Mitigating Risk in Commercial Contracts

When drafting commercial contract clauses, it’s important to be aware of common mistakes that can undermine the effectiveness or enforceability of the contract. Therefore, mitigating risk in commercial contracts is essential for protecting the interests of all parties involved. Here are some key factors to keep in mind when drafting and negotiating commercial contracts:

DO:

• Clearly define the scope of work, deliverables, and timelines in the contract. This helps to avoid misunderstandings and disputes regarding the expectations and obligations of each party.
• Specify how risks and liabilities will be allocated between the parties. This can include indemnification clauses, limitations of liability, and insurance requirements. It’s important to strike a balance that protects both parties’ interests while being reasonable and fair.
• Establish performance and quality standards that the deliverables or services must meet. This ensures that the contracted work meets the required level of quality and performance and provides recourse in case of non-compliance.
• Include provisions that allow for termination or suspension of the contract under certain circumstances, such as breach of contract, insolvency, or force majeure events. Clearly outline the rights, obligations, and consequences associated with termination or suspension.
• Specify the mechanism for resolving disputes, such as negotiation, mediation, or arbitration. Consider whether alternative dispute resolution methods would be more efficient and cost-effective than traditional litigation. Clearly outline the process and applicable rules for dispute resolution.
• Address ownership and protection of intellectual property (IP) rights. Specify who owns the IP created during the contract and include provisions for licensing, use, and protection of IP. Confidentiality and non-disclosure agreements can also be used to safeguard sensitive information.
• Establish a process for handling changes or amendments to the contract. This may include a change control mechanism that outlines how changes will be requested, evaluated, approved, and documented. Clear communication and documentation are essential to managing contract changes effectively.
• Ensure that the contract explicitly states that all parties must comply with applicable laws, regulations, and industry standards. This protects against potential legal and regulatory risks and ensures that the parties operate within legal boundaries.
• Consider including provisions that require the parties to maintain appropriate insurance coverage, such as general liability, professional liability, or product liability insurance. Specify the minimum coverage amounts and any additional insured requirements.
• Determine the governing law and jurisdiction that will apply in case of disputes. This helps establish legal certainty and ensures that the contract is enforceable in the chosen jurisdiction.
• Engage legal professionals experienced in contract law to review and provide guidance on the contract terms and conditions. Their expertise can help identify potential risks, ensure compliance with applicable laws, and provide guidance on industry-specific best practices.

AVOID:

• Using unclear or ambiguous language in contract clauses. This can lead to misunderstandings and disputes. It’s crucial to use clear, precise, and unambiguous language to accurately express the intent and obligations of the parties.
• Failing to include essential clauses that create gaps in the contract, leaving parties exposed to risks. Ensure that all necessary provisions are included to address key aspects such as scope of work, payment terms, dispute resolution, termination rights, and intellectual property ownership.
• Failing to clearly define performance standards, quality expectations, or delivery timelines that may result in disputes over the satisfactory completion of work. Ensure that performance obligations are clearly outlined to avoid misunderstandings and provide clear benchmarks for evaluation.
• Neglecting to properly allocate risks and liabilities between the parties, which can lead to disputes and financial losses. Carefully consider potential risks and incorporate appropriate provisions for indemnification, limitation of liability, and insurance requirements to protect the parties’ interests.
• Failing to consider and address relevant laws, regulations, and industry-specific requirements that may expose parties to legal and regulatory risks. Make sure the contract complies with applicable legal and regulatory frameworks to avoid potential disputes and liabilities.
• Failing to review and update contracts. Contracts should be periodically reviewed and updated to ensure they remain relevant and compliant with changing legal and business environments. Failure to review and update contracts may result in outdated provisions, potential risks, or missed opportunities for improvement.

As always, specific contract terms and clauses will vary depending on the nature of the commercial relationship, industry practices, and legal requirements in the applicable jurisdiction. Consulting experienced commercial litigation attorneys who are able to tailor the contract to your specific needs and circumstances is crucial for effective risk mitigation in commercial contracts. To reach one of Pike & Lustig’s experienced business litigation attorneys, call 561-291-8298 today.