Key Takeaways

  • Contractual issues often stem from unclear terms, non-performance, or violations of legal principles like capacity or consent.
  • Common disputes include breach of contract, misrepresentation, and ambiguity in contract language.
  • Issues may arise from multi-party involvement, lack of compliance monitoring, or poor contract lifecycle management.
  • Preventive measures such as clear drafting, regular audits, and legal review can reduce risks.
  • Resolving contract disputes may involve litigation, mediation, or arbitration.

Issues in contract law are something that every small business owner has to deal with. Even basic transactions constitute binding contracts, so you need to make sure you're up to date on the latest developments in contract law. It's also helpful to know about the most common issues in contract law, so you know what to avoid and how to use it to your advantage.

Issues in Contract Law: Everything You Need to Know

Pretty much every facet of your business will require contracts of some kind. Leasing commercial space, conducting transactions of any kind, hiring people, payroll, and more all involve contracts, so you need to make sure you know how to keep things in order.

The basics of contract law are fairly easy to understand. Only people who are at least 18 and of sound mind may enter into one. When one party involved in the contract is a legal entity like a corporation or LLC, they must have a legally authorized representative present. If any violation of the basic requirements occurs a the contract isn't enforceable.

Contracts come in a few different forms, most commonly in writing or an oral agreement. But most important contracts are in writing with the signatures of all included parties as required by law. Common contracts that often require written verification are sales of items over $500, a lease term that lasts longer than a year, and a sale of real estate. Many service contractors are also legally required to use written and signed contracts.

Common Contractual Issues in Business Agreements

Contractual issues can occur in nearly every industry and often arise from misunderstandings, vague language, or violations of legal requirements. Among the most common problems are:

  • Breach of Contract: When one party fails to fulfill its obligations, whether partial, material, or anticipatory.
  • Ambiguity in Language: Vague or contradictory terms can lead to different interpretations and disputes.
  • Lack of Capacity: A contract entered into by someone lacking legal capacity (e.g., a minor or someone mentally incapacitated) may be void or voidable.
  • Coercion or Undue Influence: Contracts must be entered into voluntarily. If one party exerts excessive pressure or influence, the contract may be unenforceable.
  • Misrepresentation and Fraud: If a party is induced to contract based on false statements or intentional deceit, they may seek to rescind the agreement or pursue damages.
  • Failure to Meet Formalities: Contracts involving significant transactions (e.g., real estate or long-term leases) may require specific formats like written documentation or notarization.

Legal Issues in Relation to the Contract

At the center of every contract is an offer or an agreement to do or not do something. This offer has all the details so the person agreeing to the contract knows exactly what they're getting into. Intention must also be made plain and clearly defined. Those requirements may sound basic, but it actually leaves room for many kinds of transactions or potential transactions not to have coverage under the law.

For example, auctioneers aren't contractually obligated to sell items they have on auction. An auction only expresses a willingness to sell rather than an offer itself. Conversely, a bidder can revoke their offer before the contract is final without issue as long as the auction has a reserve.

In some cases, contractors will have to bid on projects in order to get work. Their bids are legally binding once the party offering the project accepts the bid. Many of these kinds of contracts are additionally supported by surety bonds.

Contractual Disputes and Enforcement Challenges

Disagreements over contracts often escalate into formal disputes when parties cannot resolve the issue informally. Common contractual disputes include:

  • Non-performance: One party fails to deliver what was promised, triggering potential damages or specific performance claims.
  • Payment Disputes: A frequent issue in service and construction contracts, where the scope of work and billing terms are contested.
  • Termination Conflicts: When one party terminates the agreement without proper cause or notice, legal action can follow.
  • Jurisdictional and Governing Law Issues: If the contract lacks a clear clause on jurisdiction or applicable law, resolving cross-border issues can become complex.
    Effective dispute resolution mechanisms, such as arbitration, mediation, or litigation, must be incorporated into contracts to handle these potential issues efficiently.

Other Problems of Contract Law

Contracts can get much more complicated if there are more than two parties involved. Since the initial structure of contract law focused on the traditional two-party system, multiple parties require special attention when determining liability and responsibility. Even when the two primary parties seek to change the terms of the contract, the degree to which the third-party can intervene is often unclear.

To resolve common problems with contract law, people will often resort to third-party arbitration. Not only is the process effective, but it's also generally cheaper than the alternatives. These arbitrators are usually experts in a field.

Multi-Party Contracts and Risk Allocation

Contracts involving multiple parties pose unique challenges that go beyond bilateral agreements. These include:

  • Unclear Roles and Responsibilities: When roles are not distinctly defined, disputes about deliverables and accountability often arise.
  • Inconsistent Obligations: Clauses may conflict across different parts of a multi-party contract, leading to enforcement challenges.
  • Liability Allocation: Defining indemnity, joint and several liability, and risk allocation is crucial to avoid confusion.
  • Third-Party Rights and Obligations: In some cases, third parties may seek to enforce or be bound by parts of the agreement, raising questions about privity and standing.

Six Legal Issues to Address When Negotiating Contracts

Every contract is unique, but there are some constants that stretch across all areas of industry. Make sure you address all of the following legal issues when you're negotiating contracts.

  • Confidentiality: Make sure that the terms of your contract are kept private between you and the other involved parties.
  • Sensitive Information: Some contracts may require you to hand over sensitive information regarding your business. If the other party in the contract is in the same business as you, and handing over information like customer data is unavoidable, consider adding a non-poaching agreement to your contract.
  • Bribery: This one may sound obvious, but it's important that you make a conscious effort to avoid bribery. That means you not only should not accept bribes, but you have to actively stop bribery too.
  • Hyperbole: Exaggerations and misdirection must always be avoided in contracts. Any agreement based on false information renders it invalid.
  • Advice: Before signing a contract, make sure you have a lawyer look it over.
  • Mistaken Agreements: Written and signed contracts aren't the only ones that are binding. Oral agreements over the phone are legally binding, as are email messages. Even performing actions indicative of the contract terms can be cited as legally binding agreement.

Practical Strategies to Prevent Contractual Issues

Preventing contractual issues requires proactive planning and robust contract management. Consider the following strategies:

  • Use Clear, Specific Language: Avoid vague clauses; define terms, deadlines, deliverables, and remedies explicitly.
  • Include Dispute Resolution Clauses: Mediation, arbitration, or choice-of-law provisions help manage conflicts efficiently.
  • Regularly Review and Audit Contracts: Especially for long-term agreements, periodic reviews ensure relevance and compliance.
  • Track Contractual Obligations: Use contract lifecycle management software to monitor milestones and deadlines.
  • Seek Legal Review Before Signing: Having a qualified attorney review the terms ensures legality and clarity.
    By addressing these areas in contract negotiation and execution, businesses can minimize the likelihood of disputes and safeguard their interests.

Frequently Asked Questions

  1. What are the most common contractual issues in business?
    Breach of contract, ambiguous terms, misrepresentation, and failure to perform are among the most common contractual issues that lead to disputes.
  2. How can I prevent contract disputes?
    You can prevent disputes by using clear, specific language, including dispute resolution provisions, and having contracts reviewed by a legal professional.
  3. Is an oral agreement legally binding?
    Yes, oral agreements can be legally binding, but they may be harder to prove and enforce than written contracts.
  4. What happens if a party breaches a contract?
    The non-breaching party can pursue remedies such as damages, contract rescission, or specific performance depending on the breach's nature.
  5. Can a third party be held liable in a contract?
    Only if the contract specifically includes them or legal doctrines like third-party beneficiary rights apply. Otherwise, they generally aren't liable.

If you need help with issues in contract law, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.