Everyone understands what a “sale” is, right? Well . . .

The shortest contracts often create the largest disputes.  A recent article from Ron Morris of The American Entrepreneur very effectively illustrates what can go awry when two parties rush to sign an agreement.  If the parties have not ensured that the critical terms are clearly defined, costly disagreements can result.  In particular, payment terms – and the conditions that trigger a payment — must be clearly defined to avoid misunderstandings.

For example, in a license agreement the licensor may consider a payment obligation as triggered when the licensee’s customer agrees to purchase a licensed product.   The licensee, however, will want to defer the payment obligation until it actually receives payment from its customer.   Simple terms such as “sale”, “revenues”, or — as Ron notes in his article, “referral” —  can be interpreted very differently depending on what side of the agreement you are on.

Often, contracting parties can avoid issues like this if, before signing, they each ask a third party who is experienced with contracts — a lawyer, a contracts administrator, or another experienced person — to carefully read the agreement and identify terms that can be subject to different interpretations.  The time and expense put into carefully drafting a contract — even a relatively simple one — can avoid much more costly issues down the road.

For the full text of Ron Morris’ article, click here.

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