This article has been written by Mithi Jaiswal pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
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Contracts are the cornerstone of not only the economy but they have become a quintessential part of ease of doing business in a state. The interpretation of contracts is key to avoiding any legal dispute and the errors while drafting a contract can cause critical problems for either one or both parties. Various legal writers and practicing lawyers have deliberated upon this topic. In a recent article, a legal practitioner has outlined the eight critical contractual clauses on which the parties should pay specific attention. One of the general mistakes while drafting a commercial business to business agreement is considering the boilerplate clauses to be the same throughout the different sets of agreements. Boilerplate clauses are the miscellaneous or general clauses that are often founded at the end of the agreements. Majorly while drafting an agreement, lawyers tend to believe that these clauses are non-substantive provisions and they blindly use the template clause without any modifications. It is significant to independently consider the mechanics of each agreement and then transplant the clauses from one agreement to the other.
However, there cannot be an exhaustive list substantiating all the possible errors while drafting a commercial contract. This article addresses twelve errors that are generally made while drafting a commercial contract and the precautions that one can avail to escape it.
Mistakes to avoid while drafting a contract
Failing to include dispute resolution clause
A contract should not only be seen from the commercial angle but should also cater to any foreseeable problems that would come up after the parties have signed. The most common reason for business disputes is a breach of contract and the dispute resolution clause gives a course of action when an event of dispute happens. At times, the contract doesn’t address this clause which can hamper the resolution of the business dispute at hand. This clause is essential when the parties are based in different jurisdictions and its absence can lead to non-redressal of the disputes. It is necessary to include a dispute resolution clause that will give a defined process and procedure for resolving a dispute arising between the parties.
Use of ambiguous terms and boundaries
It is very important to use plain language while drafting a contract so that even a layman can understand it. Misunderstandings can easily happen when the contract is not well written. The appropriate expectations can be brought by a properly drafted contract. It is also necessary to avoid the necessary repetition of words. Tautology is a redundant concept and it paves a way for ambiguity. No party will want a lawyer to draft a contract that becomes void due to ambiguous terms and repetitive use of words. For example, one cannot use a clause like “I hereby understand, consent, covenant, undertake, agree, accept……..”, if only one of these words would suffice.
Amending the contract when circumstances change
Although the attorneys try to make bulletproof contracts which include planning of the future, what happens when circumstances change? Recently the circumstances in which a contract was drafted got changed totally due to COVID-19. Some of the agreements didn’t mention the force majeure clause and only dealt with acts of God. There was a tug of war between the clauses of force majeure and the act of God regarding under whose ambit COVID-19 fell? The contract makers should consider all the changes and when the original contract gives no protection, the contract makers should renegotiate the terms by either amending or modifying the agreement.
The damages should be specified when disputes arise
When a material breach occurs, the contract should mention the damages that have to be awarded. If the parties are unwilling to give a certain amount as damages, then they can assume the risk of certain damages and insert a clause limiting damages to a certain dollar. This clause will help in limiting the possible damage recoveries as well as the cost of litigation.
Inadequate due diligence
Before entering into a contract, the parties often tend to ignore thorough due diligence, maybe because of the reputation of the partner with whom they are contracting or some other reason. This assumption leads the party to give calculated risks whereas in such situations real risks are circumventing the due diligence. The parties must do adequate due diligence before drafting a contract.
The governing law provision should be present
It happens that at times the contract fails to address a choice of law that will be governing the parties and this creates huge issues for the enforcement of the contract. The contract disputes become more expensive and difficult to resolve due to the absence of a governing law clause in the contract. The governing law provision should not only be focusing on the home law but the aim should be to choose a law that represents the contractual intent of the parties.
Use of punctuation marks
A single punctuation can change the meaning of the entire clause and put the parties under the potential threat of costly litigation because of the conflict of thoughts. An out-of-place comma can lead to multiple interpretations of the clause. The use of superfluous language as discussed above and inappropriate punctuation marks can lead to misinterpretation of contracts.
Use of singular words rather than plural words
Indiscreet use of plural words can create an impression that the clause applies only to a collective group and not to individuals. It is better while drafting a contract, one uses singular words. For example, instead of saying “employees are not allowed …..” consider “no employee is allowed…”. The use of singular words will restrict the interpretation of the clauses and will consecutively make the contract bulletproof.
Avoid blind copying from the templates
It is very common to find the drafts of almost every agreement online, but blind copying can lead to unwanted and unnecessary clauses being a part of the contract even though there is no need for them. The errant clauses will make the contract more complex so it is better to avoid and delete the provisions from the draft if one cannot figure out the value of that provision. Available drafts can be used but one shouldn’t forget to inculcate the essence of the deal/negotiation in the contract; one has to focus on the deal and then accordingly change the draft provisions. As it is always said one size doesn’t fit all so unnecessary copying can put the drafter in trouble.
Avoid making the contract too one-sided
A contract is an instrument of negotiation for both parties and making an agreement that favors the client without considering the mutual transaction happening between the parties can jeopardize the existence of the contract. The opposite party can negate the contract and not agree to sign it because he/she is not benefitting from it. Therefore, it is necessary to draft the clauses in a way where both the parties are agreeable to the terms.
Reviewing the contract carelessly
After the contract is drafted, one shouldn’t haste while doing the proofreading. The more one goes through the document, the more errors one can find. It is important to take a considerable amount of time to review the works as humans are prone to errors. Proofreading the contract will make it solid and also rectify the problems like interpretation, ambiguity, etc. at the initiation itself.
Nomenclature should be strictly followed
While drafting a contract, the drafters usually use “hereinafter referred to as” for not repeating the long words or parties’ names all over again. The nomenclature that is defined in the contract must be strictly followed. For example, if the clause says “ABC Pvt. Limited (hereinafter referred to as COMPANY” then in the entire agreement the word COMPANY has to occur, and that too in uppercase. If the drafter mistakenly uses the lowercase then that will again subject the contract to interpretation.
The list given in this article is not exhaustive and there are myriads of other errors that a drafter must avoid for making a bulletproof contract. The agreement must be proofread and vetted properly so that the parties can avoid the risk of costly litigation. There are times when the drafter forgets to insert the termination clause and that is how ambiguity peeps in. If the reasons for termination are not given then the parties can assume that any and every act can lead to termination. If the interpretations of the contract are multi-facet in nature then that paves a way for litigation and unenforceability of the contract. Any contract must capture the intent and the purpose of the parties. Failure to comply can lead to heavy costs to either one or both parties. It is recommended that, make a sample draft and then improve upon it as you go along, adding in the details and requirements as expected and enumerated; and revise upon it as many times as required to be able to reach your necessitated objectives and organic satisfaction.
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