Small Business Contracts Part I: A Different Perspective
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3. Contracts are Living Documents because Balance Sheets of Risk Only Reflect Conditions at a Single Point in Time
But just as one would not be able to assess the financial integrity of a company in August 2016 based on financial statements developed 10 years earlier, so contracts at the time they are entered into may not reflect the actually risks confronting the parties several years later.
In this respect, contracts need to be revisited at regular intervals so that their terms can be modified to adjust to changing circumstances.
Over a period of time, technologies change, personnel change, trading conditions change, and economic capacities change.
Contracts viewed as static documents are of little use to parties who need some direction on how to address an unanticipated challenge, sometimes arising years later.
To make contracts living documents, useful to the parties sometimes many years after their execution, is the great challenge posed to the negotiating parties and their counsel.
The Take Away:
- Contract negotiations present parties with an opportunity to identify and assess the risks of their prospective relationship; contract negotiations should not be perceived merely as zero-sum gladiatorial contests.
- Contracts should be considered to be balance sheets of risks reflecting the parties risk management assessment of their relationship at a point in time.
- As such, for contracts to continue to serve parties as useful guides, maybe even years after the original agreement was entered into, requires the parties to view their initial agreement as a living document that may need to be altered over time.
How such documents can be drafted and used to reinforce mutually beneficial business relationships will be discussed in subsequent articles.
Related articles:
When Is an Oral Contract a Legally Binding Agreement?
