Contracts are the lifeblood of any business. They define relationships, stipulate obligations and establish a framework for resolution in case of disagreements. Despite their pivotal role, the task of drafting a contract can often seem daunting. The language used needs to be precise, the terms fair, and the document itself should be legally sound and protective of your interests.
This guide aims to demystify the process of contract drafting, offering principles and practical tips that can help ensure your contracts are clear, strong and effective. From pre-drafting considerations and essential drafting principles to the invaluable role of legal counsel, we’ll walk you through the steps that lead to a well-drafted contract. Whether you are a founder, a business owner or simply someone seeking to understand the contract drafting process better, this guide offers useful insights to make your journey smoother.
Though these general guidelines will help founders understand how to draft better. It’s important to work with legal counsel in each step of the process. If you’re looking for legal counsel, feel free to reach out to us here.
Creating a Term Sheet
Before starting the contract-drafting process, it’s vital to prepare the major deal points and conduct a thorough risk assessment. This approach lays the groundwork for the contract and safeguards against potential issues down the line.
- Identify Key Elements and Risks: Start by defining the primary terms of the agreement, which could include:
- Product / Service. Clearly outline what is being sold or what service is being performed.
- Price. Agree on the cost of the product or service, and the payment terms.
- Timing. Set deadlines for delivery of products or completion of services.
- Intellectual Property. Establish who owns any intellectual property created, and terms for its use, licensing or transfer.
- Confidentiality. Determine what information is confidential and how it should be handled.
- Dispute resolution. Decide on a process to resolve potential disagreements.
At the same time, consider the associated risks of each point. This might involve considering market conditions, regulatory requirements and any other factors that could impact the agreement.
- Negotiation and Risk Mitigation. Once you’ve identified the major deal points and potential risks, negotiate these terms with the other party. It’s important to find a balance that benefits all parties and mitigates identified risks. Risk mitigation might involve adding specific clauses to the contract such as a force majeure clause for unforeseen circumstances.
- Confirmation and Risk Review. After negotiation, ensure all parties are in agreement with the major deal points and are aware of the risks. Each party should have a clear understanding of the terms and potential issues.
- Documentation and Legal Review. Document the agreed-upon major deal points and identified risks in a term sheet or letter of intent. This document serves as a guideline for drafting the contract. Have these points reviewed by a lawyer to ensure they’re legally sound and do not pose unnecessary risks.
Preparing the major deal points and conducting a risk assessment before drafting the contract ensures all key terms are agreed upon and understood, reduces misunderstandings and potential disputes, and paves the way for a comprehensive and effective contract.
Drafting the Contract
Drafting strong and clear contracts is a skill that combines both legal understanding and clear communication. When it comes to contracts, they should be easy to understand, legally enforceable and accurately reflect the agreement between the parties involved. Writing a contract that is clear, concise, and unambiguous is essential for ensuring that all parties involved understand their obligations and responsibilities under the agreement. Here are some tips for achieving this:
- Specific Obligations. It’s important to be specific about each party’s responsibilities under the contract. This includes specifying what each party must do and how they should do it, as well as defining any limitations or exclusions. Clear and specific obligations can help prevent misunderstandings and disputes in the future.
- Precision. A precise contract is specific about obligations, timeframes, payment terms and other details. Ambiguity in contracts can lead to disputes, so it’s important to be as precise as possible. This leaves no room for misinterpretation and ensures that all parties understand their responsibilities.
- Clarity and Simplicity. A well-drafted contract employs simple, everyday language, avoiding complex legal jargon. This ensures that the document is easily understood by all parties, not just legal professionals. Any technical terms that are necessary should be clearly defined to avoid misinterpretation.
- Consistency. Consistency is key when drafting contracts. If you define a term, it’s crucial that you use it consistently throughout the document to avoid confusion. Differences in terminology can lead to different interpretations, creating unnecessary ambiguity.
- Logical Structure. The structure of the contract should be logical, with sections divided using headings and subheadings for ease of reading. Each clause or section should deal with a separate issue, making the contract easier to navigate and understand. The use of a logical structure enhances the clarity of the contract, ensuring that the reader can follow the progression of topics.
