In the business world, contracts underpin countless transactions and partnerships. These legally binding documents set expectations and responsibilities for all parties involved with the business formation or operations.
However, despite best intentions, disputes arise, leading to frustration, losses and damaged relationships. It is possible to lower the risk of a contract dispute by addressing three of the most common causes of issues as early as possible.
1. Ambiguous or incomplete terms
One significant cause of contract disputes is ambiguous or incomplete terms. Such contracts lack clarity, fostering misunderstandings and disputes. In particular, vague phrasing may lead to disagreements over the interpretation of the agreed terms. This is avoidable by explicitly detailing all aspects of the business relationship, defining each party’s rights and specifying details such as deadlines and quality standards.
2. Failure to meet obligations
Another prevalent cause is the failure to meet contractual obligations. When the other party falls short of meeting their responsibilities, it may result in frustration, financial losses and the breakdown of trust breakdown.
A thorough vetting of business partners beforehand may prevent this from occurring. In addition, the contract should include compliance consequences, such as penalties or dispute resolution mechanisms should one party fail to meet their obligations.
3. Unforeseen circumstances
Contract disputes sometimes also stem from unforeseen circumstances, like “force majeure” events. Like natural disasters or economic crises, these events may make it impossible to fulfill some obligations. For this reason, it is wise to include force majeure clauses in contracts, allowing for obligation suspension or modification during extraordinary events out of each party’s control.
According to The Zebra, 90% of businesses go through a lawsuit in their lifetime, and there are 12 million contract disputes filed each year. While contracts bring clarity to business relationships, without careful creation and management, they can also be the source of major business conflicts. Many of these issues are avoidable through clear wording and by ensuring each party fully understands the contract before they sign it.