Drafting Contracts to Mitigate Litigation Risk: Useful Tips from a Litigator

I often work with clients who have entered into bad contracts. Perhaps they relied on a form contract online or made a deal over a handshake without writing down its terms. Maybe in their excitement over the transaction, they did not fully understand its terms. Conducting business without entering into a contract of some form is nearly impossible. A bad contract either does not help a party to achieve its intended result or, worse, leads to litigation.

In a recent 2023 survey of corporate counsel in large and small businesses, 54% experienced litigation matters involving contracts in the past 12 months. Contract litigation is a cost of doing business. As an attorney, I work with clients to navigate the complexities of contractual disputes and devise innovative strategies to obtain strong outcomes. The following are proactive steps that business owners can take to address this risk.

Putting your entire agreement in writing.  

A written agreement shows professionalism and reduces the likelihood of misunderstanding by fostering a clear understanding of rights, responsibilities, and obligations. A written agreement minimizes the possibility of a dispute by providing a reference point for everyone regarding its terms.

Under the statute of frauds, specific kinds of contracts are unenforceable unless they are in writing. These include contracts involving the sale of goods valued at $500.00 or more, real property, and longer-term agreements that cannot be performed in less than a year. Virtually every U.S. state has enacted a statute of frauds to prevent dishonest actors from proving nonexistent contracts through fraud.

Leaving out essential terms.  

Before signing a contract, a party should consider every term it considers material and review it to ensure it includes all of those terms. A material term refers to a provision or condition essential to the agreement. In other words, without these terms, the party would not benefit from its bargain.

If essential terms are missing or vague, it can lead to disputes about what was agreed upon. Clear and specific terms help prevent misunderstandings and reduce the likelihood of conflict. This includes timelines, deliverables, payment terms, and other critical conditions guiding the relationship.

Using boilerplate clauses.  

“Boilerplate” clauses often appear at the bottom of a contract and can establish essential rights. Inexperienced parties usually scroll past these in their haste to sign a contract or dismiss them as non-negotiable terms. However, boilerplate terms can impact a party’s risk under an agreement. Review boilerplate terms carefully and renegotiate them if unfavorable.

Planning for termination.  

Termination clauses minimize uncertainty by explaining how a contractual relationship ends and what must happen when it ends. At a basic level, termination clauses should indicate when each party has fully satisfied their contractual obligations and can exit the contractual relationship.

Termination clauses may also specify when a contract is in breach and what the non-breaching party’s remedies are in case of a breach, including how to file a lawsuit or arbitration. The contract may provide specific steps a party must take to enforce its rights under the contract. These steps may include mediation requirements, arbitration clauses, and choice of law provisions.

In almost all cases, parties pay their respective attorney’s fees and costs. Legal expenses should be considered a business risk. The contracting parties may wish to allocate the risk of attorney’s fees to one party—such as the prevailing party in a breach of contract action. Including an attorney’s fees provision will ensure that both parties know who is responsible for their legal expenses.

Don’t be afraid to contact a lawyer.  

This list is intended to be educational and is not exhaustive. Parties should always consider speaking with an attorney to ensure an agreement will help them achieve their goals. Similarly, contractual disputes are sensitive. A party can easily say or do things to escalate the situation and increase liability. An attorney can help a party navigate the intricacies of a dispute and achieve a better outcome.

Written by Andrew Neiman, Esq.
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