- Use Active Voice. Active voice is preferred in contract drafting as it provides clarity on who is responsible for taking action. It attributes responsibility directly and clearly, leaving little room for confusion. This, in turn, helps to minimize disputes over who is supposed to do what under the contract.
- Avoid Ambiguous Language. Ambiguous language can lead to confusion and disputes. Therefore, use precise language when drafting a contract. Instead of vague or open-ended phrases, use clear and specific language to define expectations for all parties.
- Comprehensive Coverage. The contract should be comprehensive, covering all foreseeable scenarios. This includes provisions for breach of contract, dispute resolution mechanisms and termination conditions. By anticipating and addressing these issues in the contract, you can minimize the potential for future disputes.
- Legally Compliant. All contracts must comply with relevant laws and regulations. It’s important to ensure that none of the terms or conditions in your contract are illegal or unenforceable. Getting legal advice to ensure your contract is compliant can prevent legal issues down the line.
- Definition of Key Terms. Defining key terms at the outset of a contract helps to ensure clarity and comprehension. This involves providing clear definitions for technical or industry-specific terms used in the agreement. Providing these definitions upfront can help to avoid confusion later on when the terms are used throughout the contract.
- Use Headings and Lists. Using headings and lists make the contract easier to read and understand. Headings help identify different sections of the contract, while lists can clearly outline specific requirements or obligations within each section. These tools can help to create a more user-friendly contract that is easy for all parties to navigate and comprehend.
Remember, the aim of contract drafting is to leave no room for doubt about what the agreement is and what happens under different circumstances. This can help prevent disputes and misunderstandings down the line.
Work with Legal Counsel
Legal counsel is an invaluable asset during all phases of contract creation: from preparing the term sheet to finalizing the contract. Their experience, keen understanding of the law and foresight can play a crucial role in shaping an effective agreement.
- Preparing the Term Sheet. A skilled attorney helps in crafting the initial term sheet, laying a solid foundation for the agreement. They ensure the terms are clear, fair and set the stage for a more detailed contract later on. They’re instrumental in setting the tone and direction for subsequent negotiations.
- Drafting the Contract. The drafting phase is where the attorney’s legal expertise shines. They convert the terms into precise, enforceable language, ensuring each provision protects your interests. Additionally, they work to identify and address potential risks, including future unforeseen circumstances, by incorporating specific clauses or conditions in the contract. This proactive risk management can save you from future disputes and costly litigations.
- Negotiating the Contract. In contract negotiations, an experienced attorney is an ally who knows how to assert your interests effectively. They have a firm understanding of the market standards and know when to push back, negotiate or accept terms. Their guidance can help you navigate the negotiation process, ensuring the final terms align with your goals.
- Finalizing the Contract. Before finalizing, an attorney will meticulously review the contract. They check for any inconsistencies, ambiguous language and gaps in provisions that could pose problems later. They ensure the contract is comprehensive, addressing all possible scenarios, and is fully legally compliant.
Beyond their legal expertise, a good startup attorney understands the dynamics of new ventures. They balance the need for thoroughness with efficiency, focusing on major deal points that matter without bogging down the process with over-lawyering. They prioritize the startup’s momentum, knowing which battles are worth fighting and which are irrelevant. Having such an attorney on your side can accelerate the contract process while safeguarding your business interests.
In conclusion, drafting strong contracts is crucial for any startup founder. By creating a term sheet, identifying key elements and risks, negotiating and mitigating risks, confirming agreement and understanding, and documenting the deal, founders can lay the groundwork for a comprehensive and effective contract. When drafting the contract, it’s important to use clear, concise and unambiguous language that reflects the agreement between the parties involved. Working with legal counsel can also ensure that the contract is legally sound and fully compliant. By taking these steps, startup founders can protect their interests and minimize the potential for disputes down the line.
If you’re looking for counsel to help you draft a solid contract, feel free to reach out to us here.