Groaning while staring at your computer screen or losing sleep due to a contract dispute? It might make you wish you never got started, that no contract ever existed. However, the reality is that contracts are the lifeblood of every business. They govern most business activities, from hiring employees to setting terms with suppliers.
Unfortunately, contract disputes are a common issue for business owners. They can be time-consuming and expensive. If not handled correctly, they can lead to severe consequences.
Key relationships, such as those with important suppliers, could be irreparably damaged. As a result, your reputation may suffer, and your profitability could be negatively impacted. So, let’s discuss how to avoid or resolve contract disputes.
What Are Contractual Obligations?
Contractual obligations are duties and promises each party to a contract agrees to fulfill to meet the contract’s purposes. These agreements form the important parts of the contract, outlining the terms that guide the relationship between the parties involved.
Contractual obligations can require actions to be taken or avoided, either on an ongoing basis, by set dates, or under certain conditions. If any party fails to meet these obligations, it can result in disappointment, and what is commonly known as a contract dispute.
Examples of Contractual Obligations
These examples of contractual obligations typically focus on how the contract works, such as:
- Paying invoices by the due date
- Issuing invoices within 10 days after the end of the month
- Submitting contract amendment requests through the agreed process
Common Causes of Contract Disputes
Contract disputes impact businesses of all sizes, involving procurement, sourcing, and purchasing managers, as well as business owners. Such disputes can leave you feeling frustrated, questioning if a win-win buyer-supplier or employer-employee contract is even possible. Following are some of the common causes of contract disputes that can haunt businesses and personnel:
Misaligned Contract Language
The language in contracts is essential. The words you use or leave out can dramatically impact your business and the enforceability of the contract in court. When contracts pass through different teams, errors may arise. Without clear and complete language, addressing all the key terms of the business relationship, one may face:
- Missing or incorrect clauses that could but do not protect your business.
- Vague wording that causes confusion about payments, obligations, and timelines.
- Higher compliance risks if contracts don’t meet legal or internal requirements.
- Misunderstandings that result in disappointment and unrealized expectation.
Poor Contract Storage
Many companies store contracts in different places, and some even keep different drafts without clarifying which is the final binding version. Some are maintained in separate systems like ERP or CRM, some via email, and others are in physical filing cabinets. Disorganized storage can lead to:
- Lack of version control, causing missed updates and delays in approval.
- Unsecured contract data, which increases the risk of non-compliance or data breaches.
- Difficulty finding or ensuring timely adherence to the terms of important contracts, leading to missed deadlines.
- Missed dates for deliverables or payments, causing breaches or damaging relationships.
- Difficulty measuring performance, making it unclear if contracts benefit or harm your business.
- Challenges with regulatory reporting, as you can’t easily prove compliance with legal requirements.
Unintentional Renewal Mistakes
Lack of visibility into contract may cause costly renewal errors. Without proper tracking, you risk:
- Missing renewal deadlines, forcing you to renegotiate terms and pricing.
- Unwanted auto-renewals, locking you into another payment period when you intended to cancel.
Tips to Avoid Contract Disputes
Bypassing contract disputes is far better than resolving them. Following are some tips that can help:
Document the Agreement
It’s highly risky to rely on handshake deals or verbal agreements. Written contracts help manage risks, plan ahead, and protect valuable business assets. Oral agreements are uncertain and often lead to disputes. Without a written record, proving what was agreed upon becomes difficult, especially if the other party disputes the terms. Always document agreements in writing to avoid misunderstandings. You must also ensure that everyone understands their obligations.
Properly Draft and Review Contracts
While a written contract may offer more protection than an oral one, it must be well drafted. Don’t skip professional legal advice because lawyers are trained to reduce ambiguity. They may even help secure better terms. Clear, plain language is a must-have, as courts focus on the written terms. Ensure the contract is well-structured, with key provisionis clearly defined and easy for an outsider to understand.
Take Care of Contract Documents
Misplacing contracts can still cause problems, even in the digital age. If contracts are signed physically, scan them for safe digital storage and have multiple, redundant, back up procedures in place. Ensure all contracts are easily accessible to relevant teams to avoid breaches of important clauses. If necessary, consider using a centralized contract management system. This is especially required in large organizations where different departments may not be aware of one another’s obligations. Also, a proper contract management system can ensure that the right persons approve and sign on to business obligations and commitments.
Be Mindful of Contractual Timeframes
Tracking important dates is a dire need for contract management. Pay attention to time-sensitive clauses like price increases, representations, and warranties, as they often have fixed time limits. Know when and how a contract can be terminated, including any required notice periods. Some obligations, such as confidentiality and exclusivity, may survive beyond the contract’s end. Log dates to avoid costly disputes. Create standard operating procedures to ensure that all personnel are aware of and abide by contract requirements.
Draft Clear and User-Friendly Dispute Resolution Clauses
Even with well-drafted contracts, disputes can arise. Including clauses for dispute resolution, governing law, and jurisdiction can prevent confusion. One tip is to require informal nonbinding mediation by a neutral mutually trusted third party with a proviso that, unless the mediation is completed, the party who did not mediate in good faith cannot collect any attorney fees as a prevailing party in any ultimate lawsuit. Such a provision can incentivize parties to come together before a contract dispute enters an often costly, protracted, and uncertain court system.
Governing law, jurisdiction, and venue clauses specify which legal system will apply to questions about rights, obligations, and enforcement. If you skip these, resolving conflicts may be time-consuming and expensive, with prolonged arguments about where the case should be heard and which laws apply before the merits of your claim or defense are even addressed.
Wrapping Up
Contract disputes may occur when a party’s contractual expectations are not met, or are based on misunderstandings. It is best to avoid contract disputes by drafting clear and complete written agreements at the outset of the relationship. Incentivizing parties to informally work out differences if and when they arise can also help diffuse the problems and costs associated with acrimonious court proceedings. Attorneys can help you in this regard.
Looking for a powerful ally in the justice system? Contact us at Jonathan Lee Borsuk PC. Dial (424) 293-8100 or email at info@jlborsuk.com to inquire as to how we may be of assistance. However, please note that this blog is for general informational purposes only and does not constitute the rendering of any legal advice. Please do not rely upon anything in this blog in your dealings, transactions, or businesses. No attorney-client relationship is created or offered by this blog. Thank you. We wish you a pleasant week and a dispute-free year.
