Our guest contributor Dorcia Carrillo shares 3 must-do’s you should have when entering a new contract.
If you are reading this, you have likely entered into at least one legally enforceable agreement. You have probably signed a car rental agreement or clicked a button to accept the terms of service for a particular website. Car rental agreements and terms of service are adhesion contracts. That means they are boilerplate forms companies make their customers sign. Consumers largely cannot negotiate an adhesion contract; they either take it or leave it. People usually do not read them but I encourage you to at least review the contract to understand your rights and responsibilities. For example, a lot of social media users would be surprised at what social media platforms can do with user data, even though those terms are spelled out in the terms of service. Take a look at Facebook’s Sharing Your Content and Information provision if you are interested.
Turning from consumer to commercial matters, I strongly encourage businesspeople to pay close attention to the contracts they draft and/or sign. Compared to consumers, businesspeople typically do have leverage to negotiate favorable terms but also do not have consumer protections against seemingly unfair terms. I am going to lay out a few tips on drafting, negotiating, and managing business contracts. I always recommend working with an attorney who can provide specific advice relevant to your particular business needs.
Do: Proceed with Caution When Using Templates or Online Resources
The prevalence of online resources may make drafting a contract seem easy because you can answer a few questions and minutes later have a contract. The problem with those resources is that they react to what you request rather than guide you to what you need. You may think you need a non-disclosure agreement when you actually need a non-compete. Using the wrong template will obviously produce the wrong result.
By relying on a template instead of individualized legal counsel, you risk running into a serious issue. For example, I reviewed an employment agreement for a friend who wanted to hire unpaid interns. I identified some provisions that should have been in the agreement, but more importantly, I informed my friend of the regulatory requirements for hiring unpaid interns. When I asked if her company had the necessary compliance infrastructure, her response was no. The online resource she used produced an agreement without accounting for regulatory requirements. Accordingly, I recommend that businesspeople invest in legal counsel to help with analyzing, strategizing, and drafting agreements.
Do: Leverage Your Competitive Advantage in Negotiations
As I mentioned, in commercial transactions, businesses have some leverage to negotiate. Use your business’s competitive advantage to negotiate pricing, warranty, licensing, and other substantive terms. I have worked with small companies that are unique in the marketplace and therefore have power to successfully negotiate with larger corporations. Conversely, if you operate a business in a competitive market, be prepared to be more flexible.
You may not gain business because of your paperwork but you could absolutely lose business if your papers are too long or too burdensome. More clearly, if the industry standard for your business is a one-page plain English agreement, do not use a five-page contract laden with “whereas,” “notwithstanding,” and other legalese. I recently drafted a succinct single-page service agreement for a wedding vendor. The agreement adequately protects the vendor’s interest and is also customer friendly. The point is that your business’s market share and industry standards should be considered when drafting and negotiating contracts.
Do: Have a Contract Management Process
Once your attorney has drafted and negotiated a contract, the parties will sign it and live happily ever after. Except drafting and negotiating are the beginning and not the end because you still have to manage the contract. As with anything, mismanagement can lead to problems. I worked with a business client who unknowingly entered into an evergreen agreement and wanted out before the term ended. An evergreen agreement is a contract that automatically renews after the initial term. When you are busy running a business, you may forget to manage contract expiration dates and end up continuing a contractual relationship that is no longer beneficial. For this reason, it is important to take note of the term and termination clause(s) and put a process in place to alert you when action is required. The process can be as simple as using Outlook reminders or as involved as utilizing a contract management software. The volume and complexity of your business agreements will determine what is most suitable. The key is to be sure to track and monitor contract provisions such as termination dates, payment and delivery schedules, and reporting requirements.
I know businesspeople put a lot of effort into fostering business relationships, which is why I recommend they put the same effort into drafting, negotiating, and managing the agreements that govern those relationships. Do your business a favor and make sure its contracts are strategically drafted and negotiated and effectively managed.
Dorcia Carrillo manages a business and corporate law firm, the Law Office of Dorcia Carrillo PLLC, where she guides clients, including entrepreneurs and executives, through the intersection where business deals meet legal documentation. Dorcia likes helping growing businesses with practical legal advice and workable solutions. She is an avid magazine reader and ardent supporter of the Alzheimer’s Association.
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