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A well-drafted, written contract is crucial for every business, whether you are acting as a supplier or a customer. However, there are certain pitfalls in commercial contracts, which can be very risky for businesses. One of the major pitfalls is having unclear terms in a contract. This article will explore some of the problems that can occur if contract terms are unclear.
Why is It Important to Ensure That a Contract is Clear?
Clarity is vital in a commercial contract. Whilst it may be easier and quicker to rush through the contractual agreement process, this comes with risk.
Your commercial contracts should be clear and unambiguous. A clear and straightforward contract helps to protect both your interests and your counterpart’s interests. Having clear terms in a contract helps:
- clearly document what the terms of the contract are;
- protect against legal risks; and
- avoid disagreements and disputes.
Having a clear and robust contract also ensures you and the other party know where you stand contractually.
What Can Go Wrong if a Contract is Unclear?
Unfortunately, businesses do get this wrong, and it is not uncommon for a contract to either be unclear in general or include certain provisions that are unclear. Where contractual terms are unclear, various things can go wrong. Below we discuss some of the many things that can go wrong if your contract is unclear.
1. Unclear Terms Can Lead to Mismatched Expectations and the Potential for Disputes
Some business contracts can be quite ambiguous and fail to clearly document what products or services will be delivered. This can lead to uncertainties for the contracting parties.
If your contract does not clearly document what you have agreed to, several negative implications could arise, which could threaten your commercial relationships. For example, unclear contract terms could result in misunderstandings and mismatched expectations with your customers. Ultimately, ambiguous contract terms could lead to mistaken beliefs between the parties, which could result in disputes in the worst case.
As a supplier, to avoid a lack of clarity and customer complaints, your commercial contract should clearly set out what products or services you are delivering. This will help evidence what your contractual obligations are and give you certainty when entering into commercial arrangements.
A robust contract should be accompanied by a detailed Order Form or Scope Of Work (or similar document) which clearly sets out:
- the products or services to be delivered;
- any specific timeframes for delivery; and
- the payment terms you have agreed to.
The more detailed your contract is in laying out each party’s obligations, the less likely it is that a dispute could arise in the future.
2. Key Contractual Terms Could Be Deemed Too Uncertain and Unenforceable
If you and the other party cannot agree on the meaning of unclear terms in your contract, you will likely take the dispute to court. The court will have to determine the meaning of these unclear contractual clauses. If the court finds these contractual terms to be irrevocably vague to be legally binding, the court could deem the terms void. Consequentially, these contract terms would, at this point, be unenforceable. Subsequently, you would be unable to rely on these clauses. Your inability to rely on these clauses could open you up to significant legal risk. For example, an unenforceable limitation of liability clause could leave a supplier with unlimited liability for breaching the contract.
In practice, although it may be rare for the courts to deem that terms are unenforceable, litigation is itself stressful, expensive and time-consuming. As such, it is far better to have a clearly drafted contract from the outset to avoid taking the dispute to court for the judges to interpret the meaning of unclear terms.
3. Unclear Contract Terms Could Cost Time and Money and Lose Business Opportunities
As well as the legal risks, it is important to understand how unclear terms can put you at risk commercially too. When entering new contracts with a supplier, business customers tend to shop around. If you are delivering a pitch for new work and need to sign a contract to secure the new business, the terms you present to the customer could be critical.
When a new commercial relationship is about to begin, the counterparty you are doing business with will want certainty on contractual obligations. The other party to your contract wants to know precisely what they are agreeing to.
Poorly drafted contracts with unclear terms can be off-putting for potential customers and dissuade them from working with a new supplier. Therefore, it is important to invest in clear and professionally drafted terms that will help your business look professional and reputable.
An unclear contract could also lead to a lot of back-and-forth negotiations with the customer, in order to make the customer comfortable. This is often time-consuming and costly. Again, having a clear set of terms from the outset is likely to help contracts get signed off more quickly and efficiently.
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Key Takeaways
Clarity is vital in commercial contracts. Unclear terms can lead to several negative consequences. Not only do unclear terms lead to legal risks, such as potential disputes with customers, but they could also lead to loss of business if new customers are unhappy with the contract terms. Therefore, all businesses should invest time in their commercial contracts to ensure they are clear and protect themselves from such risk.
If you need help drafting a clear and enforceable contract, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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