Preventing A Contract Dispute
Most contract disputes are unexpected by one or all of the parties involved. Otherwise, the parties would never have entered into the contract in the first place.
Contrary to popular belief, individuals and Fortune 500 companies often make very similar types of mistakes, which lead to contract disputes. I know because my practice focuses on litigation—I have represented businesses of all sizes in contract disputes. Below are a few tips that, if some of my clients had received before they finished their contracts, they could have avoided later litigation:
Contract Dispute Issue #1: Insufficiently Defined Terms
The single biggest reason that I see contract disputes arise is due to insufficiently defined terms in the contract. It is critical that a contract be as specific as possible. This is important because of two interplaying factors. First, most courts tend to interpret contracts according to what is written within them. Consequently, if you end up with a contract dispute, then the exact wording becomes very important. Second, different individuals perceive things differently. For instance, suppose two people are looking at the clouds. One person might see an ice cream in a cone and another might see a person wearing a cone-shaped hat. Another common example occurs in construction projects. Suppose that there is a phrase that construction should begin "reasonably soon." The homeowner might believe that this means within a month while the construction company might believe that this means in another six months after they finish renovating a shopping mall.
One way to make your contract more specific is to make sure that your contract addresses the six W's: who, what, when, where, how, and why. [1] Who are the parties involved? What will each of them do? When will it be done? Where will it be done? How is it going to be done? Why are certain provisions important? This is the same process that is often used by journalists and researchers to make sure that they are looking at the whole story.[2] Consequently, the answer to each of these questions needs to be as specific and precise as possible.
Contract Dispute Issue #2: Changes in Economic Realities
When most contracts are written, they tend to be based upon the present economic conditions. However, while the terms of a contract can be fixed on paper, the economy can't. This is a common problem that arises in contract disputes. For instance, there's no magical formula for predicting the price of oil. But, many industries are heavily affected by the price of oil. For instance, when oil prices increase, the menu prices in restaurants also tend to increase. This is because the farms that produce the raw food have higher operating costs to fuel their equipment and ship commodities to the market. If a restaurant's clients will not pay the higher prices, then the restaurant could go out of business. If that happens, then there's an issue of how to handle the end of the lease for the restaurant's location. A good solution would be for the parties to agree in advance how such a disaster would be handled.
Contract Dispute Issue #3: "Acts of God" Strike
When people enter into a contract, their focus is normally on the great benefits that will be achieved. They are not thinking about the possibility of a flood if their office is situated in a 100-year flood plain. When one of these natural disasters occurs, in contract law it is referred to as an "act of God."
Since the results can be so severe, it is much safer to address this (usually) slim possibility within your contract. For instance, in April and May of 2011, we had one of the most violent and deadly series of tornadoes and storms in U.S. history rampaging through several Southern states. Hundreds of lives were lost and there were billions of dollars in damaged property.[3] What happens when a company's owners and employees are uninjured, but the warehouse and all of the widgets that it holds were destroyed and now cannot be delivered in May pursuant to the contract? Is there an extension of the deadline for the delivery of the widgets? If so, for how long? Is there any type of price reduction related to the length of the extension? One common solution is to have a force majeure clause in the contract. [4] A force majeure clause is made to excuse one or both parties' failure to follow the agreements within the contract due to unforeseen events beyond the control of the party. While these clauses are more complicated than can be fully discussed in this article, for our purposes, it is important to note that they are one possible contract drafting solution.
Speaking from the perspective of a litigator with extensive experience in contract disputes, you can often avoid an expensive trial by spending a little bit of extra care in drafting your contract. I have personally provided such a review for a number of clients with very good results. It is usually a very small time-commitment on my part that has saved a considerable amount of money for my clients later on.
For more information, see contract dispute or business litigation.
[1] Note: Some do not consider "how" one of the Six W's. In that case, this is referred to as the Five W's (and one H).
[2] Five More W's for Good Journalism, Copy Editing, Inland Press, Sept. 12, 2008.
[3] For instance, to date, tornadoes have killed 482 people this year. In addition, Tornado Joplin's damage was estimated to range from $1-3 billion, which includes destroying/damaging 10,000 of the 25,000 buildings in Joplin, MO. Aaron Smith, Joplin tornado damage could total $3 billion, CNN Money, May 24, 2011.
