Preventing disputes with well-made contracts
It has been said that a contract is good when you do not have to read it after it has been signed. This does not necessarily indicate the success of the said contract, but rather that the business relationship itself has been considered successful by both parties, which is why there has never been a need to return to the contract. All is well, regardless of whether the contractual text was good or riddled with holes.
In practice, contracts are often read also after the signing.
The most typical contractual problems arise when:
- the purchaser feels that it does not get what was promised because of e.g. slow delivery or unsuccessful communication (the promise has been unclearly expressed or too much has been promised);
- the supplier feels that it must give more than what was promised, or the fulfillment of the promise requires more costs than what the supplier counted for (the promise has been poorly expressed and/or the costs have been poorly predicted);
- regardless of the supplier’s best will, the supplier has not internalized the expectations of the purchaser or the purchaser’s expectations regarding the content of the service have not become clear until the delivery (the description of the delivery, i.e. the promise has remained imprecise); or
- the parties (or one of the parties) have remained silent about an uncertain matter, hoping it will never actualize (by which the contract has been left with gaps that unfold unpredictably).
How can these problems be avoided in advance? At least the following information should be included in a good contract:
- Rights and obligations. What is the object of delivery, when shall it be delivered and for what price? How are the intellectual property rights determined? In business relationships it is often appropriate to agree on confidentiality even before the actual contract is concluded, during the contractual relation and after the contract.
- Term and termination of the contract. Is the contract open-ended or valid for a limited period? Which are the notice periods and other terms? On what terms and how can the contract be terminated?
- Exceptional circumstances, amendments to the contract, changes to a party. How are force majeure situations and their consequences determined? Under what circumstances is the contract amended and with what measures? Is the contract transferrable to a third party?
- Specification and consequences of breach of contract. Consequences following a breach of contract can be e.g. contractual penalty, price reduction, damages orcancellation or termination of the deal – it is important to agree on the circumstances under which a breach of contract arises and how it should be tackled.
- Applicable law and order of application. Is Finnish law applicable to the contract or is it an international contract, to which another country’s law or the CISG applies? What is the order of application of different rules in conflict situations?
- Dispute resolution and resolving of other conflicts. Is it most appropriate to refer the matter to a court, arbitration or mediation? In which jurisdiction should the dispute be resolved?
Even though contracts are usually free from formality requirements and binding also when made orally, it is important to conclude the contracts in writing, even when conducting business with an old business partner – this facilitates the process of proving the contractual terms in possible conflict situations.
A good start to drafting a contract is to analyze and clearly define the object for oneself as well as in the contract, to model the contractual processes in advance, to use standardized checklists and to listen to more experienced colleagues. One can also critically ask oneself if the contractual template drafted for a previous project or the template found on the internet is appropriate for the project in question or does an amendment affect another part of the contractual framework.
It is often essential to review the big picture more closely and include an in-house lawyer or an external specialist in the contract team already in the negotiating stage of the process. The participation of a lawyer in an early stage instead of receiving only quick last-minute comments is important since, even though negotiations do not usually lead to a contract until all terms have been agreed upon, it may be difficult to negotiate any late amendments. After the contract has been made, it is too late to try to transfer responsibility to the other party and to amend the terms, unless this has already been prepared for in the terms.
One should ensure that the needs of both parties have been taken equally and efficiently into account in the contract. A good contract clearly stipulates what is expected of the parties in the business relationship and what the parties can expect from the business relationship. Preparing for the potential need for amendments and the impact of such amendments clarifies the responsibilities of the parties and how they should operate in dispute and other problem situations.
Good contracts are the core of seamless business; they support in continuing the business relationship as smoothly as possible. The contracts should include clear and functional keys for unpredicted circumstances and the preventing and solving of disputes. In conflict situations the contractual party should often be contacted without delay and the parties should together figure out the best way to move forward – while ensuring that necessary reclamations and other measures to monitor rights are attended to, of course.