6 Nuggets from the Hard Knocks School of Contract Law
I went to undergrad with Bullwinkle J Moose at Wossamotta U, then studied law at the Hard Knocks School (I know I am dating myself but I love the show). This is a snarky way of saying I’ve been in business since I was seventeen and I’ve made every possible mistake you can make.
The good news is I took some practical lessons away from negotiating, redlining and even testifying in court. One thing I learned is that we as businesspeople have a lot to add to the contract drafting process (it’s not just about lawyers), but we need to understand when and how to collaborate proactively with our attorneys. In no particular order, here are six takeaways from my experience that you might want to think about for your own contracts, and proactively discuss with your attorney.
1. Use plain language
There’s a movement in contract law advocating Plain Language: the idea that if a reasonably educated person can’t understand it, it doesn’t belong in a commercial contract. Whereas – deleted. Heretofore - pass. Thereupon -give me a break. I take this a step further: I tell attorneys to draft the contract for its users. The users of the contract are its parties (the people who sign it) and the agents of the parties who are responsible for carrying out the terms of the contract. If they can’t read it, what good is it?
2. Limit lopsided responsibilities
Lots of contracts read something like “Party A is completely subservient to Party B and Party A should feel lucky that Party B is willing to sell them its product.” Don’t do this. Make sure that things like payment terms, warranties and limitations of liability are specific to the situation and as fair and limited as is practical. Contracts that start off reasonably fair lead to easier negotiations and set the tone for the business relationship. If your contract sounds like a shark wrote it, your counterparty will assume you are a shark. If it sounds measured and fair, they may get a fuzzier feeling about you. I know I would.
3. Granular indemnification
Indemnification is a thing most people don’t understand well and it’s a huge source of risk when implemented poorly. For this reason, I recommend starting out with the most limited indemnification possible. For example, in our terms and conditions, indemnification is only an issue in the case of very limited actions that are prohibited elsewhere in the agreement or just plain illegal, and the indemnified parties are limited to the parties relevant to those actions. When you’re negotiating, this makes your position much easier to defend. Beware of “oh let’s just have mutual indemnification!” Blanket mutual indemnification rarely benefits both parties in practice. In a purchase agreement, the only obligation the buyer generally has is to pay, so what exactly are you indemnifying against?
4. Use email for notices
Look around. We are working from home; everything is remote and online. There’s no reason legal notices can’t be sent by email, and there’s no reason they can’t ONLY be sent by email. Use a distribution group or alias like “notices@xyz.com” that goes to all of senior management so you never miss a contract notice (and if the counterparty sends a notice to someone who left the company, you have recourse).
5. Consider a Master Agreement structure
Unless it’s a once-in-a-lifetime deal, I usually like having a “master agreement” that defines the relationship between the parties that lasts a long time (contracts can’t technically last forever but they can be written to renew automatically). Then for each project, you sign a separate “scope of work” or “deal memo” or “work order” that defines the precise engagement and fees for this project, this time only. In some states, this is not just good housekeeping but also helps to discern a subcontractor from an employee.
6. Insurance
Insurance requirements should not be treated as boilerplate (standard clauses). The type of insurance, the limits and the certificates should all match the context of the deal. Just because someone wrote some insurance limits in a contract doesn’t mean they can’t be changed. Do they really need you to carry 5 million aggregate/2 million per occurrence? Or is that boilerplate stuff they put in all their contracts? Is your existing 2M/1M enough? Do you really need to insure their equipment if they are delivering a service? Maybe you should be named as an additional insured on their policy – and if you are, make sure you put it in writing that you are entitled to a certificate showing that and when it needs to be delivered by.