Building Bridges: The Importance of Strong Contracts in Establishing Successful Commercial Relationships

In the commercial context, negotiating contracts and building relationships go hand-in-hand. Contracts play an essential role in protecting both parties’ interests; and, with a well-drafted and thoughtfully negotiated contract in place, both parties can move forward with the level of confidence they need to feel comfortable with their decision-making.

In fact, not only can contracts help build successful commercial relationships, but the contracting process can contribute to the relationship-building process as well. As the parties go through the process—doing their due diligence and negotiating reasonable protections—they can learn more about one another, engage in open and meaningful communications, and gain respect for one another’s approach to the process.

7 Ways Well-Drafted Contracts Help Foster Successful Relationships

In this article, we are focusing on the benefits of strong contracts specifically. With this in mind, here are seven ways that well-drafted contracts can help foster successful commercial relationships:

1. Making Sure the Parties Are on the Same Page

One of the first, and most important, benefits of negotiating a well-drafted contract is that it helps ensure that the parties are on the same page. Oftentimes, it will seem like the parties are on the same page when they are engaged in the high-level discussions that lead to the contracting process; but then once they start documenting the deal, they will realize that they haven’t quite had the meeting of the minds that they thought they had.

This is completely normal—and, to a certain extent, to be expected. The point of the contracting process is to focus on the details that generally aren’t part of the initial relationship building process. By bringing the details to the forefront, commercial contracts help ensure that both parties are truly prepared to move forward.

2. Setting Reasonable Expectations

In this same vein, a well-drafted contract will also set reasonable expectations. From delivery terms and service level agreements (SLAs) to warranties and indemnification obligations, a well-drafted contract will provide clarity about what each party can expect in all aspects of the parties’ commercial relationship. Setting reasonable expectations helps to prevent unreasonable complaints—and this in turn helps to prevent unnecessary disputes, disruptions and costs.

3. Anticipating (and Planning For) Potential Challenges

Ensuring that the parties are on the same page and setting reasonable expectations doesn’t necessarily mean that the parties’ commercial relationship will be challenge-free. As a result, another important role that commercial contracts play is to anticipate (and plan for) potential challenges that may arise.

For example, an increasingly common challenge that companies are facing is protecting data security. While cybersecurity breaches can wreak havoc and cause substantial damage if companies fail to respond effectively, by putting cybersecurity obligations and response protocols in writing, both parties to a commercial contract can ensure that they are as prepared as possible if the time comes.

4. Providing Comfort Through Risk Mitigation

This brings us to our next point: Commercial contracts can provide comfort through risk mitigation. In many respects, risk mitigation is among the most important functions—if not the most important function—of commercial contracting. By mitigating risk through cybersecurity protections, indemnification obligations, insurance coverage requirements, representations and warranties, damages caps or liquidated damages clauses, and other similar types of terms, both parties can feel confident that moving forward is a smart and strategic decision.

5. Improving Operational Efficiency

An often overlooked benefit of commercial contracts is that they can help improve operational efficiency—and reduce operational costs in the process. Commercial contracts can improve operational efficiencies in several ways, including:

• Providing a roadmap for launching and managing the commercial relationship
• Facilitating accurate and timely billing and payment
• Streamlining tax compliance and other back-office operations

These benefits can be achieved through careful drafting of both the substantive and “boilerplate” terms of the contract. In large and complex contracts, these terms will typically work together to create an overall environment in which both parties can manage their operations related to the relationship efficiently.

6. Clarifying Rights and Obligations to Prevent Disputes

By clarifying the parties’ respective rights and obligations, well-drafted commercial contracts can also help prevent disputes. While some commercial contract disputes result from one party’s inability (or unwillingness) to perform, many disputes result from disagreements that could—and perhaps should—have been avoided through thoughtful and detail-oriented contract drafting.

If the parties’ respective rights and obligations are clear, this will help prevent disputes from arising out of oversights, ambiguities and questions of contract interpretation. This will allow the parties to remain focused on the beneficial aspects of their commercial relationship—and this in turn will help strengthen their relationship for the future.

7. Providing For a Means of Dispute Resolution When Necessary

Finally, while a well-drafted contract will help prevent unnecessary disputes, disputes may still arise under various circumstances. As a result, it is important that commercial contracts include adequate dispute resolution provisions as well. A typical well-drafted commercial contract will include provisions that address:

• Mandatory alternative dispute resolution (ADR) (and any exceptions)
• Jurisdiction, venue and governing law
• Costs, damages and other financial aspects of dispute resolution

While these are often viewed as “boilerplate” terms, it is important that commercial parties give due consideration to the potential for a dispute down the line. All provisions in a complex commercial contract warrant careful consideration by both parties’ corporate leadership; and, by engaging experienced counsel early in the deal-making process, companies can ensure that the process of getting to a comprehensive and well-drafted contract is as efficient as possible.

Schedule a Call with a Commercial Contract Lawyer at Rendigs Today

At Rendigs, we provide comprehensive, strategic and forward-thinking commercial contract drafting and negotiation services for companies in all industries. If you would like to speak with one of our commercial contract lawyers, we invite you to get in touch. To schedule a call with one of our lawyers in Boulder, Cincinnati or Louisville, please call 513-381-9200 or tell us how we can get in touch online today.