Contracts are crucial in business. They set clear expectations for the parties involved, provide legal protection, prevent disputes and manage risks. However, the effectiveness of an agreement can be significantly threatened by ambiguous language.
Ambiguity is a leading cause of disputes in companies, costing billions annually. It’s crucial for a business owner to draft clear agreements.
Here is how you can do this:
Define key terms
Not defining key terms in a contract can lead to legal and operational risks. Clear definitions ensure all parties understand what a term refers to whenever it’s mentioned in the agreement.
For starters, clearly identify the parties entering the contract. You can state an individual’s or business entity’s full legal name and then include how you will refer to them throughout the contract in brackets. For example:
- This agreement is made between ABC LLC (the “Company”) and XYZ Supply Inc (the “Supplier”)
- This contract is entered into by ABC LLC (the “Company”) and Jane Doe (the “Client”)
Other key terms to define include business hours, scope of work (SOW), services/products, payment terms, confidential information, governing law and jurisdiction and termination conditions.
Avoid terms that can be interpreted differently
Some terms used in contracts seem clear, but reveal multiple interpretations when applied to real-world facts. This is because they lack a specific, objective meaning. Thus, they can easily lead to misunderstandings.
Examples are:
- Subjective performance standards – Best efforts, reasonable efforts, satisfactory and high quality.
- Undefined scope of work – As needed, as required, similar services, necessary work and substantial completion.
- Unspecified timelines – Promptly, as soon as possible and within a reasonable time.
You should avoid using such vague terms. And when it’s necessary to include a term, provide a clear definition.
Vagueness in contracts can lead to damaged relationships and financial losses. Learn more about drafting clear agreements to protect your company.
