3 effective strategies for preventing contract disputes

Contract disputes can prove costly, time-consuming and frustrating; especially for the small business struggling to stay on budget. Fortunately, many contract disputes are avoidable. You can reduce the risk of such disputes with a fundamental knowledge of contract law and careful planning.  While using precise, understandable language is a must, you will do well to keep the following three things in mind when creating your contract.

1. Contracts can be made without a signature

The first step is to know you are creating a contract.  All that is required to form a contract is an offer by one party and acceptance by the other.  Acceptance, including acceptance of all terms contained in the offer, does not necessarily require a signature, but may be communicated by other actions or no objection.  The classic example is a purchase order, which routinely contain terms that become a part of your contract if the order is accepted without addressing the written terms in some fashion.  While it is impractical to negotiate all terms on numerous small orders, it can improve your position to create an acknowledgment of the purchase order that contains a disclaimer of routine terms in the purchase order that you find unacceptable and add some of your own terms.  In this case, you have counteroffered the purchase order so you can argue that your terms should supersede any contrary terms in the original purchase order.  With a little planning, this can be incorporated as a standard practice in your business that does not require that you scrutinize all the fine print of every purchase order that you receive.

2. Set clear expectations

Contract disputes arise due to failed expectations regarding which party to the contract is responsible for various obligations, often including who is to absorb or pay for certain costs. Thus, it is important that you always have a firm and shared understanding of who is responsible for what and clearly express those expectations in the written agreement.  Contract law allows for significant freedom of the parties to shape their own allocation of responsibilities and risks. The courts are not supposed to rewrite a contract, but rather are to interpret it to glean the parties’ intent. Clarity is, therefore, crucial. It helps to make a check list of all major expectations that you have regarding the outcome of the contract, sometimes referred to as a term sheet, and then review the contract language to assure that all your expectations are clearly expressed.  Likewise, understand what expectations are placed on your business and determine if you can accept those terms.  A good rule is to assume that if something important is left out of your written agreement, it is going to be very difficult, if not impossible, later to insist that it was a major term of your agreement.

3. Maintain your limited liability protection

If you operate your business as a limited liability entity, such as an LLC or corporation, it is vital that you sign all your contracts in your capacity as an agent of that entity and not as an individual.  Signature blocks should include the full legal name of your entity, and your signature should be followed by an indication of your capacity as a corporate officer or other title that shows you are signing not for yourself but for the entity.  For example, “John Doe, President.”  This puts the other party on notice that they are dealing with the entity and not with you individually and, therefore, can look only to the entity when seeking to enforce the contract.

The more you can look ahead and foresee the types of contract disputes that could potentially arise, the better your chances of creating a carefully worded contract that may help you avoid them.