How To Avoid Contract Disputes

The American court system is open and available to everyone with a dispute, but suing someone in a contract dispute can be extremely expensive. For many, the costs of going through a jury trial are prohibitively high, but there are other forms of dispute resolution.

“Almost every case in California settles, because with two reasonable, objective, smart attorneys on both sides, both can evaluate where the case should end up,” says mediator Bruce Isaacs. “The range may differ, but since most cases settle — even on the courthouse steps — why not get there before incurring $750,000 in attorney’s fees?”

The Importance of a Well-Drafted Contract

A well-drafted contract helps protect business relationships by ensuring everyone is aligned. It establishes expectations, duties, timelines, and payment obligations. There is also a roadmap for when things go wrong. That way, uncertainty and litigation risk are reduced by setting enforceable standards.

Misunderstandings are less likely because obligations are explicitly outlined in writing. Having the terms listed in a document helps reduce ambiguity that can lead to breach-of-contract claims.

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Ensure All Terms Are Clear and Unambiguous

For a valid contract to exist, there must be a meeting of the minds. The parties must believe they are agreeing on the same terms. In addition, it’s in each party’s best interest to fully understand each term they are agreeing to. Unambiguous contract terms are less likely to be subject to misinterpretation.

Ambiguous terms require the court or arbitrator to infer the parties’ intent from additional evidence. This creates a new set of issues, as different interpretations can lead to significantly different case outcomes.

Common mistakes that lead to legal issues include ambiguous technical or industry terms. When you’re contracting, you might assume you and the other contracting parties share similar definitions of commonly used terms. However, after disputes arise, it becomes clear that the parties have very different definitions. Vague phrases like “reasonable,” “timely,” or “best efforts” in contract clauses lead to problems. Missing dates, deadlines, or pricing structures can cause significant issues. Conflicting clauses across different terms will also create problems.

Include definitions for the terms used in the contract. Consistently use terms in accordance with the agreed-upon definition. Break down complex obligations into numbered lists. Avoid relying on oral understandings or assumptions. Use integrated timelines (deliverables, milestones, payment schedules).

Put Everything in Writing

Contract law strongly supports putting everything in writing. While a written agreement won’t guarantee that you prevent all contractual disputes, it can prevent a majority of them. Written contractual obligations carry more weight than oral agreements.

Contracts help us to create a clear record of the negotiated terms. For example, whether the parties agree on specific timelines. When a dispute arises, missed deadlines make a party’s non-performance clear. Should business disputes arise, the contract can be submitted to the court as evidence. This can help guide the court in interpreting the parties’ intended agreement. It helps prevent depending on “he said, she said” testimony in litigation.

Contract drafting can quickly become complex. However, this isn’t always necessary. It needs to have at least the basics. It should include the scope of work and deliverables expected by one party. It also needs the other party’s payment terms and timelines. Business operations often include trade secrets or sensitive information. To protect this information, a contract should include confidentiality and non-disclosure obligations. It should include terms outlining how either party may terminate the contract. Finally, a contract should include how the parties will resolve disputes should they arise.

Include a Dispute Resolution Clause

Many contracts include mandatory dispute resolution methods. This can limit options for groups facing specific issues, but the benefit of mediation or arbitration is that they are collaborative. This can be especially important in industries where the parties may cross paths again.

“When an entertainment case settles, it either has the parties going their separate ways or parties going back into business with a new contract,” Isaacs says.

The court system is adversarial. One party versus another, with one winner and one loser, but mediation takes a different approach. “We help people to end litigation and move on with their lives rather than continue with the pain,” Isaacs says.

There are many other options in California for resolving legal disputes. These alternative dispute resolution (ADR) structures are used by savvy attorneys and litigants to resolve disputes more effectively and efficiently. Mediation is a dispute resolution process in which both parties in a dispute agree to meet with a neutral mediator. It’s often a full-day process, where everyone shows up in the morning and agrees not to leave until an agreement is reached.

There are many advantages to mediation — the biggest being a lower cost. “People tend to act more reasonably in a mediation,” Isaacs adds. “Usually, as the day goes on, people become more reasonable. They may come into the day of mediation guns-a-blazing, but often with a mediator in the room, people get reasonable. Lawyers are better able to get cases settled when a mediator is guiding the process.”

Even if a lawsuit is filed, nearly every case in California is ordered to try mediation, Isaacs notes. “The courts are overloaded and overwhelmed, and when the litigants start into the process, with all of the e-discovery involved in cases, it’s so expensive to take a case to trial. Every aspect of the process is time-consuming and frustrating. A mediation or arbitration just makes sense.”

Review the Contract with a Lawyer Before Signing

While small business owners may be tempted to use online contract templates, it’s always wise to have a lawyer review the contract before signing it. Once signed, the agreement will be legally binding. Without a lawyer’s review, the parties could agree to terms against their own interests or not legally enforceable in their jurisdiction. The legal fees for contract review are well worth the savings from avoiding the financial loss of litigation.

“There are definitely times when what are viewed as standard terms are not considered as fully as they could be, and often that’s where disputes come up,” says Matt Bills, a business litigator at Barack Ferrazzano Kirschbaum & Nagelberg in Chicago. “Sometimes those things are just recycled from agreement to agreement, or there’s not a lot of forethought put into those terms.”

Maintaining Open Communication to Prevent Misunderstandings

The language in the contract must reflect verbal communication. Otherwise, ambiguities — and therefore disputes — may arise. “In general, the clearer the language, the tighter the language, the better,” says Bills. “What many practitioners try to do is have shorter, simpler contract provisions. The challenge, though, is that creative lawyering can find openings in the English language.”

Consult With an Attorney

A clear contract is one of the strongest tools for avoiding unnecessary conflict. Clarity, documentation, and built-in dispute-resolution tools can help parties resolve disputes quickly and cost-effectively. If you’re facing a contract issue, speaking with an experienced lawyer is the best way to understand your options.

Perhaps the next time you have a contract dispute, consider mediation as a conflict-resolution option before heading into prolonged and expensive litigation. To be successful, consider hiring an experienced, reputable attorney who can give you legal advice on how to handle the dispute.