If you have a startup, drafting contracts is supposed to be an everyday affair – whether it is a partnership contract with a co-founder, a supplier contract for goods or a terms of service contract with a customer.
There are tons of different types of contracts that you may need to make on an everyday affair and for most, you might now get the help of a lawyer – unless, you are willing to shell out a lot of money.
Therefore, we asked the experts – what are the essentials that a small business has to know when it’s drafting a contract without the help of a lawyer?
Now, before we begin, a word of warning – drafting a contract is pretty difficult and your business will usually run based on the contract for a couple of years. As such, we do provide contract drafting services. But, if you need a free consultation to make your decision, do shoot us an email.
#1. Develop a Framework for the Contract
According to M. Salman Ravala, Esq, a contracts and business disputes lawyer in New York City, of Criscione | Ravala LLP, you should outline the basics of your proposed key terms so that you understand the deal itself.
“This can include such things as identifying the parties involved, their respective obligations, and key terms such as price, quantity, delivery dates, refund protocols, and methods to calculate damage(s).” You should also check whether insurance or other forms of indemnification is required.
“If certain terms are used, be sure to define them clearly so that everyone is on the same page with what a certain term means.”
#2. Identify the Length of the Agreement
“An agreement may be drafted today but not become effective for another three months.” This is why you need to “clearly delineate the Effective Date, the Term of the Agreement, [and whether the contract] is renewable, and how it renews, and how it can be terminated.”
While working on the termination details, you should consider a variety of scenarios, including “if you want to offer an opportunity to ‘cure a defect’ before final termination.”
#3. Check for Confidentiality Requirements in the Contract
“Sensitive and proprietary information is often exchanged in business deals.” If that’s the case, you need to ensure that a confidentiality clause is part of the contract or a separate Non-Disclosure Agreement is in place between the parties.
If your business deals requires exchange of confidential information, you need to check for –
- If “confidential information [is] defined and does it encompass client list, price list, and vendor details, amongst other things?
- If intellectual property is being shared, does it provide a revocable limited use license that also terminates upon contract termination?
- If sensitive information is shared, is it returned or destroyed if the parties conclude their business relationship?”
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#4. Mention the Dispute Resolution Procedure in the Agreement
You need to “consider carefully how and where a dispute is resolved.” Think about if negotiation or mediation is a viable option before you rush to the Court, and if it helps your business save time, money and negative publicity?
“If so, incorporate a negotiation or mediation clause in your dispute resolution provision.”
Also, be sure to consider “if the parties are unable to amicable resolve their disputes, where does the dispute get resolved? Consider the advantages and disadvantages of going to court vs. arbitration and the difference between the two.“
Finally be sure to mention in the contract about the jurisdiction’s law which shall apply to the dispute.
#5. Keep an eye out for the Reference Agreements
“Often time a contract may reference another agreement such as a previously executed Non-Disclosure Agreement, or Price List.
Be sure to incorporate by reference any agreements, exhibits, attachments, and include them as part of your contract, if necessary.
Look to review several “Entire Agreement” clauses in an agreement and see if it connects the dots.”
#6. Never Fail to Proofread
“A period or comma can make a huge difference in a Judge’s eyes.
Proper formatting is also a form of business imaging and messaging, and a contract full of errors, even if minor, tells the reader about your business and how much attention to detail you may put in your own products and services.
Go beyond Microsoft Word’s spell check consider modern software available to the public which can assist with a more in-depth review of spelling, grammar, and formatting, such as Grammarly and Perfect It.”
“The last thing you want to do when drafting a contract is to have to use it, but the day may come when you will need to. Ambiguity caused by improper use of relevant language or grammatical error is not something you want to deal with when the time comes to make use of the contract.
A quick run-through of Grammarly will ensure that nothing is unclear and the intended meaning gets across!”
#7. Always Review Your Contract
In addition to proofreading, it may be best to share your drafted contract with another member of your team so the document can get a fresh set of eyes. Ask yourself –
- “Do they understand the basics?
- Is there any clause that is vague or unclear to them? If so, a revision may be required.
This is true not only for one’s own contract but a contract you may receive from another party.
While few contracts are neutral, many are drafted favoring one side. Skimming is not an option and a detailed review without reading fatigue is an absolute necessity.
Business owners should also not be shy to redline and provide their input and views on the terms that may not be suitable to them.
After providing your redlines, be sure to keep track of all the changes and ensure that your input is incorporate accurately, and if there are multiple versions of a contract floating around, that you execute the latest most accurate version of the contract.”
Even if you do not hire a lawyer to create your contract, ensuring that you get it reviewed by a lawyer can go a long way.
