Negotiating a commercial contract that adequately addresses and protects your interests can be a daunting task, but ensuring that all potential contingencies are dealt with upfront can significantly reduce the likelihood of subsequent litigation. Commercial contract negotiation often involves a mixture of legal knowledge and business acumen. Some of the most significant steps in protecting a client’s rights and achieving his goals are discussed below. Even in transactions that appear simple and straightforward, obtaining legal advice is always beneficial.
Inadequate due diligence. One of the most critical phases of a purchase, merger or other transaction is thoroughly investigating the business that is at the center of the transaction. Proper due diligence includes reviewing financials, contracts, licenses and other business related documents. When parties are eager to consummate the deal, this step may be overlooked or hastily handled. Where there is inadequate time to conduct proper diligence for reasons out of the parties’ control or the transaction is too large to complete a thorough investigation, the parties should be prepared to offer appropriate representations and warranties to mitigate identified risks.
Imprecise drafting. The contracts that memorialize the transaction should reflect the intent of the parties. The contractual terms are the deciding factor when evaluating what the parties agreed to in the relevant deal. For this reason, the contract should not contain ambiguous or unclear terms. Contractual vagueness is often presented as a defense for failure to abide by the contract and may prevent enforcement of the agreement.
Failing to address damages or defaults. Contracts should outline circumstances and procedures in the event of a default or nonperformance by one or both parties. Even though parties may resist addressing what will occur when the contract “fails” for fear that such discussion will demonstrate lack of commitment to the transaction, these provisions are important in minimizing the possibility of future litigation. Such provisions include opportunities to cure a default, providing notice of non-performance and terms of renewal. In addition, the damages that are applicable in the event of a material breach must be agreed upon at the outset so that parties can clearly identify and manage the risks that they are undertaking.
Lack of enforcement procedures. Once contacts are properly drafted and executed, every business should ensure that it maintains adequate internal procures to monitor compliance with the terms of the contract. Both executives and employees should be aware of their rights and obligations under the contract to make sure they are properly exercising their legal responsibilities.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.