Avoiding Contractual Heartbreak: Contract Tips to Prevent Litigation
A contract is simply a document that defines a relationship. It sets forth the obligations that contract partners owe one another during the course of that relationship and, like a loving spouse, it may reward certain activities and forbid others. As in any personal relationship, we typically do not begin contractual relations with the expectation that the other party will one day break an important promise. Yet, it happens. As a commercial litigator, I frequently meet my clients only after this betrayal occurs and, while I would not dare claim to be a relationship expert, I can offer a few tips to help avoid contractual heartbreak:
▪ Due diligence. There may be no single act more important that performing due diligence before agreeing to terms. Investigate the potential partner’s reputation in the marketplace. Does it have adequate resources or capacity? Is a credit check necessary to confirm that the potential partner can pay timely? Is additional insurance necessary should something go wrong? The answers to these questions will go a long way toward avoiding messy breakups.
▪ Termination. Sometimes, it was just not meant to be. Occasionally, for example, a vendor’s performance is just not up to snuff. If the contract with the vendor does not contain a clause allowing for termination, the contract may continue for the remainder of its term. Contracts of this nature are very risky because the unhappy party is faced with the choice of continuing to receive poor performance or intentionally breaching the contract.
▪ Adequate Descriptions. It is important that the contract adequately describe the parties’ understanding. The contract should describe the exact goods or services to be delivered, where the goods or services are to be delivered, and for what price. Additional terms may include the method of payment and when payment must be made. Any misunderstanding between the parties concerning these facts can have calamitous results.
▪ Forum selection. Be wary of inconvenient forum selection clauses. A forum selection clause is any term that requires that litigation occur in a certain geographic area. Imagine that your company does business in Delaware. It signed an agreement with a vendor requiring that all litigation must occur in Alaska. These claims are sometimes enforceable and it may be that you will find yourself providing testimony in Anchorage.
▪ Full and final agreement. Often, a dispute may arise concerning verbal promises made before the parties commit an agreement to writing. If oral assurances are made, these must be in the contract. If those verbal promises are not in the contract, they are very difficult—often impossible— to enforce through litigation.
▪ Sensitive information. If you are concerned about trade secrets or other sensitive disclosures, it is advisable that you seek a strong confidentiality or non-disclosure agreement before sharing information—not after.
Of course, there are many other ways to avoid litigation through careful contracting. If you are concerned about the strength of your contracts, contact the attorneys at MacElree Harvey, Ltd. We can help ensure that your next contract relationship is a lasting one.
Andrew R. Silverman is a member of the firm’s business and corporate law practice group. He counsels businesses and individuals, including directors, officers, and stakeholders, on corporate compliance and internal governance, business formation, commercial contracts, and business acquisitions and financing. He can be reached at 610-840-0286 or [email protected].