Using Good Clear Business Contracts to Avoid Litigation
Lawsuits are expensive and can severely impact your profit margins. Litigation costs are more than legal fees and court costs. Litigation “costs” include:
- Lost employee productivity — lost time spent dealing the case
- Diverted resources — a simple example is photocopying costs; generally a lot of paper is required and if you have to copy a pile of business records, those copies are costs that are not going toward expanding your market share
- Emotional costs — on owners and others directly involved
- Extra stress
- Potential higher insurance premiums
- Potential damage to business reputation — lawsuits must generally be disclosed to investors and when seeking business financing.
For all of these reasons, it is important to avoid litigation if possible. One excellent way of reducing the risk of litigation is to only use well-drafted and clear business contracts. The first step in achieving this goal is to hire an experienced San Diego corporate attorney. A well-drafted and clear contract is not merely about the words used in the contract, but also about the negotiations that lead up to the written contract and whether the contract anticipates potential real-world problems that might occur with respect to the unique situation subject to the contract. Having an experienced attorney draft a custom contract for your specific needs can help ensure that the provisions included accurately capture the intent of both parties.
Here are Six Tips for Reducing the Chance of Lawsuits:
- First, all of your business contracts should be in writing. Oral or hand-shake contracts should be avoided particularly if there is anything complicated about the transaction or if the relationship is expected to be long-term.
- Second, before the contract is written, the parties should negotiate all the important terms so the contract can contain clear specifications of what is expected of the parties involved. A well-drafted contract clearly specifies the obligations of the parties involved. This helps avoid litigation because, if everyone knows what is expected, then generally, everyone will meet those expectations. Importantly, the contract will not “fail” because the parties are not arguing about who should be doing what. A contract that is fully performed is a contract that does not end up litigation. A clear contract can also shorten litigation — and, therefore, save costs — because a California judge and/or jury can read the clear contract and make a relatively quick decision.
- Third, as part of negotiating and clarifying the mutual expectations, make sure to consider reasonably foreseeable events that might cause the contract to “fail.” If the contract is for the delivery of machine parts, consider what would happen if there is a truck driver shortage or a labor union walk-out. How should the contract be changed — how should the obligations of the parties be changed — if those events were to occur?
- Fourth, the same rules apply when you are asked to sign a contract. If you are being asked to sign a business contract, you should have the contract reviewed by your trusted San Diego corporate attorney. The contract might not be well-drafted, might not be as clear as it could be and might not consider various foreseeable future “dangers” to completion of the contract.
- Fifth, if there is a dispute, the best method of avoiding litigation is to negotiate. Rarely is instant litigation the best solution. Talk to the other side, find out why there is a problem and see if a solution can be arranged.
- Sixth, consider building into the contract some litigation-avoiding mechanisms such as mandatory mediation (which does not generally require the parties accept the mediation) or other forms of alternative dispute resolution like arbitration.
Contact San Diego Corporate Law
For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.