The purpose of a contract is simply to prevent misunderstandings and to provide remedies if one party is harmed when the other fails to live up to the terms of the agreement.
Even a wonderful contract is no insurance against bad behaviour. Someone who is intent on breaching an agreement will go ahead and do so, no matter how artful the legal drafting. But a well thought out contract that accurately and completely describes the details of a business agreement can prevent accidental misunderstandings and the expensive litigation that may follow.
Here are ten tips to keep you out of that kind of trouble.
1. Negotiate, negotiate, negotiate
Leave nothing out of your discussions. Keep written, dated notes, lists of the items discussed and the settled upon resolution of open items. A contract is really just a written record of the agreement reached, so make sure that you have actually reached an agreement on important issues and even the ones that may not seem important at the outset.
2. Document negotiations
Write it all down in plain language that everyone understands and circulate it as a memorandum to make sure it captures everyone’s thoughts and intentions. Carefully label this memo ‘Draft’, so everyone understands that it is not the final word.
3. Work with a solicitor
Take your memo, lists and notes to a solicitor for his or her review and revision. Your solicitor’s job is not to decorate your agreement with a lot of legal jargon, ‘whereases’ and ‘heretofores’, but to catch issues you may have missed. The end product should still be in plain language understood by all. A solicitor is worth the investment as they will ensure your contract is complete.
4. Define terms
One thing your attorney is nearly certain to do will be to add a section that defines important terms. It is simply a measure that prevents misunderstanding, and is one of the hallmarks of good legal drafting. Make sure you have input on terms that have particular meaning in your industry.
5. Plan for disputes
Your solicitor should also add some insight into non-judicial remedies in the event of a breach. These may include insurance, indemnities agreements or mediation. This is important to consider. Everyone loses in a lawsuit, so it is best to decide how to solve disputes out of court before any arise.
6. Link payment to performance
Ask for your solicitor’s advice on payment terms. Should funds be held in escrow to be released on the achievement of certain benchmarks? Should there be an early completion incentive or a late performance penalty? What are the remedies if the contractor abandons the project, and it is never completed?
7. Keep it simple
Keep it in writing. The final product should be in writing and signed by all parties. Oral agreements are often enforceable, but if there is no document, it may be difficult to show a court what the disputed details were. For the same reason, insist that all changes also be made in dated writing, signed by all parties. Needless to say, make sure you read it thoroughly.
8. Don’t start until it’s signed
Don’t start work or exchange funds before the contract is signed. Folks will be tempted to start on the basis of the document labelled ‘draft’, but resist the urge to rush.
9. Monitor performance
Remember that the contract is just a record of the agreement. As a project manager, you know that projects are dynamic. Things change, so the record may have to change as well. Know what is going on and keep the written record up to date as well.
10. Always make a contract
Always create a contract, even when working with friends, relatives and neighbours. It is a wise approach for continuing to get along with these folks. No one will think you unfriendly, and everyone will appreciate your professionalism.
Don’t fall for “We just do things by handshake, here.” That should certainly set off alarms. If a business relationship seems dodgy, you are not really going to be able to improve it with a splendid contract, so stay away.