When you’re just beginning as an entrepreneur, you are not only the chief operating officer of your company, but you also haul your own trash and write your own contracts. While being your own trash collector might not harm you if you do it incorrectly, being your own business lawyer could eat your money unless you learn some basics about writing contracts. Here are seven things that could help you when drafting your own agreements.
Start with templates. Even lawyers rarely draft contract from scratch. There are many online services that will sell you basic contract templates for $25-$75. Buy several templates in the subject area you are drafting. Study the differences and similarities to learn what the authors think are important. It would be very unlikely that any one of them will exactly fit your situation, so you will have to customize the templates to your needs, perhaps using elements from several. Be sure to coordinate terminology, like “customer” vs. “client.”
Pay most attention to the duties. I have seen many homemade contracts that pay way too little attention to exactly what each party is required to do. This is the primary reason for having a contract in the first place. I like to put my Statements of Work (SOW) and Customer Obligations in appendices to a main agreement. The SOW is the part that is most likely to change for each of your customers, so removing it from the main part of the agreement allows you to customize the deal for each customer without affecting parts of the agreement that are more stable. Another advantage is that you can share your SOW with your customer as a basic proposal and negotiate options and changes to that, then simply attach the SOW to the agreement. Be sure to reference the SOW in the main agreement to let the reader know that the SOW is incorporated in the agreement. If your customer has any specific duties besides paying you, put that in an appendix with the same features.
Pay attention to customer payment information. Confusion over when and how much to pay are completely avoidable reasons for breaches of contract by the paying party. Don’t be afraid of writing a lot of details here. Make it very clear if any parts of the payments are non-refundable and if refunds are allowed under what conditions. Specify what happens if payments are late. If payments are very late, you might want to say explicitly that you can terminate the contract for cause.
Allow for termination but not penalties. Either you or your customer may want to terminate the contract before it ends naturally. Make sure you write in termination conditions so everyone knows what is expected of them. In general, contract law does not allow for penalties per se. If a party breaches or terminates a contract, there might be what’s called “alternative performance” built into the contract. While penalties for early termination tend to be unenforceable you can make it clear that you have given certain concessions because you expect the full term to stay in force, and if your customer terminates early those concessions will be forfeited.
Intellectual property, confidentiality, non-compete and non-solicitation. If you are providing or receiving intellectual property (things that may be patented, copyrighted, trademarked or held in secret) as a result of the contractual relationship, you have to decide ahead of time who will own that intellectual property when the contract is over. In addition, the non-owning party may need or want a license to use that property in tandem with the owner.
A confidentiality paragraph is often built in to keep both parties silent about sensitive information that might pass between them. If very sensitive data tends to be passed one way — e.g. from you to the other party — you may want to add a non-compete clause. But to be enforceable non-competes — especially ones that involve employees — must be limited in scope of time and geographic limitations, and you must have a valid business purpose for the limitation. Non-solicitation bars one party from poaching the employees (or customers) of the other party. This is particularly important if you grant access to your employees of customers during the course of your contract and those employees or customers would be valuable to the other party. Many standard templates might not have these elements, so look around for ones that do.
Dispute resolution. Arbitration is popular for settling disputes — but think this through before limiting your access to the court system. The main reason arbitration is popular is because jury trials tend to be expensive. Ask yourself, if the other party defaults, would you rather have a jury decide the appropriate remedy for the damage done to you? And at the same time, think about the problem from the point of view of the other party. Would they likely have more leverage with a jury? If a jury scares you either way, it might be best to require binding arbitration. Also, you always want to propose that the choice of law and venue for settling disputes be in your own backyard. Since most people don’t read the contracts they sign, this will likely slide through unnoticed.
Force Majeure. After you sign the contact, you will be expected to do what you promised, come hell or high water, or you will have to pay someone else to deliver on those promises. So think about what might keep you from being able to perform. If hell or high water would be significant obstacles, put in a force majeure condition that releases you from your duties in those cases. Any conditions or disasters that might preclude you from getting supplies you need should be considered.
After a while in your business, you will probably want to hire the services of an experienced business attorney to draft and review contracts for you, but in the meantime, thinking through these elements will help. These are not the only elements of any contract you might need to draft, but paying attention to these seven things will take you far.
While there is no such thing as a perfect contact, you can come close to having one by paying attention to all the details regarding managing expectations and allocating risks among the parties.