Contract drafting is a fundamental skill for legal professionals, essential for protecting client interests and ensuring that agreements are enforceable. However, even experienced lawyers can fall prey to common pitfalls that may jeopardise the effectiveness of a contract.
Research from the International Association for Contract & Commercial Management (IACCM) reveals that poor contract management can cost companies an average of 9% of their annual revenue. This highlights the critical impact that ineffective contract practices can have on a business's bottom line, and the value and impact you can add as a lawyer with strong contract drafting skills. Without diligent contract management, companies often experience ‘value leakage’, stemming from vague terms, miscommunication and inadequate oversight. For example, 77% of IACCM member companies report that project delays or cost overruns are a regular source of loss, while 53% cite disputes and claim settlements as significant issues.
By understanding these pitfalls, you can enhance your drafting skills and create clearer, more effective agreements - bolstering your skillset, effectiveness and helping to strengthen your position within your organisation. This blog explores several key mistakes in contract drafting and offers practical tips to help you avoid them.
1. Ambiguous Language
The Issue
Ambiguous language in contracts can lead to significant misunderstandings and disputes - this is, in fact, one of the biggest pitfalls we see in legal practice. Vague terms can create uncertainty regarding obligations, leading to disagreements about performance. For instance, phrases like ‘reasonable efforts’ or ‘timely manner’ can have different meanings for different people, resulting in frustration and potential legal action.
How to Avoid It
To eliminate ambiguity, always use clear and precise language - define any terms that may be open to interpretation in a definitions section at the start of the contract. Be specific and clear - instead of saying something vague like ‘reasonable efforts’, use ‘all commercially reasonable efforts’ and replace ‘timely manner’ with ‘within (specific timeframe - e.g. 30 days from the date of notice)’. By specifying exact timeframes and expectations, you provide clarity that not only helps prevent disputes but also fosters trust among the parties involved.
2. Failure to Specify Key Terms
The Issue
Key terms such as price, quantity and delivery dates are often inadequately defined - this lack of specificity can lead to confusion and disputes later on. This is another pitfall that many lawyers have or will encounter at some point - for example situations where stating that ‘Party A will deliver items’ fails to clarify what those items are or when they should be delivered, creating room for misinterpretation.
How to Avoid It
Always include specific details for all critical terms - clearly outline the quantity, type, quality of goods or services and the timeline for delivery. By providing detailed descriptions, you not only set clear expectations but also minimise the risk of future disputes, which protects the financial interests of all parties involved.
3. Inadequate Consideration
The Issue
Consideration must be clearly defined within the contract - failing to do so can render the contract unenforceable. Inadequate consideration is another error that can lead to legal challenges, with courts potentially deeming the contract void. For example, if one party claims they were not adequately compensated for their services, this could lead to costly litigation. Courts often scrutinise consideration to ensure that it is both adequate and legally sufficient. If a contract lacks clear terms regarding consideration, such as specific payment amounts or the nature of services provided, it creates ambiguity that can lead to disputes.
In the case of Chappell & Co Ltd v Nestle Co Ltd (1960), the House of Lords ruled that the consideration must be sufficient but need not be adequate, meaning it must hold some legal value, even if it is not equal to the benefit received. This highlights the importance of explicitly defining what constitutes adequate consideration in any agreement.
How to Avoid It
Specify the consideration in the contract explicitly - outline what each party is giving and receiving in clear terms, whether it's monetary amounts, specific services or goods. By being clear here you will solidify the contract's enforceability and minimises disputes over what constitutes fair value, which can have serious financial repercussions if the contract is challenged.
4. Lack of Intention to Create Legal Relations
The Issue
For a contract to be enforceable, both parties must intend to create a legally binding agreement. This intention is generally presumed in commercial contracts, where parties are expected to engage with the intent of establishing legal obligations. However, in social or domestic agreements between family members or friends, this presumption may not apply. Courts often view such agreements as non-binding unless there is clear evidence of intent.
This assumption can lead to complications - for example, misunderstandings may occur if one party believes an agreement is binding while the other does not. Including explicit clauses stating the intention to create legal relations can prevent ambiguity and safeguard against potential disputes. Legal cases, such as Balfour v Balfour (1919), illustrate that domestic arrangements may lack the necessary intention, highlighting the importance of clarity in all agreements.
