Simply put, a contract is a legally binding agreement between private parties.

Business owners make promises expecting that these obligations will be upheld. They enter into agreements, perform transactions, and negotiate important deals; these actions are the core tenets of business. As such, reflecting these agreements in the form of contracts is an essential practice. Absent a legally binding and enforceable agreement, neither party can be held accountable for the promises they have made to the other party.

 At Baxter Legal Services, our experienced business attorneys leverage our knowledge and experience to draft high-quality contracts for our clients, ensure regulatory compliance with contractual obligations, and litigate contract breaches. Our legal work centers around upholding the goals and interests of business owners in Snohomish County and across the country. To learn more about our practice, consider scheduling a consultation with us at (425) 686-0657 today. 

Contracts: A Legal Overview

 At its most fundamental level, a contract represents an agreement between two or more parties that creates mutual responsibilities which are legally enforceable. Contracts are used to determine which agreements, promises, and transactions can be recognized as legally binding. This means that if a contract is breached, the issue can be remedied in a civil court of law. Washington State maintains a set of laws pertaining to business contracts, which can be found in Chapter 62A.2.201-210 of the Revised Code of Washington. These laws state the formal requirements for enforceable contracts and provide for specific circumstances that render contracts void.

 All contracts have three basic elements, which include:

• Offer: in business, this is most often the proposal to perform a transaction, such as buying or selling an asset. The offer is the first step to forming a contract, inviting one party to conclude the agreement through their assent. 
• Acceptance: the agreement to comply with the terms of the offer. A contract is not considered valid until the other party has expressed acceptance, which can be done in a variety of ways. In most cases, acceptance must be communicated explicitly, often through writing.
• Consideration: this can be understood as the bargained exchange; both parties agree to give something of value in order to receive something of value in return.

 Most contracts are governed using common law, which is derived from prior court decisions and established state law. Commercial transactions involving the sale of goods and products are dictated by Article 2 of the Uniform Commercial Code. These rules and regulations are used to govern business transactions throughout the entire process, including the identification of contract terms, payment time and type, and issues surrounding the risk of loss.

Memorializing Agreements Is Essential

 The guarantee that a contract is enforceable is crucial to performing commercial transactions, both within the United States and abroad. In business, the easiest way to avoid disputes and minimize risk is by memorializing agreements in writing. While binding contracts can be made orally, documenting the contract in written terms is typically the safest approach. In doing so, it is possible to include legal protections within the agreement and avoid disputes regarding the agreement’s terms.

 When both parties sign a written contract, they are accepting the terms set forth within the agreement. In the event of a breach of contract or dispute, having evidence of the contract’s terms is essential. Moreover, when memorializing a contract, it is possible to include provisions about how disputes will be settled or how the terms of the agreement will be enforced. For this reason, memorializing a contract can save both parties time and money in the long run.

Contractual Tools to Manage Risk

 Due to the nature of their work, business owners and entrepreneurs are often closely familiar with the concept of risk. Contract risk encompasses all the potential issues that may arise from a specific contract that you entered. Too much risk increases the chances of facing loss due to the inopportune terms or management of the contract, therefore leaving a company vulnerable to financial and legal consequences.

 While all contracts possess an element of risk, it is possible to mitigate the level of undue risk that your company engages in. Contract risks can be financial, legal, or even reputational, impacting the image of a business. Contract risk management refers to the procedure of assessing the risk contained in a contract and taking steps to eliminate it. There are several different tools that companies use to manage risk when they enter contracts, such as:

• Including a limitation of liability clause. This clause can be used to impose a limit on liability, which can also be referred to more colloquially as a damages cap. This cap limits the amount of compensation that the other party can seek in the event of negligence or a breach of contract. Whether a flat number or a percentage of the value of the contract, this limit can be helpful in assessing the financial risk associated with a contract.
• Implementing a contract approval workflow and mandatory contract reviews. For larger companies with several stakeholders, establishing a contract approval workflow can be incredibly beneficial. Stakeholders can be asked to review and approve the terms of an agreement before it is formalized. For smaller businesses, contract reviews are still possible. It can be helpful to create a group of trusted professionals from varying disciplines who can review contracts and ensure that they meet internal standards and governmental regulations.
• Using a waiver of damages. This clause presents specific circumstances in which either party can hold the other liable for damages. For instance, an agreement may state that aside from instances of gross negligence or intentional misconduct, neither party can be held liable for losses that occur under the contract, including personal injury or lost profits.

