The importance of legal contracts to any successful company cannot be overstated. Reaching a key agreement with new customers can cause a company’s stock to rise.
Signing a new contract with an important vendor can form the basis of a company’s competitive advantage. Their importance manifests itself in another way; contract-related disputes are normally the single largest category of disputes companies face.
Given their importance and the potential for litigation, care should be exercised in drafting contracts. The following are some suggestions to keep in mind to help your business execute more effective contracts.
Written/Standard Contracts: I’m always surprised when a client tells me that I can’t get a copy of a contract because it doesn’t exist in writing.
While it’s perfectly lawful to have an oral agreement for most contracts, it’s a sloppy practice that destined for trouble. It takes some effort to reduce the business deal to writing, but that effort pales in comparison to the effort it takes to deal with a lawsuit concerning a vague oral agreement.
Computers and word processing have greatly reduced the effort needed to draft an effective contract. Develop “standard” written contracts for customer, vendor and consulting contracts that can easily be developed and/or adapted as the need arises.
Customer Agreements: Periodically review your customer agreement and think about whether the agreement is conveying the right message.
An overly complex agreement which has exceptions and qualifications may cause your customers to wonder whether your business really stands behind its product or service.
Try to balance the need for limited liability with the need to attract and retain customers. There is a significant trend toward employing “plain English” in customer agreements (both business as well as consumer agreements).
Legal Review: Don’t be “penny wise and pound foolish”; use an experienced contract lawyer for your significant deals and “standard” contracts. Make sure your lawyer has negotiated hundreds of contracts.
Any lawyer (or non-lawyer) can draft a contract; lawyers who have drafted and negotiated a significant number know how to balance the need for adequate protection with the need to reach a deal.
View the cost of legal services for preparation and negotiation of the contract as “insurance” against lawsuits.
Legal Terms: Don’t win the battle over the business terms only to lose the battle over legal terms. If the deal blows up, the business terms won’t matter – the legal terms will. Spend as much time in developing the legal terms as you do in developing business terms.
ADR/Choice of Forum: Because litigation is extremely expensive, consider using an “alternative dispute resolution” (“ADR”) clause. An ADR process can usually produce a faster, less-expensive result than litigation. ADR clauses are increasingly being employed in customer agreements to reduce the cost of defending customer claims.
If an ADR clause is not employed, consider using a choice of forum clause designating the courts of your state as the forum in the event of a lawsuit. If your business is located in Michigan, having to sue a vendor in California will be an expensive proposition.
Flexibility: Always consider the possibility that the deal won’t go swimmingly. There’s a ton of things that can happen after the deal is signed that can go wrong – poor quality, poor service, the other party is acquired by a competitor; the other party has financial problems, etc.
The termination provision is the most important section in any contract because it gives companies flexibility.
Consciously think past the “honeymoon” stage and make sure the language allows your company to get out of the deal should it need to. Conversely, try to build in some protection on the upside should the deal go better than expected (option to renew, price increase protection, etc.).