I was recently asked for some tips on how to put together a good contract, or how to make an agreement that really works. We as lawyers spend a lot of time drafting contracts and agreements. It’s one of the primary functions that we do. For myself, sometimes it’s in the form of partnership agreements when we have multiple owners coming together for a business, corporate documents when we’re implementing a continuity plan when owners are planning for the future when they may not be involved in their business, or equity incentives, or other contracts for commercial terms of agreements between a company and its investors or its customers or vendors. Contracts take many forms, but we’re always looking for certain things in contract drafting.
What do you do to draft a good contract? For those of you that may want to take a dabble at putting together a contract, or at least understand what your lawyer’s doing behind the scenes when it’s happening. By the way, you may have seen my prior blogs that talked about the risks of novices drafting contracts. If you haven’t, you should take a peek at it. But if you’ve decided to give it a try and you want to draft a contract, here are five keys tips to help you draft a better contract.
#1 Make sure you’re thinking of the broader issues and bringing together terms from a variety of contracts. Lawyers tend to reuse materials. We will copy and paste contracts from one client to another. But the key is in the alternation, how we combine and bring things together for the needs of the particular client. That’s really the art form, and that’s what you’re truly paying for, is the knowledge and expertise to bring the things together and make them work. So you’ll want to be thinking about what is unique about your situation with your customer, vendor, investor, et cetera, what are the terms, and then you want to bring those terms in from another agreement that has them. Often you’ll have to involve multiple contracts in order to do this. You’ll take a little bit of element from here and a little bit of element from there and bring it all together, much like a master chef bringing together a bowl of soup and bringing flavors and ingredients from various different places to come up with that masterful blend that makes things sing.
#2 When you bring together the multiple contracts, you’ll need to fix the definitions and defined terms. You’ll want to make sure everything works together in a way that makes sense. Different things are called different things in different contracts. For instance, sometimes I see companies referred to as the corporation in a defined term, and sometimes it’s referred to as the company. Similar concepts may be used to have different terminology. Once you bring all the elements from multiple contracts and agreements together, you need to make sure all of your terminology fits together in a way that makes sense.
#3 Make sure you keep track of the business deal. What was the business agreement? What needs to be documented? With my clients, I often start with a white sheet of paper, and I ask, what is the client getting? What benefits are they receiving? In return, what obligations are they taking on? What benefits are they giving? I make a two line list on a piece of paper. It doesn’t have to be any more sophisticated than that, but that gives me the key business terms that need to go into the contract. Everything else from that becomes fine tuning, making sure that we’re anticipating issues, making sure we’re doing things that are sensitive to the industry, and pulling all the pieces together. But the key is we need to really, really start with that business deal of what’s important and what really matters.
#4 Don’t make the contract feel overwhelming. So many people make a contract look dense, and this is why people are scared of contracts. You can do a lot with formatting, spacing, the use of schedules and exhibits, and other techniques to make the contract feel readable. Ideally, the contract should be in plain English. This is important because if it ever goes before a judge or jury, you want them to be able to read it and not have to guess as to what you meant. But it also is good for the parties, and the more that you can split things up, make them very understandable and well-formatted, it becomes easier for both sides to read it, understand it, and refer to it later. So don’t get into overwhelming things. Make sure you do things right.
#5 Use other contracts as much as you can but don’t be afraid to go your own direction. Part of building a good contract is to build it as customized as possible to a situation. You’ll be looking for form agreements, and it’s generally a good idea to use drafting of other proven contracts when you can, but there’ll be times when you can’t use that, and then you need to draft custom to your situation and really make sure it fits.
Bonus tip. Make sure all those signature blocks and other things are technically correct. For instance, if a company is signing, you want the signature block to show it’s signed by the company, by a person who’s signing on behalf of the company. All too often we see people make mistakes and have the name of a person there or other sloppy materials. This could lead to secondary liability for the person signing or other difficulties. You really want to be careful about how you put your drafting together and make sure you pull that last piece together.
Are you ready to do it? Are you ready to draft a contract? Or maybe you just want to call a lawyer. At least this gives you some idea of what you’re getting for your money when you talk to a lawyer.
What’s been your experience? Have you drafted your own contracts? Have you ever got burned? Join us in the comments below and let us know about your thoughts and experience.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Odan Jaeger.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
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