The purpose of a contract is not just to reduce an oral agreement into a document. It also serves the very important purpose of forcing the parties to figure out their arrangement, specifically, who is to do what by when and how. But contracting parties should be mindful of avoiding the following common pitfalls:
Shoehorning the Deal into the Contract. All too frequently, the party charged with writing up the arrangement decides to save time and money by just plugging in some key terms into a standard contract that has nothing to do with the type of relationship proposed. In essence, a party attempts to “shoehorn” the deal into an inapplicable document. If you are crafting a custom deal, you should have a custom contract.
Not Following the Contract. If you do not follow the contract you will not be able to complain if the other party fails to follow it as well. If you must deviate from the contract, make sure to amend it in writing.
Not Including a Waiver of Choice of Law. Your contract may say that Ohio law is to apply to all disputes. This does not mean, however, that substantive Ohio law will apply. Under each state’s Choice of Law and Conflict of Law rules, the law of the place where the contract is to be substantially performed will be applied under its choice of law rules. By failing to include a waiver, you may end up in an Ohio court arguing over New York law.
Not Including All Key Terms. If you have spent time getting to an agreement on a concept with the other party, make sure the concept is included in the contract. Be literal – if the contract does not explicitly say something, it cannot be inferred later on.
Not Figuring Out an Exit Strategy. Not all ongoing arrangements work out. Over time, for example, the arrangement may become less financially beneficial. That is when you need to exercise a right to terminate the deal and move on. If you do not have an exit provision, you can always breach the contract – but you may incur legal damages or need to pay the other party to release its claims. Make sure you retain a right to terminate the contract after reasonable notice as of right whenever possible.
Not Reading and Understanding the Contract. Never sign a contract that you have not read (or have not had a lawyer read for you). Moreover, if you do not understand a concept in the contract, have it explained or else delete it.
And last but not least:
Planning on Explaining What You Meant Later On. By far the most common and destructive contract pitfall is a party’s incorrect assumption that if there is a legal dispute later on about what the contract says, they will be able to testify in court what they meant. The so-called “parol” rule of evidence states that unless the language in a contract is ambiguous (and is therefore capable of two or more meanings), the parties will not be permitted to testify about what they intended the word or term to mean. The parties are stuck with the “four corners” of the contract as their agreement and the court is prevented from hearing their testimony or taking their testimony into consideration in allocating legal blame.
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