This article has been written by Aditya Kapoor pursuing a Diploma in Domestic & International Commercial Arbitration from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The foundation of any successful business relationship is a well-crafted agreement.  However, unforeseen circumstances can arise, posing challenges to the smooth execution of a contract. This is where risk mitigation comes into play.

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Risk mitigation in agreements refers to the proactive identification and strategic implementation of clauses that minimise the potential for loss or loophole. By anticipating potential issues and establishing clear procedures for addressing them, agreements become more robust and disputes less likely.

This introductory discussion will delve into the various risks commonly encountered in agreements, explore effective risk mitigation strategies, and analyse the importance of clear and concise contractual language in achieving successful outcomes. Through this exploration, we will equip you with the knowledge necessary to safeguard your interests and navigate the contractual landscape with confidence.

Understanding risk mitigation in agreements

In the legal world, the language used in contracts can make all the difference when it comes to mitigating risk and avoiding costly disputes. The primary reason why clear language is so essential in agreements is that it helps to eliminate confusion and ambiguity. If parties are unsure of their rights and obligations under an agreement, it can lead to disagreements and ultimately result in costly litigation.

Let’s take an example to understand the situation better. Assume that you’re in need of an agreement for yourself. Would you rather have your lawyer draft it with majestic, fancy words that at times don’t make a lot of sense to you, the other party signing the agreement, and even your lawyer, or would you rather have the agreement drafted in simple words that reduce ambiguity amongst the involved parties?

Just imagine the pain of spending hundreds and thousands of dollars in litigation just because the language of the agreement didn’t help you or the parties involved understand the obligations. After all, how is a party supposed to fulfil the obligations when they don’t even understand them in their entirety? 

The following are just a few examples of poorly drafted contracts – 

  • Vaguely drafted clauses are another common mistake, as they leave room for interpretation and the more vague the agreement, higher the chances of it being interpreted differently from the actual intent of the agreement.
  • Unclear words and missing details can create escape routes for the other side. They might use these loopholes to skip out on what they owe you or find ways to get more than they deserve. This can significantly hamper the agreement’s integrity as a whole. 

Role of lawyers in mitigating risks

The primary goal of your lawyer should be to ensure that the agreement is air-tight and that there’s no scope for confusion or a different interpretation of the obligations of the involved parties because, let’s be honest, if an agreement can be interpreted in more than one way, then your lawyer probably hasn’t done a good job.

This is not to suggest that parties always enter agreements with malicious intent. However, there can be situations where one party may be aware of a shortcoming in the agreement but chooses not to raise it during the signing process. This shortcoming could then be used to their advantage later on, particularly if the relationship between the parties deteriorates.

As a lawyer, it should be our duty to ensure that we layout each clause of the agreement in a way that it not only secures the best interest of our client but also helps them avoid costly litigation going forward and the following can be incorporated to ensure this- 

  1. Organise information: Present information in a logical and organised manner to make it easier for readers to follow the document. Use headings, subheadings, and bullet points to break up the text and highlight important information. Also, structure the agreement in such a way that it not only follows your chain of thought but a reader’s chain of thought as well. For example, listing out the ‘Term’ and the ‘Termination’ clauses is a common practice as it helps the parties understand what the duration of the agreement is and automatically helps them understand the scenarios under which the decided term might be cut short in case of certain “material breaches”.
  2. Be specific: To effectively mitigate risk, ensure each party’s rights, obligations, and responsibilities are crystal clear. Consider the following: a simple “Party A shall pay Party B $100 every month” clause invites misinterpretation. When is “every month” interpreted as payment due?  Party B might anticipate receiving it by the first week, while Party A prefers month-end. Similarly, the method of payment is unspecified. Cash might be convenient for Party A, but bank transfers offer better record-keeping for Party B. These ambiguities can escalate into disagreements and, potentially, litigation.
  3. Use examples: Did you notice something about the previous points?  Providing relevant examples or scenarios to illustrate complex concepts or clauses in the agreement can help clarify the intended meaning and ensure that all parties are on the same page.

Importance of clarity in contracts for judges

Judges are human beings at the end of the day, who might have different perspectives or notions about different situations. So, would you rather leave it to luck that the assigned judge has the same thought process as you, or would you rather make yourself crystal clear to avoid trouble for your client? It’s better to choose the latter.

Judges typically use several tools and principles to interpret ambiguous contract language. One common approach is to consider the plain meaning of the words used in the contract. This involves looking at the language of the contract itself and determining the most reasonable interpretation based on the words used.

In case you’re looking to define a word in a way that is slightly different from how it’s usually interpreted, then make sure that you define it in the agreement very clearly so that it cannot be mistaken for its plain or, as it is commonly referred to, ‘day-to-day’ meaning. A good example would be the word ‘completion’, as it’s often used in project-based agreements. For a layman, it might mean “completed to their satisfaction”; however, in an agreement, a lawyer may choose to list the services that one party will provide and may further define ‘completion’ as the following – 

“Completion” shall occur when all of the following conditions are met:

Delivery of deliverables: Party A shall deliver all final work products as specified in Section 1 [Services], including but not limited to [List of Deliverables]. All deliverables shall be functional and free from material defects, as determined by Party A in its sole discretion.

However, “material defects” shall not include minor deviations from the client’s preferred style or aesthetic choices. The client acknowledges that such subjective preferences do not constitute a material defect.

Client acceptance: The client shall provide written acceptance of the completed services. Such written acceptance shall not be unreasonably withheld, and will be deemed provided upon ten (10) business days of Client’s receipt of all deliverables, unless Client provides written notice to Party A specifying in detail any outstanding issues.”

This served as a mere illustration, but hopefully, the underlying point is clear.

Best practices for business owners in contract negotiations

This might come across as contradictory, but as a lawyer, using simple language doesn’t imply the elimination of legal language from an agreement. A lawyer might be able to eliminate a few legal jargons here and there to make the document more readable to a layman but having to remove everything legal from it isn’t possible. 

One might argue that without legally sound agreements (or contracts, as some might say), what’s the purpose of involving lawyers at all? Perhaps, for business owners, familiarising themselves with a few key legal terms could be beneficial. Understanding the meaning of common clauses, like indemnity and severability, might not empower them to draft contracts independently, but it could undoubtedly enhance their grasp of the agreement’s overall context.

It’s only when you actually understand what is being executed between you and the other party that you can effectively negotiate and have your queries addressed. Otherwise, how are you supposed to negotiate something that you don’t understand completely? 

Now, this understanding or basic legal acumen may not develop overnight, but you can always work on it. A good practice would be to have your lawyer explain to you the clauses of the agreement that you’re unsure about. Another practice would be to question what you don’t understand and have your doubts clarified rather than agreeing to whatever is being told. 

Conclusion

In closing, let’s drive away the myth: clear language in agreements isn’t about dumbing down the law. It’s about empowering all parties involved. By prioritising plain English, we achieve several key objectives:

  • Reduced risk: When agreements are unambiguous, misunderstandings and disputes are less likely. This translates to fewer costly legal battles and stronger business relationships.
  • Increased efficiency: Clear contracts save time and resources. Parties can readily understand their rights and obligations, leading to smoother execution and less back-and-forth communication.
  • Fairness and transparency: When the terms are readily grasped by all, there’s less room for misinterpretations or hidden agendas. This fosters trust and promotes a more ethical business environment.

The call to action is clear: Advocate for clear language in your agreements.  For business owners, invest in lawyers skilled at crafting clear contracts. For lawyers, prioritise making legal concepts understandable to their clients. Judges, too, can play a role by rewarding well-drafted agreements that prioritise clarity.

References

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