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5 Contract Drafting Nightmares And How to Avoid Them

Reporting & Insight

Every phase of the contracting cycle presents its own set of challenges. Contract drafting can be particularly brutal with lawyers for each side going round and round over virtually every detail. Unfortunately, sometimes even those lengthy and detailed drafting sessions result in a mediocre contract. There are certain prevalent problems that crop up time and again irrespective of the contract's core content. Here are 5 potential contract drafting nightmares and some tips on avoiding them:

1. Excessive or Overly Specific Definitions

In many contracts, the parties will be relying on certain terms, some of which may be unique to the industry or deal at hand. In these instances, it is always important to ensure that there is an agreed upon and clearly delineated definition contained within the contract. The most common way to define special terms in a contract is by appending a glossary of definitions. However, it is important not to get too bogged down and start trying to come up with a special definition for everything.

For one thing, there are certain terms that are simply legal terms of art and virtually impossible to define adequately. The word "reasonable" is a perfect example of this. In addition, if a definition gets too specific, that in itself could end up causing problems when resolving a dispute later, as there may be almost zero room for reasonable interpretation. Rather than endure long, drawn out fights over how best to define something or waste time defining every word of potential importance, the parties should identify the key terms of the deal, meaning those that could have a real impact on contract performance, compliance, and conflict resolution.

2. Generic Language

This may seem confusing since we just harped on not getting too specific, but generic contract language can be problematic as well. In this instance, however, the concern is more about using boilerplate contract language that simply may not be appropriate for the particular deal. For example, parties may be tempted to use one of those online legal template databases, but there is a very good chance that the contracts they provide will contain terms that just aren't applicable. Although company leaders cringe when they have to fork over a hefty sum to a lawyer for drafting assistance, it really is best to ensure that the starting agreement actually pertains to the type of deal you intend to do.

3. Vague References

Contracts often contain references to certain statutes that are applicable or other business documents or even an appendix to the contract itself. But, sometimes the drafters who are aware of and familiar with the relevant statute or document forget to account for the fact that other readers of the contract may not be familiar with them. As a result, any and all references to an item that is not immediately apparent must be very clear. This may mean actually spelling out the name of the law including any specific numbers, and perhaps even having a link to where that item can be retrieved. As for a business document, there must be a description that will allow the reader to easily locate it. And, for appendices, proper labeling and ensuring that the referenced document is attached will be crucial.

4. Incorrect Dates and Timeframes

The inclusion of an incorrect date, deadline, or pertinent timeframe is usually more of a clerical error, but it is one that can have enormous consequences. This is more likely to occur when the parties are filling in blanks and simply mistype the date or fail to look at a current calendar to ensure they have the right date. Although this is an all too common error that can end up being an absolute nightmare, it is one that is harder to avoid because it stems from human error. The safest way to avoid this issue is by relying on drafters with a sharp attention to detail and instituting a rigorous proofreading process. The dates must be cross-referenced with the deal sheet and a calendar, double checked by another set of eyes, and then confirmed with the other party to the agreement before anyone signs.

5. Unclear Limitations on Liability

Contract drafting basically comes down to identifying risks and the parties jockeying for how to write the agreement so that they avoid bearing a disproportionate brunt of an issue, should one arise. The determination and allocation of liability should be described clearly in the actual contract, but unfortunately, this important provision is often written in a way that is unclear. This is often due to each side trying to accommodate the other just enough to ensure mutual satisfaction, but then this leads to anger, confusion, and mistrust later when the parties have a diametrically opposed understanding.

Ultimately, the parties have to be transparent about the amount of risk they are willing to take and the liability that this imposes. There is understandable concern that being completely upfront about this will derail negotiations. But, the reality is that when push comes to shove, everyone needs to be on the same page as to how things will go down. The lack of understanding and differing expectations regarding limitations on liability are often the reason that these sorts of issues are taken to court for resolution, something that could have been avoided with clarity and communication. Communication and transparency can be facilitated even further by using contract lifecycle management software.

Disclaimer: ContractWorks, part of SecureDocs, Inc. and its affiliates do not provide legal advice. This blog was written for informational purposes only. Therefore, it is not intended to provide legal advice, and it should not be construed as such. Please be sure to consult with an appropriate professional for advice pertaining to any legal matters.

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