How to Stress Test Your Contracts Before Signing

Contracting is fairly standard practice for most companies these days, although some industries are more contract heavy than others. Even though individuals and companies have been entering into contracts for centuries now, these agreements still manage to cause problems, with contract disputes clogging up countless court dockets. Although some disputes may be unavoidable given that many things are beyond one party’s control, companies should take the appropriate precautions to determine whether they can withstand certain issues. Understanding where a contract could go wrong before actually signing it is a bit tricky given that contract performance will not commence until all terms and conditions are agreed upon and the final version is executed. However, here are some of the questions that the contract negotiation and drafting teams should be asking throughout their respective processes to stress test the agreement before either company signs on the dotted line:

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Your Contract Terms Were Violated: What Now?

Contract violations are probably a lot more common than one would expect. In many situations, the breach is due to carelessness or a simple lack of awareness. Most contracts are lengthy documents and contain so much obtuse language that people do not always know or understand the actual terms. And, some people do not even read them, like all those licensing agreements that pop up stating terms of service for using a product. The vast majority of people probably hit agree within seconds of seeing that screen accepting the terms offered, without actually reading what those terms are. Thus, many breaches are not intentional or malicious, but rather inadvertent lapses. Of course, there are plenty of instances in which business contracts are breached on purpose, often for strategic reasons.

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Is There an Optimal Contract Duration?

There is a fair amount of discussion and disagreement on this topic, but the simplest answer to this question is, “it depends.” The length of a contracting relationship is contingent on so many variables, including the complexity of the agreement, as well as the resources and investment at stake. In a vast number of business transactions, these agreements last between two to five years. Although there is no hard and fast rule with respect to the optimal contract duration, there are several things to take into consideration when deciding on this matter.

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The Benefits of Early Engagement by the The Contract Team

For many companies, the team that negotiates a contract is different from the team that drafts the arrangement. Of course, a completely different team then oversees the management of the finalized agreement. This is an understandable and efficient allocation of human capital, but a complete division of labor is often one of the underlying reasons that contractual relationships go sour and contract disputes arise.

 

Although it may not be realistic for the management team to actively participate during all phases of the contracting cycle, they should become engaged in the process as early as possible because their insight will help prevent the emergence of certain issues. Here is how their early engagement and input can help:

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Difference Between Mediation, Arbitration, and Litigation

Even the most perfectly drafted contracts sometimes become contested nightmares, as performance breakdowns and compliance issues are never completely avoidable. However, the manner in which any such disputes are decided varies, usually depending on the scope of the issues at stake and the severity of the alleged breach. In addition, many contracts directly stipulate how certain matters will be decided, such as mandated arbitration or a requirement to seek mediation before resorting to the court system. It is important for everyone involved in contracting to understand these potential mechanisms for redress, so here is a brief overview.

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A Defined Scope and Clear Goals Are Critical to the Contracting Process

Contracts come in all shapes and sizes. There are plenty of simple agreements and even more complicated ones. Unfortunately, contract disputes are fairly common, and they are often the result of ambiguity and misunderstanding. Fortunately, these issues are avoidable by adopting the following approach:

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