TOP CONTRACT DRAFTING AND REVIEWING MISTAKES

Drafting and reviewing contracts are deceptively challenging tasks not to be taken lightly.  The hasty acceptance of a “standard contract” is inviting future mishap.  Here key mistakes to avoid in the contract arena.

Not Spending Enough Time Thinking About the Contract Before Drafting the Contract

Drafting a contract is not a one step process in the same manner that negotiations are typically not concluded in a single step.  Good drafting starts with deliberate thinking about what outcome you desire, what terms are involved and how will each term be assured.  Drafting contracts is also team effort involving you, your colleagues and your lawyer.  Often, the best way to start drafting a contract is to outline the major deal points in bullet-point fashion leaving a good amount of space between each bullet-point.  After looking at the first cut of deal points, additional points, refinements and sub-points will come to mind.  You may even want to set the outline aside for a day or two before reexamining its structure.  You should also ask others who will be involved in various aspects of performing the contract for their comments on the outline.  Once you have done this, you are ready to sit down with your attorney and step through the legal issues related to the contract outline as well as identify new issues and areas for further clarification.  

Not Drafting the First Draft

Where possible, volunteer to create the first draft of a contract. Being first can give you a tremendous advantage in structuring the deal and directing negotiation points.  From a legal cost perspective, creating the first draft is often more cost effective than responding to the other lawyer's one-sided draft, or other party's ill-considered draft.

Not Including Explicit Payment or Price Terms

Almost everyone understands that payment terms and price are an essential part of an agreement and should not be omitted or left to be decided until after the agreement is signed.  However, more precision is often needed.  Good contract drafting requires that the payment and price terms be clearly laid out in the agreement.  Avoid ambiguity about price, or provide a clear formula for determining it.  Include discounts if applicable.   Include terms that explicitly state when payments must be paid, and also state the repercussions if the other party doesn't pay or pays late. And, make sure to determine who pays any taxes involved.

Not Including All Deal Terms in the Agreement

All "deal terms" should be included in the agreement. This means that you should not only include needed standard clauses, but also the key items upon which the client relied when it entered into the agreement.  And make sure all deal points are addressed.  No side deals that “contradict” the written agreement.  These side deals are most likely inadmissible in court if the deal goes sour.  If you hear the statement:  “don't worry, that's just our standard language it won't apply to you,” run the other way.
Typical questions to ask yourself regarding deal points include:

• What are the specific “deal points” needed to enter into the agreement?
• How does each deal point break down?
• What did the other party specifically agree to do for you and what did you specifically  agree to do in return?
• What timeframes did the parties agree to?
• Are there any special circumstances that the parties discussed?
• Are there critical deadlines for certain aspects of the contract?
• Was there some key event or condition that was to happen before any of the parties became fully obligated?

The answers to all of these questions should be included within the agreement so that if at any point the deal falls apart, it can be shown that you relied on these points in entering the deal.

Making Assumptions

Don't make any assumptions when drafting or reviewing an agreement. What this means is that you should spell out all the obligations and assumptions under the agreement within the agreement itself. For example:

• If you are purchasing equipment, do not assume that the other party will know to deliver the equipment with any related software or attachments, or to include needed training or set-up. Spell it out explicitly.
• Don't assume the other party will know that if you receive the goods you purchased late, that you will lose thousands of dollars. Put a "time is of the essence" clause in your agreement if this is true.  In fact, briefly explain why time is of the essence.
• If the parties agree to have goods shipped and delivered to a certain location, make sure that you both are in agreement about the location and who pays for shipping costs.  Ask yourself whether the goods need to be insured during transit.

If you are unclear on any portion of the agreement, get an explanation. Conversely, if the other party is unclear on something you are talking about, explain it and spell it out in the agreement.

Not Paying Attention to Boilerplate Terms

Boilerplate terms are an essential part of any agreement and can significantly affect the rights under the agreement as much as any other terms. These terms can be negotiated in the same manner as all other terms in your agreement.

Key boilerplate terms to really focus on include those that address:

• Whether disputes will be arbitrated or mediated in place of or prior to litigation.
• Where litigation will take place and whether the prevailing party in any dispute will be awarded its attorney's fees.
• Whether amendments to the agreement can only be made in writing.
• Whether the contract may be assigned.
• Whether the contract includes the entire agreements of the parties (the "integration" clause).
• Any specific representations and/or warranties provided by the parties.

Not Negotiating Everything

Everything is negotiable. Everything. Even the things the other party tells you are not negotiable are negotiable. Even preprinted forms and boilerplate terms are negotiable.   Some portions of the agreement will be more important to you than others, but everything can be important in the event of a problem. There will be give and take in negotiating the agreement-it is important to you to decide in advance which things you can't live without and which things you can live with. Negotiating everything means that you discuss, argue, deliberate, and ultimately agree upon all terms of the agreement. Not only are you allowed to do this, but also you are typically expected to do it.

Not Knowing When Enough Is Enough

In much the same way as it is important to negotiate everything (see above), it is also important to know when it is time to stop negotiating and just get the agreement signed. If you go one inch beyond enough, there is the possibility that the negotiations will fall apart and you will be left without an agreement.   The key in lots of negotiations is leverage—do you have more leverage or does the other side have more leverage? Knowing this can help you decide when enough is enough.

Not Including A Termination Clause

“The best time to talk about the divorce is at the engagement party.”  A termination clause is vital to most agreements.  The termination clause states how you will get out of the agreement if the agreement isn't working. No one likes to plan in advance for ending of a relationship but it is much better (and easier) to plan in advance than be caught without this plan if things turn sour. In the termination clause, you establish the terms under which a party can end the relationship, the opportunity for a cure period, and the consequences of termination.

Not Stating the Jurisdiction Governing the Agreement

This is quickly mentioned in the boilerplate discussion.  However, it is important enough to warrant its own discussion section.  Don't neglect to negotiate where any disputes relating to the agreement will take place. This is critical, particularly when parties to an agreement reside in or do business in two different states, different countries, or, in the case of large states like Texas or California, two different counties.  The typical choice in your favor is where you resides or do business.  (Of course, the other party may want the same.)  Try to have the other party agree to come to your jurisdiction.  This clause is particularly important if you are dealing with companies in foreign countries.

 Forgetting that You Are Not Perfect

Sometimes you see issues after the agreement has been signed.  Don't wait for a problem to arise.  Ask the other party to consider an amendment to address whatever detail may have been left out or unclear.