I am sure we have all experienced that one business deal that was done on a handshake (instead of a written contract), and ultimately became the deal “from hell” that turned into a money pit. Perhaps it was as simple as a customer signing your proposal containing the innocuous wording of “we strive to make our customers happy,” yet the services and deliverables expected expanded with “scope creep” (because the customer never became happy) and you wound up spending more time, effort and resources than what you were paid (if you were paid at all). What do you do to avoid missed expectations? Do you try to have a 30-page contract that contemplates every terrible scenario (and risk scaring off your customers with an over-reaching agreement)? Or could a contract of a few pages do the trick – a short agreement that covers the business expectations of both parties.
The opportunity to use a short-form contract really depends on the type of business transaction (deals like commercial real estate leases and banking agreements on investment agreements usually will involve lengthy contracts). But unless that is your day-to-day business, those type of deals are usually one-off deals. But for most businesses, a pithy written contract might be “good enough,” if it includes reasonable protections for both parties.
Of course, both parties should have a good business lawyer review the contract – be careful – a deal can get bogged down with “over lawyering” the contract. As a business person, you can control the process, so that the business contract covers the most likely scenarios (and assuming each party is willing to accept the risk of improbable “what ifs”). So here is my list of some must-haves to help close the deal (again, this is general, and each business and transaction is different):
- Contract Essentials: Names and addresses of the parties, clear description of the services/products provided and price, duration period of the agreement, and without question, have the contract signed by both parties and dated.
- Termination Provision: At what time can either party terminate the agreement? Non-performance (including payment, etc.)? Termination for convenience (be careful about this if you are dedicating resources to the project that otherwise would be on another project)?
- Scope of Services: By adding milestones, both parties can set expectations of acceptance of the services and the respective payment for each milestone completed. Here both parties can protect themselves, so if a milestone isn’t completed satisfactorily (after attempting to fix), perhaps the contract can be terminated.
- Intellectual Property: If you are hiring a company to create IP (website, music, software, etc.) – make sure that it is a “work made for hire” (e.g., the party paying owns the work) and that the creator promises that all creations made are original (the last thing you want is another company suing you for infringement).
- Disputes: Consider arbitration instead of going to court. Generally arbitration is a faster and cheaper way of resolving a problem. The prevailing party should be entitled to collect its legal and professional fees.
- Confidentiality (if appropriate): Each party only should have access to, and use of, any confidential information of the other party strictly for the purpose of its performance under the contract.
- Limitation of Liability and Consequential Damages: Consider limiting liability under the contract to the amounts paid (or a multiple thereof). Also, neither party should be liable to the other for lost profits and other unforeseeable/unquantifiable amounts (other than perhaps in the event of a breach of confidentiality obligations or infringement of proprietary rights).
For the most part, a contract that is “good enough” and a few pages long might just do the trick and close the deal. The longer the contract is, the more likely it will be negotiated tooth-and-nail, and the deal could take weeks or months to close. Using a business pragmatic lawyer helps a lot too. Just because a contract is 30 pages long, doesn’t mean it can’t be negotiated quickly. Sometimes those agreements are “square-pegs-in-round-holes;” meaning that there might be a lot of provisions that don’t even apply to the goods or services provided. For instance, I had a client who was to conducted a single audit of assets for a large financial institution (which sent over their “perfect” 30-page master services agreement). It didn’t make economic sense for my negotiating inapplicable provisions (like a 2-page intellectual property clause (among other inapplicable provisions), because my client wasn’t creating any intellectual property). Despite the unwieldy contract, it took only a few hours to negotiate as that my client could control its risk of doing business (like not injuring people while on-site, not creating intellectual property, etc.).
Keep your eye on the prize, and “paper the handshake” pragmatically!