Business Contracts Faux Pas: Something Companies Inadvertently Do

Contracts and agreements, in their different forms, are the most common part of transactions in the business and the corporate world; and it is here where most problems begin or abate. When a well-qualified and experienced legal practitioner comes across any contract or agreement, they are instantly able to identify the drafting and interpretation faux pas, primarily by a general browsing of the document placed before them for their attention and service.

A legal practitioner is immediately able to gauge the effectiveness of the contract on their table. One can even decipher, as to who has drafted the said contract, whether legal practitioner, or a highly qualified professional in some other field, or whether it is merely an altered template. The gaffe that most corporates indulge in, is drafting important documents with major consequence themselves, by allotting the task to any distinguished practitioner within the organization, who may be an expert in some other field, only to cut down legal costs or some other reason known to them.

This is like attracting the curse of self-medication in some cases as they call it in the world of medicine. This is especially seen in those companies who do not have an in-house legal counsel, and/or depend entirely on service-to-service based legal professionals or law offices, and brush away the need of seeking legal support. Such drafts explicitly exhibit the following:

1. Good language

2. Lacks legal terminology where required, or too much of legalese when not required.

3. Reflects template style, sample draft available online or in their files.

4. Incoherent words, not aligned to the purpose of the agreement /contract.

5. Lacks reference to specific laws that need to be mentioned.

6. May not be elaborate, when required to be elaborate.

7. Unpolished clauses, open clauses that allow misinterpretation of manifold interpretation.

8. Purpose diluting phrases.

9. It shows that it is a revised draft used for some other purpose, between different parties, and a part of it is inadvertently left in this new agreement/contract.

10. May contain irrelevant facts.

11. Clearly exhibits that it is cut-copy-paste, thereby ambiguous, where the intent again is diluted.

12. Improper organization of words/phrases/clauses.

13. Unclear transition between logic, sentences and clauses.

14. Overuse of passive verbs.

15. At times boilerplate clauses missing, which is one of the major faux pas.

16. International contracts between two companies in different countries, devoid of indispensable clauses, in consonance with the laws of each country in which the party/parties are incorporated/ have a branch, depending on facts and circumstances in each case.

17. Faulty risk allocation clauses.

18. Either too long or too short.

19. Improper usage of legal jargons.

20. Displays lack of prudence in the arrangement of clauses.

These are some of the things that come to the fore apart from others. Cut-copy-paste of drafts is the worst of it all, where some generalize the use of some drafts to all contracts and agreements, and when such drafts come up before a legal practitioner, he/she ends up scratching his/her face and begins his/her elementary surgical punctuation to understand the core content.

When such drafts come before the courts, as evidentiary records, the judges depend upon the case well presented by either of the lawyers and passes a verdict in their best discernment and discretion. Some companies are confident with such drafts until problems knock their door, and such confidence is only pitied at. Such a contract or an agreement which gives wide scope for misinterpretation, with plenty of loopholes and lands the company in trouble. It is in the loopholes that any case reels to survive, and overthrow.

It seems palpably clear that cost-cutting is a major reason for some companies to adopt such a practice. However, in the pursuit of cutting those costs, they end up in major suits with millions of amount at stake, at times their goodwill and business itself at stake. It is then, such contracts and agreements pile at the desk of a legal professional.

Further, when you present a squabbled bouillabaisse, which is a result of an incautious and tactless corporate decision to your lawyer; you then need to realize your lawyer is not a supernatural saviour but only a human and an expert in his/her field who can only exercise judicious expertise and in his/her best ability iron out the creases and may be able to distinctively achieve that which is required and possibly achieve under the facts and circumstances of each case.

Not many understand the need and the purpose of drawing up a valid business agreement or a partnership agreement, or a shareholders agreement in case of an LLC and likewise. What do we mean by valid? For an agreement to be valid in its execution and terms contained therein, in simple terms, a good agreement must lay out the intention of the parties, clearly along with its boilerplate clauses and not be a cut-copy-paste of any other agreement.

Many partners in business venturing into new startups or projects commit the mistake of using the readymade drafts available online or use a template or just cut-copy-paste, and then desire to execute their plan of launching in a jiffy, be it partnership firm and/or an LLC or an FZC. And when problems spring up between parties or businesses, then the loopholes in the draft agreements they have entered into start to lift their ugly head which entangles their feet, and they find themselves in a conflict which later develops into sour litigation.

Minor squabbles between human beings are but inevitable. Thereby, drawing up intention between the parties clearly by way of agreements, and in writing, whilst in commercial trading is a prerequisite. Again this brings us to the point of emphasizing the need for executing valid business agreements depending upon the need and type of structure.

For example, It would be considered a wise move if fiduciary clause in a shareholders agreement or a partnership agreement is clearly worded and in case any of the parties upon whom such a fiduciary duty/right is bestowed fails to comply with the terms and defaults, then the duties, responsibilities and rights of the alternative partner/party have to be clearly laid out. In many agreements drafted in a jiffy, this aspect is ignored, and when the parties try resolving those disputes, it gets tardy.

In yet another example, if the partner faces any disagreement during the subsistence of the agreement or the fear of misappropriation creeps in, then any of the partners can intimate the banks for not honouring any financial move from the defaulting partner until further notice. This again points out to the need of drafting the agreements and setting the intentions clear. A validly drawn agreement will not only aid in smooth implementation but also aid in easy rescission of the contract as well.

Written by:

Henrietta Newton Martin | Lawgical Group