Originally published in the May 2020 issue of Tampa Bay Business & Wealth Magazine.
Whether you work for a Fortune 500 company, or you own a small business, odds are you enter into contracts on a regular basis. In an ideal world, these contracts cover every important detail of the relationship you are establishing with the other company. But as a lawyer who routinely represents businesses in lawsuits, I am often dismayed at the contracts that my clients sign with other companies or vendors. Often times, the contracts look like they were written on the back of a napkin. Sometimes, there is no written contract at all. Even the companies that have a decent contract forget to include provisions that are critically important.
So here are seven tips for drafting a business contract. While following these tips won’t guarantee that your business relationship goes smoothly, they should help protect you in the event that things go sideways.
Put it in Writing, and Make Sure it is Signed
Business deals should not be memorialized by a handshake. Even if you know and trust the person with whom you are entering a business relationship, you need to put the contract in writing and have each person sign it. Although there are circumstances in which an oral contract (that is, a contract not reduced to writing) can be enforced in court, relying on an oral contract is often problematic. Even if you can enforce it in court, you will spend considerable time and money fighting over the terms of the contract. So put the contract in writing, and make sure everyone signs it.
Payment Terms
Arguably the most important term in a contract governs the payment obligations. Each contract should spell out in detail how much one party will pay to the other for the services or goods that it receives, when that payment must be made, and the acceptable methods by which the payment must be made. If payment is supposed to be directed to a particular person or department, the contract should specify this as well.
Default and Notice to Cure
A contract should also specify how to handle when payment is late. A standard default provision would require the party that is entitled to be paid to provide notice to the other party that payment was not received, and give that party a set period of time within which to cure (i.e., make payment). If payment is not received within that time period, the contract should specify what rights the non-defaulting party has, such as the right to charge a late fee and/or interest on the amounts owed. The contract should also include when a party can terminate the contract for late payments. A common provision is to allow the contract to be terminated if three payments are late in one-year, even if those payments are eventually made.
Performance Metrics
Similarly, the contract should specify the exact requirements that must be met in order for a party to receive payment. If goods are being delivered, the delivery date should be specified. If services are being provided, the timeframe by which those services must be rendered should be set in stone. Also, performance metrics should be included in the contract. If a party is delivering goods on a monthly basis, what percentage of the goods are you willing to allow to be damaged in shipment? Requesting perfection is unreasonable, but asking a company to ensure that 92-95% of the goods be in good condition is not.
Venue Selection Clause
If you are a Florida based company, do you want to travel to California to enforce your rights under the contract? If you do not carefully review the contract, you might find out that you are required to travel great distances just to have your day in court.
Almost every well-drafted contract has a venue selection clause. That is, a provision in a contract that determines ahead of time to what state’s courts the parties will go to resolve their disputes. If you sign a contract with a Florida based company, odds are the contract will have a specific location in Florida listed as the required venue. But if the company is from another state, that company will likely pick its home state as the place where the lawsuit must be filed.
It is important, therefore, that you review the contract thoroughly and make sure that Florida is chosen as the venue where disputes are resolved. You do not want to have to go through the time, expense, and inconvenience of traveling great distances just to resolve the dispute.
Prevailing Party Attorney’s Fees
The “American Rule” dictates that each party will pay for his, her, or its own attorney’s fees in every lawsuit. You can, however, change this by including a contractual provision that requires the other side to pay your attorney’s fees in the event that you win.
If a dispute arises between the parties, this provision can be used as a key piece of leverage during negotiations. Attorney’s fees can be expensive; having the threat of forcing the other side to pay for your attorney’s fees often can get you a better deal when you discuss settling your dispute.
Confidentiality Provision
If the contract you are signing gives the other side access to your company’s “secret sauce” – such as your pricing, profit margins, customer contact information, or proprietary software – you must include a confidentiality provision. This clause should reflect the other party’s agreement that it will not disclose your confidential information to third parties, and it will not use your confidential information for its own personal use.
