Contracts. They seem so boring.
And aren’t they just a formality?
This is how most people think of contracts — at least until there’s a problem. When a dispute arises between the parties to a business deal what does everyone do? They run for the contract, or find out there never was a written contract (enforceable contracts can be oral, sometimes), and then try to figure out what to do.
So contracts are critically important. They allow us to resolve disputes.
Contracts also serve another very important purpose in business. They order the affairs among the parties to the contract. The mere existence of a contract and the work in negotiating a contract usually leads the parties having to have discussions about what their expectations are of each other and how their business relationship should go forward.
So contracts do have a very important place. And if we do contracts better, we should have a better businesses with less problems.
So in this article I’m going to take some lessons from my business consulting firm, and my law firm, and bring them together to bring you seven things you can do to make better contracts.
I hope you’ll find this helpful and it will save this article to be used as a checklist for future contract drafting and negotiations.
1. Stop Blindly Using Forms
The first step in having better contracts is to stop blindly using forms. When clients ended up in trouble I often find using some “form” typically found on the internet and didn’t have a carefully negotiated contract.
Let’s not be unrealistic. Your lawyer is probably using forms too. It would be a very inefficient lawyer who would custom write a contract for every client. This would just be too time consuming, require reinventing the wheel and just really wouldn’t be efficient. But starting with something else used before and tailoring for a new a situation? That’s smart.
So why can’t the general public is grab a form off the internet and be fine? The biggest problem for the general public is knowing what is in the form and what might need to change. A properly trained attorney understands that each clause and each word has significance and that a form found on the internet reflects prior negotiations.
Recognizing this significance, a good attorney will start revising the forms they use to meet the specific subject matter of the transaction they are working on. Who is the client? What is unique about the client? What is best for the client in the particular situation being negotiated?
Usually the forms are drafted in favor of the person who originally prepared it. All the clauses can be tailored and shifted slightly. One tweak, or another, depending on the business needs of the parties, can make a big difference. As such, a properly drafted contract will lean a certain direction — in favor one in favor while the parties.
The problem for most users is when they grab a form contract and start filling it in they don’t understand which way the contract is slanted. This means one of two things has to happen: (1) either the parties get very sophisticated understand the nuances and different possibilities of wording and structure of a contract, or (2) the party should employ a lawyer to develop the contract based on years of experience with similar structures, applicable laws and cases.
The lesson for all of us to stop blindly using forms. An unmodified form is usually a very bad thing.
2. Think About Your Business
Going hand-in-hand with not using forms is thinking about the unique aspects of your business in the contract process. Your contract should really fit your business and the specific situation of the parties. Not only are forms shaded to favor one party or another based on who drafted and prior negotiations, the forms also don’t take into account your business.
You should be using contract that reflects your business. Specifically, if you’re a seller you should be looking at the situation of the sales process you’re involved it. Your contract should fit like a glove to what your sales people are telling your purchasers. Your contract should match your business, common problems, past miscommunications and anticipated contingencies that might happen after the contract is signed.
Better contracts take into account the nuances of your business. And each business is unique. How we compete, what value we add to the customers, and how we deliver that value is all different.
As an example, let’s think about a software business. In the software business the customer usually wants to guarantee that the software is going to work. Uptime guarantees to customers be very expensive to the software company (this is where you guarantee the software will work a minimum percent of the time). These types of guarantees, if a problem happens, can lead to a situation where a software problem becomes very very expensive for the vendor.
So the blanket advice for most lawyers would be to remove an uptime clause and not give away any guarantees that the software will be of any particular level of reliability. But, let’s reflect a little more. If your business is competing on being reliable and having a high up time, this could be the rare case where you want to give this guarantee even though most software companies wouldn’t want this.
This is why we need to think about your business in light of your contract so that we can pair the two together to work in harmony.
3. Determine Your Risks
Another key consideration in coming up with great contract is determining your risks. Certain industries tend to have certain risks. But what’s also true is that each business has its own risks. If you want to get really good contracts you need to know what your risks are – the risks that are peculiar to your company.
And it starts by assessing your business. What track record do you have? What issues have you seen in the past? What are those risks points? Where have them in expectation gaps between you and your counterparties with respect to the contracts? Each of these issues shows you where risk points are that you can address in your contracts.
Such stress points tend to be very custom to each business.
And you’re really killing two birds with one stone in a situation like this. Not only are you protecting yourself with respect to likely problems with your contract, but you’re also creating clear expectations with your counterpart. If you spell out the common issue points and how you’re going to handle the situation your counterparty will know exactly what they can look forward to any event of a problem.
