Contracts - Getting What You Bargained For

Contracts are an everyday part of business.  The obligations under most contracts are diligently performed.  Serious disputes do occur, however, and what is written in your contract will determine your rights and obligations.  Unfortunately, all too often contracts are signed that do not embody the full agreement of the parties or adequately address critical issues.  The shortcomings of a contract usually come to light at the worst possible time – when a dispute arises.  When something goes wrong the first thing people reach for is the contract to understand their obligations and rights. 

 Contracts should be drafted so that an independent third-party (i.e. a judge) can clearly understand the intent of the parties without having to look at any other documents or listen to the testimony of any party.  A court generally will seek to interpret the intent of the parties to a contract from the contract itself without resort to external information.  This is known as the Four Corners Doctrine.  If there is a difference between what you thought you agreed to and what the contract indicates you agreed to, the Four Corners Doctrine may prevent you from successfully claiming that the contract is incorrect. 

 On the other hand, if the contract is ambiguous or has conflicting terms, the court will have to resort to information outside the contract to determine the intent of the parties.  This will result in greater unpredictability and may lead to the application of contract rules unintended by the parties.  The court may consider testimony from the parties (i.e. he said, she said scenario).  Additionally, the court is likely to apply various rules of contract interpretation from the Uniform Commercial Code and caselaw developed by the courts.

  To reduce the risk of unintended consequences from poorly drafted contracts, the following basic concepts should be kept in mind when reviewing contracts:

  1. Confirm that all parties to the contract understand their obligations and rights, and that they are clearly set forth in the contract.

 2. Ensure the language is unambiguous.  It is helpful to consider whether a term, sentence or clause could be interpreted in multiple ways.  If so, eliminate the ambiguity by modifying the language.  There are times, however, that parties are unable to agree to a few terms but wish to move forward with the contract.  In such instances, ambiguity likely will exist since certain terms will be left out of the contract because the parties were unable to agree.

 3. Carefully review terms that you normally include in your contracts, and determine if you should make them unilaterally in your favor or remove them completely.  For instance, if your standard limitation of liability provision limits the liability of both parties, but your obligation under a contract is limited to making payments and the other party is to perform services and deliver goods, it may be advantageous to make the provision unilateral or remove it completely since your greatest risk is that the services or goods will be defective.