Five steps to a solid contract

If agreements are not thorough, clear and fully enforceable, they can lead to damagedrelationships, lost business and lawsuits

Broken contracts often lead to damaged relationships, lost business and lawsuits. When you do manage to find new business partners in this climate, it can be tempting to rush through the contract-drafting process and file the document away quickly.

Not so fast, though. In our era of broken promises, you cannot afford to sign a contract riddled with loopholes that could trip you up in court. By following the five steps outlined here, you will be well-equipped to develop agreements that are thorough, clear and fully enforceable.

Confirm your counterpart’s negotiating authority

For many negotiators it’s an all-too-familiar scenario: You reach an agreement with someone and then she says that she has to “kick it upstairs” to her boss, who insists on new concessions.

Before beginning a negotiation, ask your counterpart to clarify her ability to make a commitment on behalf of her organisation. This tactic could pay off if the deal ever ends up in court. Suppose the other side argues that its negotiator did not have the necessary authority to bind her organisation to a deal. If a court agrees, your agreement could be invalidated.

For these reasons, you should also carefully delineate negotiating authority in your own organisation before getting down to business.

Build carrots and sticks into the contract

Imagine that a home contractor insists that his team will be able to finish renovating your kitchen within two months. You are skeptical of this claim, given that other contractors have said that the work would take much longer.

How can you and the contractor manage your legitimate differences of opinion about the future?

Experts advocate writing a contingent contract into your deal. By placing bets on your different predictions, you and the other side can effectively account for uncertainty. For example, you could ask the contractor to agree to a price reduction in the event that he doesn’t finish the work on time.

Before you craft a contingent contract, take time to consider whether the other side is better informed than you are about the issues at stake.

Prepare for the possibility of noncompliance

When drafting contracts or negotiated agreements, wise negotiators prepare for the possibility of a contract breach in several ways.

First, you can agree in writing to meet at regular intervals to review your progress during the life of the contract, suggests Professor Lawrence Susskind of the Massachusetts Institute of Technology in Cambridge. When you build regular meetings into your contract, you give yourselves the opportunity to nip potential problems in the bud while also strengthening your relationship.

Second, Susskind advises you to write dispute-resolution clauses into your contract.

In the event of an alleged violation, this type of clause might require both sides to continue to meet their contractual obligations while a third party investigates the matter.

Third, include liquidated-damages clauses in your contracts, specifying the amount to be paid if the contract is breached, said Professor Guhan Subramanian of Harvard Business School and Harvard Law School in Cambridge, Massachusetts. Consider that, if you sue the other side for breach of contract, you typically will be awarded monetary damages rather than the specific goods or services that you lost. Therefore, if you negotiate up front that supplier will pay you $1,000 for a missed shipment, for example, this liquidated-damages clause will make any future court hearing much more straightforward.

Seek firm commitments

In an ideal world negotiators and their attorneys would have ample time to write and review contracts before they’re put into motion. Time and money are often in short supply, though, and deals may be rushed through via fax, telephone or back-and-forth emails. Even when agreements are signed, they may be nonbinding due to poor documentation.

Take the case of a tenant who signed an apartment lease and then mailed it to her landlord for his signature. The landlord never returned a copy of the lease, a fact that the tenant noticed only when she had trouble collecting her security deposit after moving out a year later. Without a signed lease, the tenant’s lawyer had a hard time fighting her case in court.

For this reason, whenever possible, you and your counterpart should both sign a formal, binding contract. When logistics make this impossible, eliminate ambiguity by taking thorough notes during telephone calls and retaining as much documentation as possible.

Communicate closely with your lawyers

After reaching a negotiated agreement, professionals often rely on their lawyers to draw up the official contract.

Unfortunately, miscommunication between negotiators and their lawyers often leads to costly mistakes. Contract terms may not accurately represent the negotiated agreement, key deal terms may be missing or clauses may contradict one another.

To ensure that your contract accurately reflects both sides’ understanding of the deal, follow these negotiation guidelines from Subramanian:

Start by sharing the motivations behind the deal with your lawyer. When a lawyer understands the purpose of your contract, mistakes are less likely.

Then take time to read the completed contract yourself. Encourage your counterpart to read it carefully as well, and then discuss any areas of confusion with your lawyers. Finally, because you can’t be expected to grasp the subtleties of legal jargon, ask your lawyer to read the contract back to you in plain English.

Ask follow-up “What if?” questions that probe the boundaries of ideal conditions to make sure that you’ve covered all the bases.

© 2015 Harvard University

Experts advocate writing a contingent contract into your deal. By placing bets on your different predictions, you and the other side can effectively account for uncertainty.

Source | The Hindu | 26 August 2015