Ten Tips for Creating Strong Business Agreements and Contracts | Upsize Minnesota | May/June 2023

Agreements are supposed to make things easier by reducing risk and avoiding litigation. Unfortunately, that’s not always how things work out because people often make very simple mistakes when entering agreements.

This article highlights some of the most common and expensive mistakes people make that push them into expensive and risky litigation.

1. Put the agreement in writing

Although oral agreements can be legally binding, they’re often difficult to enforce and lack crucial details both parties need or want to fulfill both ends of the bargain. A written agreement is less risky than an oral one because a document clearly spells out each party’s rights and obligations in case of confusion or disagreement.

2. Use clear and concise language

Ambiguity has been the cause of death for many contracts throughout history. To avoid that fate, it’s important you keep contract language as clear and simple as possible. Businesses do not need to use legalese for an agreement to be legally binding. Instead, use short sentences structured with numbered headings. Similarly, cut unnecessary words or phrases. If a term can be simplified, do it.

3. Use recitals and define important terms

An often-overlooked part of agreements is to include recitals and definitions. Recitals provide context for the agreement and identify the correct legal names of the parties to the contract, which is important for identifying who is responsible for performing which obligations under the agreement. Definitions are helpful in situations where industry-specific terms of art apply or where words potentially have multiple meanings. Once defined, stick with your definitions and capitalize each defined word in the agreement.

4. Define the scope of the agreement and obligations of the parties

The body of the agreement should spell out the rights and obligations of each party in detail. Don’t leave anything out of the contract that was negotiated or agreed upon, as any omitted terms will be next to impossible to enforce. Contracts are largely interpreted based on the “four corners” of the document, not what the parties said during negotiations. To the extent obligations are expected, they should be described in detail in the contract.

5. Specify payment obligations

Specifying who pays whom, when such payments must be made and the condition for making payments is critical. Money is often a contentious issue, so this part should be very detailed. There are several ways to structure payments, such as in installments, upon completion of work, to your satisfaction, upon delivery or minimum acceptance rates. Whatever you decide, identify it in your contract and state the dates, times and requirements. Consider including a method of payment as well.

6. Agree on circumstances that constitute a breach and how to terminate the contract

Contract-based lawsuits often concern a breach and if the contract was terminated. Clearly articulating what constitutes a breach and then setting forth the circumstances in which the parties can terminate the contract is a sensible approach to preventing misunderstandings between the parties and avoiding protracted litigation. For instance, if one party misses too many important deadlines, the contract should make clear that the offending party is in breach and enable the other party to terminate the contract without being considered in breach itself.

7. Include jurisdictional and venue provisions

If you and another party are located in different states or you sell your products/services in multiple states, you should choose a specific state’s laws to govern any potential disputes arising under the contract. Ideally, this would be the state in which you reside or have your principal place of business so as to reduce the need for travel and for the sake of familiarity with those laws. You should also specify where any disputes should be heard.

8. Agree on a way to resolve disputes

Write into your agreement what you and the other party will do if something goes wrong. In addition to having a court resolve any potential disputes, parties may also elect to enter into binding arbitration or mediation instead of going to court. This should also include where the dispute must be heard if alternative dispute resolution is elected.

9. Identify potential scope of damages, including attorneys' fees and costs

In performance-based contracts, it is particularly important to outline what the potential scope of damages can be if a party fails to satisfy their end of the agreement. Specifying potential damages, such as not being able to fulfill downstream orders or losing the value of another contract, puts the other party on notice of risks you face if they were to breach the contract and enables the non-breaching party to recover monetary damages.

Some contracts also contain “fee shifting provisions.” Under the “American Rule,” parties are responsible for their own attorneys’ fees unless the contract or statute says the party can recover its fees and costs. Consider adding a fee-shift provision if you have concerns that the other party will not honor its obligations and there is minimal risk the fee-shift provision could be weaponized against you. However, think twice about adding or agreeing to a fee-shift provision if you are a larger company. Fee-shift provisions level the playing field between small and large companies – and that’s not a good thing if you’re the large company. It may also prolong litigation because both parties are convinced they will recover their fees as the prevailing party.

10. Hire an attorney to review your contracts

It is up to you to understand the importance of the agreement you are entering into. And while you must use your judgment to determine whether you need an attorney who focuses on such work, it oftentimes is beneficial to have an attorney review the contract before it is executed. Doing so may raise questions that were not considered by either party and can prevent larger and costlier legal disputes down the road.

Bryce Riddle is an attorney with Bassford Remele. He focuses his practice in the areas of complex commercial litigation, data privacy and cybersecurity, construction, general liability, and tort litigation. He has significant class action experience.

Kyle Willems is a shareholder with Bassford Remele, co-chairs its construction practice group, and is a member of the firm’s board of directors. Kyle is a business litigation attorney who guides businesses and business owners through disputes in the real estate and construction sectors.

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