A contract is not going to prevent all disputes. It will definitely prevent some, but certainly not all. I would guess that about 90% of the lawsuits my firm handles involve a contract. And, frankly speaking, many of the cases are good cases with fair arguments on both sides of the issues. So does this mean that the attorney (or who ever it was) who drafted the contract did a bad job?
Answer: No (…I mean, “it depends”–the only correct answer to a legal question).
The Main Problem
Even though you have a contract, you’re still dealing with humans. If you want to avoid disputes, don’t go into business or don’t deal with humans. Disputes happen (T-shirt Idea!). If you believe that a contract is going to be able to predict every possible contingency and variable that could impact the contractual relationship, you’re off your rocker. There is always going to be some risk of problems arising in business dealings. This will always be true.
Contracts Define Relationships and Govern Disputes
Often, a contract dispute is about a failed relationship as opposed to a bad contract. A good contract will help define the relations by having terms with clear duties. If a dispute still arises, a good contract will streamline the litigation process and assist in reaching a conclusion, which will in turn save you money and headache. In a sense, litigiation is not a manifestation of a failed contract, but is an example of a contract in action. The parties, attorneys, and the court are each going to rely on their interpretation of a contract.
As a real world example, I was involved in a case where a construction contract stated that the contractor had a duty to inspect and approve the work of a subcontractor. At the outset of the project, everyone would have probably agreed that this contract clearly assigned these duties to the contractor. It was unclear, however, whether the contractor fulfilled these duties. This ended up being a $2.85 million question. The contract helped the Court determine and evaluate the issues and reach a decision in a somewhat reasonable time (in terms of litigation). Without the contract, the dispute would have been much more difficult (read: expensive) to resolve. (In case you were wondering, the judge ultimately agreed with our position).
So there was obviously a breakdown in this relationship. But does that mean the contract is bad? In retrospect, the contract could have defined what “inspect” and “approve” means. After all, there was a legitimate issue as to whether the duties had been fulfilled. So, yes, maybe the contract can be improved.
This brings me to the next point.
When You Identify Problems, Address Them
If you have a bad outcome with a contractual relationship, you can change the contract or change your business practices going forward. As you do so, your contract or business processes will evolve to become stronger. In the example above, I may advise the contractor to include the definitions of “inspect” and “approve” in future contracts. Or, as an alternative, the contractor may prefer to implement internal procedures that would document the inspections and approvals in a more clear way. The contractor also has the option to do nothing, which could also be fine. There is a balance between having a contract that accurately defines the relationship and one that is too exhaustive, cumbersome, and restrictive. The important thing is that the business takes a look at the issues and makes an informed decision.
If there is a silver lining in a business contract dispute, it is that these disputes can provide an opportunity to strengthen a contract or business practice. So it only makes you stronger.
Did I convince you? Have you had any bad (or good) experiences with a contract? Let us know in the comments!