Contracts are interpreted in accordance with common sense, course of dealing, course of performance, judge-made rules, and the California Civil Code, among other sources. Due to the typically complex nature of business contracts, misunderstandings can arise and trigger litigation unless they are drafted with particular care and skill in the first place.
The Big Eight
The following is a far from exhaustive list of common contract drafting mistakes:
Doing business on a handshake: Although strictly speaking, this is not a “drafting mistake,” it deserves mention anyway. If you get into a dispute without a formal contract, it is likely that your dispute will be resolved through an exchange of memos or through another method that significantly distorts your original intentions.
Failure to clearly identify what constitutes a breach of contract: In particular, California law divides breaches into two types – material breaches and non-material breaches. A material breach allows the non-breaching party to quit the contract without liability while a non-material breach does not (although it does entitle the non-breaching party to proportionate compensation).
Failure to provide an exit mechanism: Unforeseeable business developments might render it advantageous for you to quit the contract at some point. An exit mechanism allows you to do so without liability if sufficient notice is given to the other party.
Inappropriate or non-existent dispute resolution mechanisms: When a dispute arises and negotiations deadlock, the default solution is an expensive lawsuit. You might want to consider requiring alternative dispute mechanisms, such as arbitration, that are typically cheaper and easier.
Ignoring or underestimating the importance of intellectual property issues: Most startups own little other than their intellectual property at the time their first contract is signed. Intellectual property issues must be handled carefully and comprehensively.
Relying on an invalid employee non-compete agreement or clause. California courts almost always refuse to enforce employee non-compete agreements that purport to prevent employees from working for competitors after the termination of their employment – even if your company is headquartered outside of California. You should rely on confidentiality agreements instead.
Failure to deal with assignment issues: What happens if another company issues a lucrative offer to buy you out? Regardless of how tempting the offer may seem, the value of your business could be greatly reduced if you lack the ability to assign your contracts to the acquiring company or if assignment provisions are so ambiguous that litigation with the contract’s counterparty becomes likely.
Failing to specify how a particular contract relates to other contracts between the same parties: This could get you into trouble in a myriad of unpredictable ways. Even if you have only one agreement with a particular counterparty, it should include an appropriately drafted merger clause.
Contact Us before You Draft Your Business Agreement
At CKB Vienna, we are committed to the aggressive representation of our clients, with meticulous attention to detail and a fine-tuned understanding of the long-term consequences of seemingly insignificant drafting choices. We have assisted a great number of clients throughout Rancho Cucamonga, including Alta Loma and Etiwanda. Call us at 909-980-1040 or fill out our online contact form to learn how we can best assist you.