For example, let’s assume that your business has had a problem with people wanting to return a product after they read it or reviewed it – basically getting access to your copyrighted work for free. Many businesses in this situation feel a sense of frustration because the customer can read understand and learn the system or process and then return the information to the vendor.
One option in this situation if for you to throw your arms up in the air and say “there’s just nothing we can do about this.” The other option is to do what a lot of people have done which is to spell out exactly what the return process would be and if returns are accepted at all. Putting clear clauses in there will set expectations clearly from the beginning.
Can you set the difference to a judge or jury between a clause that says no refunds versus a contract which is wishy-washy on it? The courts typically want to uphold what the parties intended when they wrote the contract. The more we can make it clear about what the parties attended the better for everybody.
4. Listen to Your Customer’s Problems
How do you make your contracts and make them even better? Listen to your customers.
Are your customers having an issue with your contract? Do they see a problem in the language? Do they commonly question certain terms? Is there a common misunderstanding about one or more items?
Where your customers are and what issues they have can be a big indicator of where you should focus your attention.
Also, are there any issues or problems coming up in your business or not showing your contract? The two should work parallel to each other. As your business evolves and grows you will learn what customer problems are presenting themselves and you should be updating your contracts to deal with these issues and to anticipate these issues.
But you can only do this if you are listening to your customers. Take an inventory of who your customers are, what issues are facing in their business and lives, and what issues are having with you. Bring all of that together and update your contracts to be best in class for your customers while still protecting you.
5. Think About Your Reader
One of the big mistakes we see in a lot of contracts is that the drafter of the contract doesn’t think about their reader. Ultimately whatever you put on paper as your contract or agreement is going to have to be read by the other party (or parties). Are they going to want to read it? Will it make sense?
Most people don’t even want to read a contract. And it makes sense. If you look at how most contracts are written, they are very dense, detailed and hard to unpack. But, with proper usage of spacing, paragraph headings and other details we could actually make our contracts easy to read and understand.
People tend to want space room to understand to see the big structure before they jumped into the details of the contract. So when you’re drafting your contract think about your reader and what their needs will be. Where are their concerns? What should you say to them? How can you phrase contract terms in a way that they understand?
The key here is to think about your reader/user when you’re building your contract — not just protecting yourself. Always be thinking about what their needs are and whether they’ll understand the contract. This change in philosophy will be a game-changer in getting to a good, friendly and easy to understand contract that people are more willing to sign.
6. Watch Your Business and Update Your Contracts
It’s also important that you watch your business and update your contracts based on what you’re seeing. You really going to learn what needs to be in your contracts from ongoing experience.
Just asking your legal team to write a contract is not enough. Your legal team may have past experience with other clients in your industry – but the issues will be different for your business.
So start evolving evolving your contracts by working with customers and suppliers to seeing what issues come up and where the lack of clarity is. These are the items to go back to update on your contracts.
You can think of your contract as an evolving discussion. Something you update and revise as you go. It will change with your business and it will change with your customer base.
Periodic contract reviews, perhaps quarterly, where you go back to your contract forms, talk about what issues are coming up, and adjust them can be very powerful.
7. Think About the Growth of Your Business
In addition to adjusting your contracts as your business changes, you also want to think about the growth of your business in connection with your contracts. What is going to happen to your business in the future and how can you incorporate that into the contracts?
For instance, if you plan to sell your business at some point, is part of your exit strategy you want to make sure your contracts are transferable to the buyer? Some contracts have non-assignment clauses or other provisions that make it difficult to transfer the contract to the new buyer. If you have recurring customers the buyer is not going to pay as much for a business that does not have transferable contracts. So anticipate that type of issue as you build your contracts.
You also want to take into account operational issues with the future of your business when creating contracts. Will you be adding locations additional employees or other scaling? You may want to incorporate those into your contract. In such a case make sure your contract makes it clear that you can service customers in another location, use others associated with your business to service your customers (employees and contractors) or make other operational changes that are likely in your growth plan.
The time to get those into the contracts this before there’s events happened so you don’t have to go back and redo existing contracts or make other operational changes that aren’t in your growth plan. The time to get those into the contracts this before there’s events happened so you don’t have to go back and renegotiate existing contracts.
Contracts are critically important and few companies are doing them completely correctly. I hope that by looking at this article so you’ll have a better understanding of things you can do better in your contracts. Hopefully it makes a difference in avoiding some issues and making your company stronger.
NOTE: I am a lawyer currently licensed in 12 states and Washington, DC. In this article I have discussed general concepts of law. While we have attempted for accuracy the laws of your state or jurisdiction may be different. Additionally the nature of this article does not permit me to give you the type of one-on-one advice that is tailored to your situation you should expect from an attorney.
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