Advancing technology and international commerce are changing the opportunities facing businesses. At the heart of these opportunities are contracts that, in theory, explain the terms of given transactions and set the responsibilities and expectations of the parties. Unfortunately, in practice, it doesn’t always work that way. Eager to consummate the deal, contracting parties often rush the negotiation process and end up with a written document that does not clearly explain the agreement or define the parties’ respective obligations.
Having litigated numerous contract disputes — from a few thousand dollars to multi-year complex deals worth over $1 billion — I see the same issues occur over and over again; issues that, with minimal effort, could have been avoided. Below are 10 guidelines to assist in avoiding these contract pitfalls:
1. Include policy objectives. Parties should make it clear at the outset what the contract is trying to accomplish. A clear explanation of the objectives of the transaction will make it much easier to interpret a specific term “when considering the contract as a whole” and/or in making a judgment as to a breach that goes to “the heart of the contract” (standards used by Indiana courts). Even in simple transactions, a short explanation of the overarching policy objectives can be very helpful.
2. Define performance standards. Parties tend to focus on an explanation of the transaction and neglect to explain the standards by which performance will be measured. This can be particularly problematic in service contracts, where intangible benefits are at issue. The contract should not just explain what is supposed to happen but how it will be measured. This is a simple concept, but in practice, can be challenging to identify and negotiate. Drafters should think in terms of objective and subjective measures for timeliness/efficiency, quality and quantity. Whether it be in the form of key performance metrics, service level measures, delivery timelines, accuracy standards, progress milestones, or subjective satisfaction obligations, all are important to a clear understanding of expectations.
3. Define material breach. After explaining performance standards, the contract should define what will constitute a material breach. Then, nothing is left to question — the parties will understand what the transaction is, how it will be measured and what will be a material breach. In Indiana, courts will enforce the parties’ agreement as to what constitutes a “material breach.” See, e.g., State v. IBM, 2016 Ind. LEXIS 210, at *24 (Ind. S. Ct., Mar. 22, 2016) (“where a contract itself provides the standard for what constitutes a material breach, this is the standard that governs”). Absent such provision, the parties will be left with the default common law application of the factors in Restatement (Second) of Contracts §241 (1981). Why leave the enforcement of the parties’ agreement to an inexact standard, when the parties can expressly define when a material breach will occur?
4. Evaluate choice of law and forum selection provisions. The complexity of the contract, the number of witnesses, the amount of documents/exhibits at issue, and the need for expert testimony could dictate where the parties should litigate. Parties should examine venue options and applicable legal precedent — including what resources the courts have available and how the jurisdiction applies covenants of good faith and fair dealing, gap-filling provisions, blue-pencil rules, best efforts/reasonable efforts provisions, standards for parol evidence, non-compete/non-solicitation provisions, subjective satisfaction provisions, waiver/disclaimer provisions, standards for expert witness admissibility, standards for summary judgment, etc. — before suggesting or agreeing to a specific venue or choice of law.
5. Use short paragraphs. Long and complicated paragraphs can be confusing and cause undue focus on non-essential provisions. Instead, keep paragraphs short, use lots of headings and section labels, and number lists. It is easier to argue the importance of a single sentence when it is set apart and explained in a short paragraph with a proper heading, than when it is buried in a half-page paragraph of complicated sentences littered with semicolons and non-essential terms.
6. Define key terms and avoid acronyms. Clearly define important terms and make sure to cross-reference their use for consistency throughout the contract. Proper use of definitions will help ensure consistency and accuracy in interpretation. Acronyms should also be avoided. Acronyms can be confusing, often requiring the reader to pause and look back to where the acronym was defined, disrupting flow and continuity. Instead, use descriptive phrases — i.e., something like “Subcontractor Fee” when referring to the portion of subcontractor sales to be shared with the facility owner, rather than “SFSFO.”
7. Avoid legalese. Contracts should use common language and clear, short sentences. Attorneys and clients often pull from boilerplate or model contracts to explain terms but fail to take a fresh look at the clarity of the borrowed provisions. Clear language is essential to enforcement.
8. Consider data privacy and cybersecurity. The exchange and storage of confidential electronic data is becoming the norm — even when not the focus of the transaction. Parties should include expectations and allocate risk as part of the negotiation process, including setting security parameters, breach notification requirements, incident response plan, cybersecurity insurance coverage, etc. Neglecting this can cripple the business.
9. Involve litigators. Transactional attorneys should include litigators in the review process. Experienced litigators will have a good sense of the types of disputes that occur, what terms can cause problems in enforcement, and the current legal landscape. Litigators will also give supporting terms a fresh look — waivers/disclaimers, limitations of liability, set-off rights, notice and cure, dispute resolution, choice of law provisions, etc. All can be important in minimizing risk.
10. Be systematic and organized during negotiations. A clear understanding of what changes occurred and when in negotiations can be extremely important in litigation. Simply marking the date and using the word “draft” on documents and keeping a spreadsheet that cross-references paragraph sections as they change can be useful. Also, attorneys should keep the final contract and related negotiations organized by date in a clearly marked electronic or hard-copy file. Spending a few minutes to stay organized can save substantial time and expense in discovery and fact development should a dispute arise later.
These simple guidelines can help ensure accuracy in interpretation and can minimize the risk in enforcement of the final agreement.•
Mr. Greene is a partner in Barnes & Thornburg and a director of DTCI. The opinions expressed in this article are those of the author.