $500,000 by following the consultant’s advice, and sales only go up $300,000, should the client be able to sue the consultant for the difference of $200,000? If the consultant’s contract does not limit his or her liability, then the client may be able to do just that.  Liability can be limited to the amount paid, for example, but your contract should have some limitation.

These are just a handful of contract issues that I have seen in my practice.  Addressing these and others can make your contracts more effective, set expectations with clients and customers, and protect your company’s revenue and assets.

If you have more questions or wish to discuss your company’s contracts, please contact Mark Spitz at mark@spitzlegalcounsel.comor call at 720.575.0440.