[4] Force majeure literally means "greater force" in French.
Rain Minns
Contrary to popular belief, individuals and Fortune 500 companies often make very similar types of mistakes, which lead to contract disputes. I know because my practice focuses on litigation—I have represented businesses of all sizes in contract disputes. Below are a few tips that, if some of my clients had received before they finished their contracts, they could have avoided later litigation:
Contract Dispute Issue #1: Insufficiently Defined Terms
The single biggest reason that I see contract disputes arise is due to insufficiently defined terms in the contract. It is critical that a contract be as specific as possible. This is important because of two interplaying factors. First, most courts tend to interpret contracts according to what is written within them. Consequently, if you end up with a contract dispute, then the exact wording becomes very important. Second, different individuals perceive things differently. For instance, suppose two people are looking at the clouds. One person might see an ice cream in a cone and another might see a person wearing a cone-shaped hat. Another common example occurs in construction projects. Suppose that there is a phrase that construction should begin "reasonably soon." The homeowner might believe that this means within a month while the construction company might believe that this means in another six months after they finish renovating a shopping mall.
One way to make your contract more specific is to make sure that your contract addresses the six W's: who, what, when, where, how, and why. [1] Who are the parties involved? What will each of them do? When will it be done? Where will it be done? How is it going to be done? Why are certain provisions important? This is the same process that is often used by journalists and researchers to make sure that they are looking at the whole story.[2] Consequently, the answer to each of these questions needs to be as specific and precise as possible.
Contract Dispute Issue #2: Changes in Economic Realities
When most contracts are written, they tend to be based upon the present economic conditions. However, while the terms of a contract can be fixed on paper, the economy can't. This is a common problem that arises in contract disputes. For instance, there's no magical formula for predicting the price of oil. But, many industries are heavily affected by the price of oil. For instance, when oil prices increase, the menu prices in restaurants also tend to increase. This is because the farms that produce the raw food have higher operating costs to fuel their equipment and ship commodities to the market. If a restaurant's clients will not pay the higher prices, then the restaurant could go out of business. If that happens, then there's an issue of how to handle the end of the lease for the restaurant's location. A good solution would be for the parties to agree in advance how such a disaster would be handled.
Contract Dispute Issue #3: "Acts of God" Strike
When people enter into a contract, their focus is normally on the great benefits that will be achieved. They are not thinking about the possibility of a flood if their office is situated in a 100-year flood plain. When one of these natural disasters occurs, in contract law it is referred to as an "act of God."
Since the results can be so severe, it is much safer to address this (usually) slim possibility within your contract. For instance, in April and May of 2011, we had one of the most violent and deadly series of tornadoes and storms in U.S. history rampaging through several Southern states. Hundreds of lives were lost and there were billions of dollars in damaged property.[3] What happens when a company's owners and employees are uninjured, but the warehouse and all of the widgets that it holds were destroyed and now cannot be delivered in May pursuant to the contract? Is there an extension of the deadline for the delivery of the widgets? If so, for how long? Is there any type of price reduction related to the length of the extension? One common solution is to have a force majeure clause in the contract. [4] A force majeure clause is made to excuse one or both parties' failure to follow the agreements within the contract due to unforeseen events beyond the control of the party. While these clauses are more complicated than can be fully discussed in this article, for our purposes, it is important to note that they are one possible contract drafting solution.
Speaking from the perspective of a litigator with extensive experience in contract disputes, you can often avoid an expensive trial by spending a little bit of extra care in drafting your contract. I have personally provided such a review for a number of clients with very good results. It is usually a very small time-commitment on my part that has saved a considerable amount of money for my clients later on.
For more information, see contract dispute or business litigation.
[1] Note: Some do not consider "how" one of the Six W's. In that case, this is referred to as the Five W's (and one H).
[2] Five More W's for Good Journalism, Copy Editing, Inland Press, Sept. 12, 2008.
[3] For instance, to date, tornadoes have killed 482 people this year. In addition, Tornado Joplin's damage was estimated to range from $1-3 billion, which includes destroying/damaging 10,000 of the 25,000 buildings in Joplin, MO. Aaron Smith, Joplin tornado damage could total $3 billion, CNN Money, May 24, 2011.
[4] Force majeure literally means "greater force" in French.
Rain Minns
