Contracts and the Art of Tea Leaves
Take a seat, show me your contract and I’ll tell you about yourself. I may even be able to tell you your future. Legal psychic? Maybe or maybe I have read enough contracts in my career that there are indicators, tells, and if I couldn’t, then I wouldn’t be a great advisor.
I really do enjoy reading and drafting contracts. To me, a contract is a story unfolding and every contract has a spirit. Most recently, I created an agreement for a client and as I was drafting the contract, I was visited by the ghost of contracts past. All the good and bad that have happened with every contract before this one shaped this contract. (I’m looking at you evergreen clause that traps businesses in services they don’t want…)
At this point, I’ve lost some with this narrative, but those of you that stayed can appreciate that I have a personality just like my clients do. It is my job, to reflect that personality and the culture of the company in every contract I touch.
Here are a few things I’ll look at when drafting a contract:
- First, is it the right contract? I know this goes without saying but some lawyers either don’t understand the deal or try to make a square fit in a round peg. For instance, you don’t want a license agreement when you are really entering into a reseller agreement. Also, sometimes you may have two different transactions with the same parties. IT’S OK to have two separate contracts. Why bind yourself to both when maybe only one transaction will actually be successful?
- How one sided is the contract? Is it all about the take and no give? Fun fact, bigger companies tend to have more fair contracts than smaller companies. I can read a long contract and have two comments and then read a 10 page contract that I completely mock up. Why? Big companies understand that it takes a lot of time to negotiate every point. They want a mutually beneficial relationship and don’t look to make money on damages.
- Which brings us to the next point, liquidated damages. BE CAREFUL here. They are often inflated and have no direct corollary to actual damages, and more than likely will not hold up in court.
- Boilerplate paragraphs aka ‘standard paragraphs’ which may, in title, be standard in contracts but their terms are anything but. Jurisdiction, venue, attorney’s fees, even assignment clauses. A business dispute will absolutely turn on these so called standard paragraphs and I have gotten to many settlements because the standard paragraph overcomplicated the dispute. (I will delve into more of these in later posts because jurisdiction is a fun one.)
- And of course, the substance of the deal to make sure it is reflected correctly and the right warranties, limitation of liabilities, IP rights, etc are memorialized. Also, that the contract has the right cash flow for the business holder because that is imperative for operations.
Every contract embodies the spirit of who you are as a company. It is about leverage and negotiating power. If you make your contract fair and concentrate on the art of the deal, you set the stage for a healthy business relationship; hopefully a long term one.
Don’t download your next contract from the internet, contact us today for contracts that showcase you and get you paid.