Contracts are the foundation upon which all future business between parties is conducted. Thus, the choices that you make and the details you include provide the framework for everything that occurs moving forward. In this blog, I’ll share the most common contract errors committed during the drafting of a contract which can result in potentially dire future consequences. Nobody is exempt from such mistakes. Even the most experienced contract drafters have been responsible for oversights that can lead to friction, mounting costs, and even the severance of business ties. The key is to circumvent these missteps during the contract formation process.
It is certainly possible to amend a contract in the future in response to changing circumstances and shifts in responsibility, but the core of the initial contract will ultimately determine the nature of the business relationship from its inception. Furthermore, as most of us know, one poorly constructed contract can spoil a partnership and undo all of the work that has been accomplished.
Because a contract is a legally binding document, the details are of utmost importance. Outlining each parties responsibilities, deadlines and compensation clearly and fairly is key to creating mutual understanding. Even simple, careless mistakes such as misspellings and incorrect clerical information can dampen the confidence that has been built between the parties.
Even beyond their impact on the business relationship, the extent of such errors may have grave consequences when it comes to future enforceability. There is no specific formula for maintaining the enforceability of every contract because the specific details of every relationship are all very different. For instance, a deadline set between parties may be easily adjusted in one scenario whereas, in another, that deadline is crucial to the very nature of the agreement and has the potential to void the entire contract.
Failure to establish the important details of a contract at its inception has the potential to result in serious structural, financial, and even legal, consequences. The following are examples of some of the most common errors as well as how they can be remedied before they have the capacity to present future issues.
Most Common Contract Errors and Remedies
Error #1: Typos, spelling errors and incorrect information
Human error is often the greatest enemy of contract drafting. On average, manual data entry yields one error in every 100 pieces of data. Thus, the more complex and detailed the document, the greater number of opportunities there are for this type of error. Although this may seem like a minor consideration, simple mistakes such as these have the potential to generate additional unnecessary expenses. Among the most common contract errors, this one occurs most frequently.
The secret is to copy the correct details of your contract directly from the contract management software. Using software designed for this purpose, you can pull out pertinent information like names, addresses, pricing and descriptions. You can also send back data to your contract management software in order to update any changes or track the stages of the deal.
Error #2: Inattentive review protocols allow errors to go unnoticed
Though it may be slightly time-consuming, having your documents carefully reviewed by a second party can help to catch mistakes that the original drafter may have missed. However, further errors may result if those tasked to review the document are not privy to the alterations made by all parties involved in the review process.
The most simple and straightforward response to this issue is to set up a shared workflow in which all creators and reviewers have access to changes in real-time. By developing a living approval workflow, everyone is working collectively on the same document to ensure it is ready before delivery.
Error #3: Failing to provide for a clear opportunity for termination for each party
If after signing the contract and establishing your business relationship you may find a better deal in a competitor. Even possible changes in your own business approach could lead you to will to end your actual business relationship. Several companies only allow termination of the contract in the event of a breach.
All your business contracts drafted should have a way for the parties to exit the contract. The reason should not be only if the counterparty committed a breach of a contract, but also if it makes sense for the parties to do it.
Error #4: Inappropriate dispute resolution mechanism according to the size of the business
Litigations process can be really expensive and startups sometimes lose considering that a good way to solve a dispute may arise under the contract but the cost of enforcing the contract ends up being prohibitive for the business.
Mediation is a voluntary mechanism. The agreements made through mediation are binding. Another possible dispute resolution mechanism could be arbitration, which has a lower cost. A hired arbitrator hears both parties and establishes a binding resolution in favour of one of the parties.
Error #5: Inadequate details of Parties’ Responsibilities
Poorly drafted contracts may outline the responsibilities of each party in a vague and generic way. They may neglect to include specific methodology or time frames within which their assigned tasks need to be fulfilled. Leaving these details up to interpretation is a recipe for future misunderstandings and disagreements.
When it comes to declaring the responsibilities of each respective party, special attention should be paid to the language. Every duty must be stated explicitly and specified down to the last detail when necessary. Generic terms should be broken down further to make sure that every party is perfectly clear on what is expected of them.
In a nutshell
A contract is a legally binding document that provides the foundation for any good or bad business relationship. Particularly within large corporations i.e. those that have many business deals operating concurrently, oversight in contract drafting has the potential to run rampant. Greater volume and greater detail simply creates greater potential for mistakes and increases the likelihood that these errors will slip by unnoticed. These errors can be especially harmful to the smaller the business because each contract makes up a greater proportion of the overall business. Thus, when one contract presents an issue or is completely voided, it has an even greater impact on the overall business. Attention to detail and tedious review is the most important defence against the consequences that poorly drafted contracts can potentially yield. ContractAwesome provides tools to help you identify and analyze common contract errors before you ship your contracts.