How to Avoid It
Explicitly include a clause confirming both parties' intention to create a legally binding agreement - this clause not only reassures both parties of the enforceability of the contract but also sets clear expectations about their commitments. By including this clause, you help prevent disputes over the nature of the agreement and can safeguard against potential financial losses that could result from misunderstandings or assumptions about the agreement's validity.
5. Neglecting Governing Law and Jurisdiction
The Issue
Failure to specify the governing law and jurisdiction can complicate matters if disputes arise. Without clarity on which laws apply or where legal action can be initiated, parties may find themselves uncertain about their rights and obligations. This lack of clarity can lead to significant delays and confusion during legal proceedings, as parties may have differing interpretations of their responsibilities under various legal frameworks. Additionally, jurisdictional disputes can lead to costly litigation if parties end up in courts that are not suited to resolve their issues. This is another area where we see many contracts fall short, often resulting in avoidable legal complications and increased costs.
How to Avoid It
Include a governing law clause that explicitly states which jurisdiction’s laws will govern the contract - this clause should clearly identify the applicable laws to ensure that all parties understand the legal framework that will be used to interpret the contract. Additionally, specify where any disputes will be resolved, whether in a particular court or through alternative dispute resolution methods such as arbitration or mediation. By streamlining the legal process should issues arise, you ultimately reduce potential litigation costs and enhance the overall enforceability of the contract.
6. Ignoring Termination Clauses
The Issue
Not including a clear termination clause can lead to significant complications if one party wishes to end the contract - without defined terms for termination, disputes regarding how and when a contract can be terminated can put a spanner in the works. This lack of clarity can create uncertainty about the rights and obligations of both parties, potentially resulting in legal action if one party believes they have been wrongfully terminated.
A key example is the case involving NASA, where a contracting employee's personal relationships created the appearance of a conflict of interest, ultimately leading to the termination of a $651.6 million contract for operational services at the Marshall Space Flight Center. This highlighted how vague or poorly defined terms in a contract can complicate relationships and result in costly legal disputes.
How to Avoid It
To mitigate these risks, incorporate a detailed termination clause that outlines the circumstances under which the contract may be terminated. This clause should specify the conditions that justify termination, such as breach of contract or mutual agreement. Additionally, include provisions for both parties, such as notice periods and the required method of communication (e.g. written notice) to ensure a smooth termination process.
By establishing clear grounds for termination, you not only prevent disputes over the termination process but also protect against potential financial loss that may arise and clearly defining these terms can foster a more amicable separation should the need arise, preserving professional relationships and reducing the likelihood of litigation.
7. Over-Reliance on Boilerplate Clauses
The Issue
While boilerplate clauses can save time during contract drafting, using them without proper context can lead to misapplication. Generic clauses may not address the specific needs of the contract, potentially exposing parties to risks or omissions. This oversight is a common trap for legal professionals and can result in critical gaps that could lead to disputes or legal challenges.
How to Avoid It
To mitigate these risks, always review and customise boilerplate clauses to fit the specific context of the agreement. Carefully evaluate each clause to ensure it aligns with the unique circumstances of the contract - by tailoring these provisions, you can avoid potential pitfalls that could negatively impact financial outcomes and reinforce the agreement’s integrity.
8. Failing to Review and Proofread
The Issue
We’ve saved one of the most common pitfalls for last - neglecting to thoroughly review and proofread contracts. This oversight can lead to typographical errors, inconsistencies or omitted clauses which can create confusion, reputational risk and potentially undermine the enforceability of the contract. It’s alarming how often these issues occur and they can have significant implications.
How to Avoid It
To combat this, work to a comprehensive review process that includes multiple rounds of proofreading. Use technology to review - a simple spellcheck in Work and platforms like Grammarly - and engage colleagues and stakeholders in your process to provide additional perspectives. This will help you catch any errors that may have been overlooked and a fresh pair of eyes can often identify issues that the original drafter might miss, ultimately strengthening the contract and ensuring its enforceability.
Ready to Enhance Your Skills?
To further enhance your contract drafting skills, consider enrolling in BARBRI’s Introduction to Drafting: Effective Commercial Contracts course. This short online programme offers valuable insights and practical strategies that will equip you with the tools necessary to draft clear and effective contracts. By investing in your professional development, you can not only improve your legal expertise but also significantly contribute to the success of your clients and your organisation.
To find out more or book a course or masterclass, visit: Legal Life Skills
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