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10 Thoughts on Writing a Good Contract

by Mike Massey on December 6, 2011

By: G. Michael Massey

Everyone deals with contracts sooner or later.   So any good business person should be a student of good contract principles and understand the legal basics when it comes to contracts.  Just a few thoughts, for starters:

  1. A contract should document a “meeting of the minds” between the parties to the contract.  Many contract disputes arise when the parties later find out that they’re not on the same page and that’s when they go back and dig the contract out of the files and carefully study the “fine print” to find out what it is they actually agreed to do.  Failure to read a contract is not a good defense when problems later arise.
  2.  Lawyers make a lot more money on the back end of a contract dispute than they do when you seek some guidance BEFORE you sign the contract.  You’d be surprised how many times I’ve been asked – “Would you mind looking this contract over?  I just signed it and want to make sure everything is OK?”   My response is generally “What for?  It’s already signed.” If you’re uncomfortable with a contract with material dollar implications it might be well worth your while to have a contract lawyer read it over and offer his interpretation and revisions before you sign.
  3. Disputes often arise because a contract is “ambiguous”, that is two reasonable persons could arrive at different conclusions as to the meaning of one or more material provisions.   Generally, most states acknowledge a legal presumption that ambiguous provisions are resolved AGAINST the drafter of the contract.  So be careful if you’re undertaking to draft the agreement.  One provision that a lawyer will frequently include in a contract is a statement that “This contract shall not be construed for or against a party based on his level of participation in the drafting of the instrument.”  The purpose of such a provision is to prevent any presumptions against the drafter.
  4. A very good attorney taught me a long time ago that one of the most important considerations in a contract is how to get OUT of the contract if it turns out to be a bad deal.  Frequently, parties on the short end of the stick find themselves hopelessly mired in a long term and unfair contract.  For instance, if you’re a new business and needing to lease space, you’ll run into landlords very eager to sign you up for a five (5) year lease.  But we know that startup businesses have high failure rates, particularly in certain endeavors.  It may have been a much better deal for the lessee to have signed a two (2) year lease with a three (3) year option that he could exercise to make sure he had the ability to shut the business down if he was not succeeding.  A lot of contracts might set forth the terms of dealings between the parties perhaps with a one year term, yet specify that the contract can be terminated on thirty (30) days advance notice.  Think carefully about what could go wrong on the front end and address those issues.
  5. Another important consideration is the resolution of disputes, or potential breaches of the contract.  It is now very commonplace for big companies to include mandatory arbitration provisions in their contracts.  They may seem harmless, or a way to get a quicker resolution, but you often find that you’ve contracted to pay for your judge (the arbitrator chosen) and so you may incur much additional cost, while also foregoing the right to a trial by jury in your local area.  If you’re the party most likely to be sued, you tend to like that arrangement.  If you’re the party who is aggrieved, you may find such a provision a big obstacle to gaining a fair resolution to your dispute.  Also be mindful of venue selection provisions.  A lot of large companies in the small print might state that any disputes will be resolved in their back yard, (New York or Delaware for instance), forcing you to seek out of state counsel and incur additional burdensome costs.  Those type provisions sometimes stifle lawsuits (often intentionally) and can seem very unfair, especially when that foreign jurisdiction had nothing to do with the contract.  You may wish to specify that if a party is found to have breached the contract that they will be responsible for the payment of your legal costs.  In England, the loser normally pays the legal costs of the victor, but that is not the rule in America, so deal with it contractually.
  6. Carefully identify the parties to a contract.  If you’re dealing with a corporation or limited liability company, make sure to properly name the entity in the contract and obtain signatures from the appropriate officer or Managing Member with authority to bind the entity.  Make sure the entity is in good standing with the Secretary of State’s office.  Sometimes out of state companies make the mistake of not registering to do business in our state which can deprive them of the right to avail themselves of the benefits of that state’s legal system.  If your company is “doing business” beyond your home state, you should likewise ascertain whether you are required to register to do business in that state.  Such information is available online through the various Secretary of State offices.  Also be mindful that you could be signing a contract with a newly formed entity with no assets to back up the contract obligations.  A bit of due diligence might bring you to the conclusion that a personal guaranty may be warranted if dealing with a “shell” entity.
  7. Obviously, the terms of payment of funds are of paramount importance.  Be clear as to the amounts owed, any service charges, when payment is due and remedies in the event of default.
  8.  Be clear as to the term of the Agreement and how it may be renewed.  Many contracts contain nasty surprises.  For instance, you may be looking forward to the termination of a lease arrangement, but have forgotten about that “Evergreen” provision, which states that unless one of the parties provides notice that the lease will not be renewed at least 60 days before the end of the lease term, that the lease will AUTOMATICALLY renew for an additional five years.  If you discover that ten days before you thought the lease was going to end, you may have a big problem.  Calendar critical dates so that you won’t forget years down the road.
  9. Carefully define the scope of the obligations of the respective parties, what you will do, and even what you will NOT do if necessary to avoid misunderstandings.
  10. Small print and “boilerplate” provisions may turn out to be very important.  Be wary of those entities unwilling to negotiate or revise the terms of their contracts, the types that tell you that “this is our standard contract and we can’t revise it.”  Maybe they won’t, but they certainly can if they want to do business with you badly enough.  And there lies the rub sometimes.  Do you have enough leverage to gain a fair deal?  If not, you may be forced to agree to terms you wouldn’t have agreed to if you had enough juice to get it changed.  But that’s about negotiating, which is a whole other topic.  One final thought on “standard” or “form” contracts, be wary of online downloadable form contracts.  If you take anything from this article, it should be that all contracts tend to be unique and they should be carefully tailored to avoid problems that might later arise.  Make the effort on the front end to get it right.  Regardless of the outcome, you send a signal to the other party to the contract that you pay attention to contract details and that may set a tone that keeps you from getting walked on later.

Read my related article “10 Points on Good Business Negotiations”

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