You probably enter into business contracts regularly. But do you understand contracts basics? Can you interpret boilerplate provisions? Are you sure your contract is enforceable?
For many business owners, contracts are a necessary evil. While there are many advantages to being the party that supplies the contract in a transaction, there are circumstances under which it makes sense for the other party to provide the initial draft.
Here are a few basic, practical tips for making the contract review process more efficient and effective.
Start with an internal review of business terms.
Your first step should be a review of the key terms. If you have a term sheet, do all of the terms appear in the contract? Do you understand the terms as they are presented in the document? If not, ask the drafting party for clarification of any ambiguities.
“Don’t fall victim to the thought ‘this is probably standard.’ Everything is negotiable.”
Don’t fall victim to the thought “this is probably standard.” Everything is negotiable. Whether you’ll get what you ask for may be another story, but there is rarely such a thing as a standard form agreement. It may not be necessary to get an attorney involved in the initial stages of negotiating a contract unless you have specific questions about how a deal point has been presented in the document.
The next step is to run the contract past anyone internal that may need to weigh in on the deal terms. This could include your business development team, marketing team, compliance officers, or tax professionals.
You don’t want to spend weeks negotiating, redlining and revising, only to have your tax team review the final document and send you back to the negotiating table because it needs to know, “who’s responsible for paying taxes on the car that you’re giving away in the promotion?” Or, your compliance officer tells you that unless there is a particular insurance policy in place, the event can’t take place.
Provide your business attorney with context and ask questions.
Your attorney can provide significant value when you’re negotiating the terms of a contract. He or she can help ensure that the document: (a) accurately identifies the obligations of each of the respective parties; (b) addresses who will bear the burden of potential risks; and (c) provides suitable consequences if a party does not fulfill its obligations.
Your attorney can help identify inappropriate legal or business obligations and note where terms are missing. Attorneys also add value when they’re able to provide insight based on past experiences with negotiating contracts in the industry.
“When you share the contract with your attorney, provide a high level overview of the deal being negotiated.”
When you share the contract with your attorney, provide a high level overview of the deal being negotiated. This is the lens through which he or she will review the contract to make sure that the written terms are in line with the anticipated relationship. If you know that particular areas will be heavily negotiated, share where you might be willing to make a concession. This can help your attorney craft an appropriate negotiation strategy.
Equally important is to identify your specific concerns. If you have questions about terms or concepts, don’t be afraid to ask. Your attorney may otherwise assume that the terms are self-explanatory and, therefore, don’t require further discussion. Lastly, think about the “what ifs” and share them with your attorney. What have you seen go wrong in these types of contractual relationships or in past dealings with the party? Where are your vulnerabilities? Your attorney can draft language to protect you in the event that one of these scary scenarios actually plays out.