Finally, M. Salman Ravala, Esq mentions – “While many contract templates exist online, each business relationship and transaction is unique. Business owners may avoid costly pitfalls and end up saving more in the long run by working with an attorney who not only understands contracts but is familiar with how to resolve disputes in an economical and efficient manner.”
#8.Identify the Parties to a Contract
“Identify all of the parties to the agreement.
This sounds simple, but it is easy to get wrong.
For example, is a party a business entity, an individual, a group of individuals, or an individual using a fictitious name? Identifying the wrong party will make it much harder to resolve disputes and may result in you not being able to enforce the agreement.”
#9. Don’t Draft a Contract Steeply in Your Favour
“The most common mistake I’ve come across is where one party (generally, partners or suppliers) drafts a contract steeply in their favor. If you are trying to save on cash, this is something you want to avoid.
More often than not, the party with the less favorable coverage will want a more balanced contract, which can quickly escalate to nasty, avoidable back and forth. This commonly leads to lawyers or mediators being called in.
Save yourself the time, energy, and resources and ensure that both parties benefit from a mutually beneficial contract.”
#10. Try to ensure clarity in your contract
As per Andrew Taylor, Director of Net Lawman, “as much as you think that we lawyers (or business owners) like to confuse their clients with a whole lot of jargon, the main goal of any contract draft is to be as CLEAR as possible with the wording so that no double meanings can be taken from the contract itself.
Ensure [that] the contract is adaptable
Make space for definitions of concepts that may be unclear or for very important elements of the contract itself.”
#11. Make sure your contract contains the essential requirements
“Contract requirements are not universal and can vary depending on the state you conduct your business in.
The following information should be included in the contract:
- Terms of the contract.
- Dispute resolution clause (how the parties will deal with a breach of contract).
- Termination of contract clause.
- The date and signatures of the parties.”
Gennady Litvin further mentions –
“Running a small business usually presupposes dealing with contracts.
A contract is an agreement between two or more parties and can be made up orally or in written form (which is preferable).
To draft a business contract, you do not always need to address the lawyer for help. But you should keep in mind that the agreement has to protect your interests. “
Antonella Colella mentions – Termination provisions are always important to look at – how do you get out of the contract if necessary. Will you have to pay a steep penalty to terminate?
Is there an indemnification provision? Will the other party compensate you for any harm/loss suffered by you?
Remember that contracts can be negotiated, you should never just accept something without understanding the implications.”
#12. “Each party should obtain a copy ofthe contract with the signatures. If there is a signature of only one party, the contract is not considered in effect.” – Gennady Litvin
#13. Never copy your contract from the internet
“One piece of advice I can give to small business owners that need a contract is to not copy it from the internet. Contracts should be tailored to each specific business and possibly, for different situations. Small business owners tend to DIY the legal portion of their business to their detriment.
Very often I see contracts that are incomplete, have terms that don’t even apply to the situation at hand, or even have terms that are disadvantageous.”
“Do not simply use a stock form without thinking carefully about how it might apply to your specific situation and disputes that might arise! Too often, I see people and businesses who have tried to cram their situation into some stock form, resulting in unintended consequences.
Ambiguous or unclear clauses, especially when applied to other side deals or a specific situation, can result in huge disputes.
Moreover, businesses need to carefully consider what an attorney-fee shifting clause can or should look like in their contracts; it does you no good to have a good contract that might entitle your business to a $20,000 payment if it would cost $100,000 to litigate the issue and you do not have an attorney-fee shifting clause in the contract.”
#14. Take added care when mentioning about penalties and consequences in the contract
“It’s important to keep in mind that the subject of penalties and liquidated damages.
If a party fails to meet a specific requirement under a contract, what happens?
Without carefully designing penalties and liquidated damages into the agreement themselves, parties may unintentionally create clauses that will make their business more costly- which defeats one of the purposes of having contracts in place.”
#15. Be ready for contingencies before you start drafting
Sarah Ouis, a former lawyer with an extensive experience of commercial contracts negotiation and the founder of ‘Law But How’, advises that when drafting a contract, it is essential for drafters “to ensure they get sufficient time To fix problems if they arise (if they provide services) or [to] get out of the contract easily if they’re the ones receiving the service”.
This may include having a payment suspension right. This is more so applicable for the buyer of a product or service, which means you have the right to stop providing payments if you don’t receive the service or product.
That’s all for now. The best route when making a contract for small businesses and startups is to make the contract yourself and getting it reviewed by an attorney for a lesser price.
This helps lower the price as well as ensure any contractual errors get detected. That said, hope you found the piece helpful and if you did, make sure you share it to someone who you think will also benefit from the read.
Pretty complicated right? Don’t worry!
If you have any questions, drop in a comment, or if you want a one-on-one consultation, shoot us an email. I recommend that you also check out our list of services so as to check if we can help you out in any other way as well!