Legal Contracts: 6 Drafting Tips for Small Businesses

If you own or manage a business, you’re likely to have entered into contracts with employees, vendors, consultants, renters and landlords, banks and other financial institutions, insurers, and, of course, customers and clients. To help prevent your agreements from getting you into the wrong kind of bind, here are six tips on drafting legal contracts:

1. “But it was free” doesn’t matter if it isn’t right for you: 

“Suppose you decide to search the Internet for a free confidentiality agreement form because you need to hire a consultant for your business. The point of a confidentiality agreement is to protect the confidential and proprietary information that your company uses to create whatever competitive advantage it has in the marketplace, arguably the single most valuable asset of the company. So, when you find a free confidentiality agreement form on the Internet that looks like it may be a good one, can you tell whether it was drafted to favor the company or to favor the consultant?” (Should Businesses Risk Using Form Agreements from the Internet? by Tom McLain) 

2. Using a form contract? Make sure you don’t put your business at risk:

“Form contracts account for more than 80 percent of all agreements used to complete business transactions today… Unfortunately, many executives do not carefully review the specifics of a form contract before signing. Instead, they assume the form contract to be an agreement equitable to both parties. However, terms in a standard form contract are designed to favor the party that presents it. To limit your company’s risk, it is vitally important to be able to recognize and negotiate unfavorable provisions out of form contracts.” (Limiting Your Company’s Legal Risk by Negotiating Form Contracts by Greenberg Glusker Fields Claman & Machtinger LLP) 

3. Clear and understandable language is crucial:

“You get an agreement from a new vendor. You start to read it and your eyes glaze over. “In the event that….provided, however, ….. including but not limited to…… For the avoidance of doubt……….” And on and on it goes. What gobbledygook. Of course this stuff is hard to read! So is quantum physics, but that’s because quantum physics is, in fact, hard, no matter how well you write it (even for quantum physicists). Contracts, however, should be easy to read – clear declarative sentences organized into paragraphs arranged in a logical order.” (How To Simplify and Improve Any Contract by Sands Anderson PC) 

4. A little ambiguity isn’t always a bad thing:

“Common sense suggests that clarity should be a primary goal in drafting contracts. But as Judge Posner notes, ambiguity may play a valuable role in contract drafting. As he explains in The Law and and Economics of Contract Interpretation, an economic analysis of contract interpretation reveals that the presence of intentional ambiguities in contracts is not only rational but, in many circumstances, desirable.” (The Forthright Negotiator Principle and the Legitimate Role of Ambiguity in Contracts by Young Conaway Stargatt & Taylor, LLP) 

5. Prepare for the unexpected. And get it in writing:

“… a key to avoiding litigation costs is drafting well-written force majeure and make-up provisions in your contracts. Failure to have these provisions reviewed during negotiations may lead to either paying damages to end-users or paying your attorneys later to litigate poorly drafted and inconsistent force majeure and make-up clauses in your …  contracts. Missing key terms or inconsistent definitions ultimately leads to dissatisfied customers, costly litigation, or worse yet—both!” (Prepared for the Unforeseen? A Primer on Force Majeure Contract Provisions by Dinsmore & Shohl LLP)

6. Want a contract that’s binding? Say so: 

“It almost seems redundant. Why would you need a paragraph saying that the contract is binding? After all it’s a contract right? Well not so fast. Judge Richard Posner, a noted federal judge and scholar on the topic of contracts recently decided a case in which he explained why not every document which expresses a mutual understanding is or should be enforceable as a contract, especially when that document includes language that specifically disclaims the intent to form a contract.” (Do It Yourself Contracts – Who’s in Charge? by Sands Anderson PC) 

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