The signing of a contract in business indicates that all parties involved have read and agreed to the terms stipulated. The purpose of a contract is to clearly outline the terms of an agreement: each party’s obligations, the parameters for the provided service (such as performance, delivery, cost, etc.), and payment terms. Ensuring that all of these aspects of doing business are laid out and clearly defined before entering into a working relationship minimizes liability and reduces the potential for confusion or unmet expectations.
Common Law vs. UCC
There are a few ways to look at contracts. Contracts may be written under the Uniform Commercial Code (UCC), which applies to the sale of goods and securities. In contrast, the common law of contracts is considered to apply to those dealing with services, real estate, insurance, intangible assets and employment. The importance of common law lies in its ubiquity and accessibility.
Benefits of Common Law Contracts
There are many common law pros and cons. One major benefit of a common law contract is that it provides clarity. They enable all parties to understand the terms of their agreement, serving as a guide to the relationship. They not only minimize the potential for litigation and liability, but also the risks of business disagreements and the loss of business relationships.
It is nearly always easier to understand something when it’s written out in a physical form, allowing you to revisit the information at any time for clarity. Contracts have the added benefit of detailing the nature of the relationship and the terms of the agreement. A well-written and legally binding contract leaves very little room for confusion or misinterpretation.
Disadvantages of Common Law Contracts
Contracts cost time and money to write. Whether they’re drafted by a lawyer or reviewed by one, or even if they are written by an HR professional, contracts require a good deal of energy and are not an inexpensive undertaking. Depending on the type of contract, the agreement, or your business, a lengthy contract and additional paperwork may be required, taking time away from other responsibilities.
While contracts aim to bring clarity, sometimes the language used is anything but clear. The language used in a contract could create a barrier between the terms of the agreement and the signing party. Harvard Business Review explains that a plain-language contract sidesteps this issue. It avoids ambiguity by keeping the language and the clauses simple and easy to understand.
Finally, circ*mstances can change, and that means the terms agreed upon when the contract was signed might not be applicable or sustainable at some point. Termination procedures detailed in the contract could complicate matters even further, and the business could face financial penalties for terminating a contract early.
How to Minimize Liability
A contract should be clear and thorough, detailing the intent of the relationship and the timing of all required parts. For example, an employee contract should include the duration of the arrangement, pay, raise procedures, responsibilities, termination grounds and more. By disclosing all expectations and requirements, the employee agrees to all stipulations when signing.
Avoiding implied conditions — conditions that are not explicitly written out — is crucial. Otherwise, they’re left open to interpretation, which can lead to litigation and liability. HG explains that additional paperwork, such as nondisclosure, noncompete and assignment clauses, could also be necessary to minimize liability risk. It’s always best to cover your bases.
A limitation of liability clause could also be useful. This addition puts a limit on the amount in damages that could be recovered if a problem were to arise. Be familiar with local state laws when drafting such a clause, as they need to be carefully drafted and negotiated to be enforceable. In addition, be sure to keep copies of all revisions, as limitation of liability clauses require proof of negotiation.
Minimizing Liability in Contracts
Too many contracts — or those that are too lengthy and too restrictive — could lead to suspicion, urging the other party to seek legal counsel they otherwise would not have. If a contract is intended to minimize liability, inviting outside and additional legal counsel could potentially uncover liability, whether it was intentional or not.
Drafting a contract before an agreement is a way to call the shots of the business relationship. Contracts are meant to protect all involved parties. By being the one to draft the contract, you ensure that your assets, and therefore your interests, are protected first.
