In 2021, we reviewed and revised dozens of contracts prepared by clients using standard online forms. As we frequently work with startups, we do understand that often tight budgets prevent many from engaging attorneys to draft their initial business contracts. However, in our experience, when businesses put together contracts in-house, often, the costs they incur in fixing problems retroactively far exceeds any costs savings they may have had by not engaging attorney at the outset. Your business contract with another party is the roadmap for navigating the relationship from its beginning to its end (through good and bad). And, as with most things in life, with contracts too, there is no such thing as one-size-fits-all. Although, structurally, most business contracts have similarities, the devil is always in the details. There are always variables and unique factors that apply to each contract which makes it different from anther, even where the nature of the engagement to which they pertain is otherwise identical. In this short blogpost we will provide a recap of the most common mistakes we have observed over the past year when our clients customize “off the shelf” contract without involving attorneys.
- Failing to identify parties correctly: As contracts are binding only upon the signatories to it, it is important to identify the contracting parties correctly. We have seen executed contracts, where the names of parties were missing from the introductory paragraph and signature blocks. We have also seen contracts that are intended to be business-to-business agreements but are signed by each business’s representative in his or her individual capacity. Although, when contracting parties are on friendly terms, these mistakes can be resolved easily, it is, nevertheless, best practice to correctly identify the contractual parties and include proper signature bocks to avoid the cost of resolving ambiguities.
- Selecting forms with more favorable terms for the other party: The most common mistake we have seen our clients make when they download and use forms from the internet is they fail to identify and revise language that favors the other side. Any contract can be drafted to be one-sided or neutral. So, when you use online forms, it is important to identify whether the form favors one party over another. For example, while preparing a services agreement, if you are going to be the recipient of services, you would want to make sure the agreement has some warranty from the service provider regarding quality of his or her work and timeliness, and also provides for your ability to refuse payment if the deliverables do not meet the agreed upon specifications— and ideally you should not use a form with language disclaiming all liability for the services. Standard forms are just that and using a standard form without tailoring it to meet your circumstances can lead to unintended consequences.
- Not defining obligations clearly: A well drafted contract should carefully define the roles and obligations of each contractual party and leave nothing to guess work. If something is not spelled out in the contract it likely will not be enforced. We often see clients use forms where obligations are vaguely defined and left to guess work. To use the example of a services agreement again (because we reviewed and drafted so many of these in 2021), if you, as the service recipient, want to pay for services only after they have been performed to your reasonable satisfaction, spell that out in your contract. But if you are the service provider, you want to make sure the contract does not give the customer the right to refuse payment and reject deliverables based on vague criteria or at his or her sole discretion. It is almost impossible to fix contracts retroactively to create enforceable obligations after parties have performed.
- Failing to provide for dispute resolution: Many a times our clients ask us if they can compel the other side to arbitrate disputes when their contracts are silent regarding arbitration. Unfortunately, you cannot mandate arbitration unless there is a well drafted contractual provision that requires parties to arbitrate their disputes and includes an explicit waiver of the right to seek judicial resolution of disputes. Worse still are situations where parties have no provision regarding dispute resolution, venue, or jurisdiction. This can result in messy situations. Hence, our two cents are if you plan to draft contracts without engaging attorneys, clearly address dispute resolution and provide for cost efficient mechanisms to resolve deadlocks.
- Failing to provide for an exit clause: Most contract will specify a term for the contract—but what about ability to terminate before the term is up? There are lot of situations where it is no longer possible or desirable for a contracting party to keep the contract going, but if the contract does not provide a party the ability to terminate for cause or convenience, a party will likely not be able to terminate the contract without incurring costs or risking a breach. Hence, when customizing standard forms, pay careful attention to whether the form includes a well-drafted termination clause.
- Inadequately describing confidentiality obligations: Most standard forms these days will address confidentiality. However, where your business’s primary asset is its confidential information, it is particularly important to ensure the confidentiality provision in your business contracts are sufficiently robust to protect against intentional or inadvertent disclosures by recipients of your confidential information. Also, the legally permissible breath of these provisions often depends on the relationship being created through the contract. Often clients come to us after their valuable information have been misappropriated by recipients, and, often, we find missing or threadbare confidentiality obligations in the parties’ contracts. Another issue is adequately defining “confidential information”. For instance, if this provision merely provides a list of information that should be treated as confidential there is always a risk of leaving out something important. Rather a well drafted provision should be sufficiently broad without being too verbose. Here is one example:
During the Term of this Agreement, a Party (as the “Disclosing Party“) may disclose or make available to the other Party (as the “Receiving Party“) information about its business affairs, products/services, confidential intellectual property, trade secrets, third-party confidential information, and other sensitive or proprietary information, whether orally or in written, electronic, or other form or media, and whether or not marked, designated, or otherwise identified as “confidential” (collectively, “Confidential Information“).
In the above example, the clause covers all sensitive and proprietary information disclosed by a contracting party to the other, including information not specifically listed in the clause, and also covers information not specifically identified as “confidential” at the time of disclosure to the recipient (as long as it is otherwise proprietary information of the disclosing party). A well drafted confidentiality clause will typically also specify what information will not be treated as confidential. The idea is to ensure there are absolutely no ambiguities regarding what should be treated as confidential and the obligations of the receiving party to ensure the disclosed information is used strictly for the purpose for which it is disclosed, and the receiving party is obligated to takes all measures a reasonable person would to keep his or her information confidential.
Failing to address ownership of intellectual property (IP): This is another important clause which should be customized to fit your circumstances. We have often seen intellectual property clauses in standard forms which do not adequately and sufficiently address ownership of IP. If the intention of the parties is that ownership of all IP created or developed by a party under a contract be retained by that party, then specifying that IP created or developed under the contract is “works made for hire” is contrary to such an intention. On the other hand, if the intention is that ownership of intellectual property created by a service provider be transferred to the customer, include adequate language that signifies this intent, including addressing what happens if any intellectual property cannot be treated as “works made for hire” by law. And this clause should also address how to resolve issues with the assigning party not reasonably cooperating to make timely assignments of ownership of intellectual property. Of course, to ensure such a provision achieves the parties’ intended outcome regarding ownership of intellectual property, the party customizing the standard form should have enough expertise to identify whether the clause in the standard form meets the parties intended goal or requires modification.
While it is easy to find a form contract, if such a form is not customized based on your specific circumstances, it is possible that eventually the costs of fixing ambiguities and gaps in the contract may far exceed any initial cost savings. It is understandable that where the monetary value of a contract is not substantial, it may not make sense to engage counsel to draft it. But, based on our experience of fixing problems with online forms used by clients without proper customizations, we recommend engaging an attorney where much is at stake.