While not exactly fine wine, good contracts age well. Bad contracts, by contrast, age like spoiled milk. As the commercial relationship evolves, poorly written contracts show their age quickly.
This post breaks down a few failure points in contracts and what can be done to mitigate these risks:
1. Too Much Specificity.
Most business relationships develop based on a specific activation. A vendor has specific products, and a retailer wants to buy them. A consumer tech company wants to license a SaaS product for backend support. A company wants to hire an influencer as its brand ambassador. The result is an agreement littered with highly specific references, including to individual products, campaigns and administrative requirements. One may even see a preamble with references like “the parties wish to collaborate on the sale of widgets, namely XYZ widget” or individual employees who are responsible for taking actions.
Well-drafted agreements avoid such specificity, at least in the main agreement. By contrast, schedules, addenda, and appropriate delegations are used to sort out the details. When a new product is launched, nothing needs to be amended. The parties simply sign a new addendum that covers a specific project. This creates a natural time and scope boundary and avoids a messy amendment process.
2. Unanticipated Risks
Contracts are a snapshot of a meeting of the minds at a particular time. But what if the minds weren’t fully pricing in risk? We all remember the early and optimistic days of the internet, long before fears of hacking and digital privacy concerns were prevalent. A digital services agreement ignoring such risks would be fairly worthless for allocating risk.
So, what can be done? The key is not to predict the future. Rather, it is to build in mechanisms for addressing future changes. Governing law clauses should have catch-all provisions, rather than just listing important statutes. Handbooks and codes of conduct should be incorporated by reference and subject to change by notice. Ditto privacy policies.
To borrow a phrase from Donald Rumsfeld, there are unknown unknowns. One doesn’t need to predict these risks, but just have a way to address them when they arise.
3. Locked-In Commercial Terms
It is a cliché because it’s true: businesses think in quarters, not decades. The primary task is often to get a contract signed and product out the door (or money in the door), enabling the team to hit its KPIs. The problem with this logic is that contracts often serve as the basis for a long-term commercial relationship. Even if both sides can amend it, what gets written down shapes leverage for subsequent negotiations. Locked-in commercial terms can cause serious pain when things change.
A few terms in particular can age poorly. The first and most obvious is price. Circumstances change and inflation is real. Increased costs erode the purchasing power of the average consumer and business. Locking in price—even with an ability to amend—can shape subsequent negotiations to increase pricing. Second, payment terms are often more of a snapshot of leverage at the time of signing—not any underlying macro logic. If one locks in payment terms at the time of signing, one could be either giving (or receiving) an interest-free loan. Third, and finally, is shipping. Incoterms affect not just the logistics of getting product from point A to point B, but also price and risk. Locking in default shipping terms can have cascading effects later.
Sophisticated parties have a plan for addressing these commercial risks. Best practice is to have a commercial addendum with a fixed deadline. This method leaves a clean slate for renegotiating terms. It also avoids giving one side excess leverage when it comes time to make changes. While schedules may not be warranted for short or limited-scope contracts, the commercial addendum model is the gold standard for master service agreements (MSAs) or master purchase agreements (MPAs). Periodic renegotiation keeps the contract aligned with commercial reality—which is the point of having one.
Closing Thoughts
Don’t let the first draft sour the whole barrel. A well-written contract should age well and anticipate future changes. Governing law, operations, and commercial leverage all evolve over time. Good agreements evolve with these changes, while maintaining a solid foundation.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.