As a business owner, you need a contract for almost all relationships you have. You need an agreement with a business partner, shareholders, employees, contractors, suppliers and clients. It’s vital to ensure that all your contracts have clear terms.
Ambiguity in contracts can lead to disputes, delays, increased costs and legal issues. Below are three tips for avoiding ambiguity:
1. Define terms
It helps to have a dedicated “definitions” section in a contract to define key terms. This ensures anyone who reads it understands what you mean whenever you mention those terms, for example, industry-specific jargon.
2. Avoid subjective words
You should avoid subjective words in your contracts, such as reasonable time, promptly, material breach, high-quality, normal business hours and confidential information.
Instead, specify what you mean. For example, state that a supplier should deliver goods within 30 days of the purchase order, a client failing to make payment within 30 days of the invoice date is a material breach and an employee should complete all assigned tasks with a defect rate of less than 2%.
Further, specify to your clients when you operate. For instance, 9:00 AM to 5:00 PM, Monday through Friday, except for federally observed holidays. You should also clearly list the information that is protected in your confidentiality clause. These can include trade secrets, client data, unique business methods or proprietary technology.
3. Ensure terms will remain clear in all situations
Some terms in a contract may appear clear, but can create ambiguity when applied to real-world facts. For example, using the dollar sign without clarifying if it’s US or Canadian. Or when a company informs a supplier to deliver goods to its warehouse when it has multiple warehouses, and fails to include an address.
Contract ambiguity can negatively impact your business. Learn more about creating clear contracts to avoid disputes.