Types of Contract Clauses

 As one of the primary tools used to mitigate risk within a contract, clauses are a key element of every business agreement. There are a range of contract clauses that can be utilized to prevent misunderstandings and clarify the agreement. The following are some of the most common types of clauses found within a contract:

• Timing clauses. Statute of limitation clauses, time limitation clauses, and time of performance clauses are all helpful in understanding the time parameters of a contract.
• Non-compete clause. Commonly used in employment contracts, non-compete clauses prohibit employees from working for a competitor or competing with the employer for a specific amount of time.
• Non-disclosure agreement. To ensure that key information is kept confidential, these clauses can be useful.
• Indemnity clause. This clause states that one party agrees to indemnify, or be held responsible for, the damages or losses that another party incurs. Indemnity clauses are incredibly common in commercial agreements, as they allow the contracting party to control the level of risk and protect itself from damages and lawsuits.
• Arbitration clause. If disputes occur regarding the terms of the contract, arbitration clauses require both parties to first seek remedy through a third-party rather than a court proceeding.  
• Escalation clause. Commonly found in commercial lease agreements, escalation clauses allow one party to increase the agreed-upon costs or prices in specific situations.

It is important to note that contracts should be tailored to fit the unique agreement and the objectives of both parties. There are a multitude of different clauses that can be utilized within a given contract to accurately reflect these agreements and objectives. An experienced attorney at Baxter Legal Services can provide a fuller understanding of which contract clauses may be useful to help reach your individual business goals.

Methods for Preventing Contract Disputes

 Regardless of the time taken to minimize risk and deter breaches, even the most well-written contracts are subject to dispute issues. Disputes may arise for a variety of reasons, ranging from general misunderstandings to inadequate performance of contract terms. Understanding how and why issues arise is integral to mitigating the financial and legal consequences associated with lengthy contractual disputes. The following are three methods for preventing contract disputes when establishing business agreements.

Ensure the Contract Is Well-Written

 Regardless of how simple and straightforward an issue may seem, writing an airtight, legally sound contract is not easy. When drafting a contract, it is important to use clear and concise language. Define any technical terms to ensure clarity and use different clauses to address specific issues. When disputes arise, the court’s scope will be limited to the written content within the contract rather than the parties’ intentions or prior spoken negotiations. As such, it is important to ensure that if an objective third party reads your contract, they are able to fully grasp the key rights and obligations set forth by the agreement.

Poorly drafted contracts can be leveraged to escape liability or terminate an otherwise valid agreement. While a well-written contract may help prevent future disputes, “perfect” contracts do not exist. Unexpected events can – and do – occur, and a contract should anticipate these uncertainties. Hiring an experienced business attorney to draft well-written, properly executed contracts can help save significant time and money down the line. 

Understand Relevant Timeframes

 Failure to comply with contractual timeframes is a common reason for disputes. Often, there are a range of different dates that must be tracked to remain in compliance with a contract. Moreover, there may be time limitations placed on certain warranties and provisions, meaning they cannot be called upon indefinitely. It Is important to acknowledge when a contract ceases to be valid and the timing of any notice periods. When drafting a contract, it is also crucial that all parties understand their exit route and are not held up in an agreement for longer than anticipated. Including specific dates for all contractual obligations and abiding by these timeframes exactly can help to avoid disputes.

Utilize Proactive Contract Design Strategies

 Contracts can be crafted proactively, to optimize the parties’ chance of success and prevent unnecessary misunderstandings. Specifically, it is possible to provide for pre-agreed procedures and resolution mechanisms in the event that changes, delays, or disturbances occur. A report from the International Association for Contract & Commercial Management states that the terms that parties most often negotiate are not the terms that regularly result in claims and disputes. In other words, the issues that generate problems are not being focused on when negotiating contracts. When proactively designing a contract, the issues that cause legal disputes are explicitly addressed within the agreement, ensuring that these problems are accounted for well before they become an issue.

The Importance of Follow-Up and Oversight on Contract Provisions

 The importance of follow-up and oversight on contract provisions cannot be overstated. After a contract has been negotiated and memorialized, it is essential to monitor compliance with the responsibilities set forth in the agreement. When a contract is effectively managed, businesses can expect to see:

• Minimization of the risk of conflict and disputes
• Maximization of the efficiency of business output.
• Financial returns that are being fully realized
• Satisfaction with the delivery of services provided within the contract
• Proper evaluation of suppliers and their performance
• Discovery of actionable insights regarding future contract amendments or provisions
• Adherence to contractual obligations

The Benefits of Hiring an Attorney When Drafting and Negotiating Contracts

 Hiring an attorney when negotiating and drafting contracts for your business can have an array of benefits. An attorney will be able to negotiate contracts that optimize your outcomes and work in your company’s favor. Possessing acute knowledge of contract law, contract attorneys can interpret technical legal terms and will focus on protecting your rights throughout the negotiation process.

 Additionally, hiring an attorney who is familiar with your industry can present distinct advantages, as they are better able to evaluate trends and craft contracts accordingly. Finally, seeking legal assistance helps to ensure that all active contracts are continuously reviewed for regulatory compliance, avoiding costly missteps and errors.

Contact Baxter Legal Services Today

As skilled negotiators and trusted legal advisors to entrepreneurs around the country, Baxter Legal Services business attorneys understand how to draft airtight contracts that enhance your outcomes and prevent costly legal disputes from arising. To begin the process of protecting your business interests through high-quality contractual agreements, consider contacting our office at (425) 686-0574 today.