In today's corporate ecosystem, there is almost no business without written contracts.
Written contracts provide legal standing to professional / business relationship of parties. It is obvious for companies to enter and execute contracts with other parties to ensure their relationship has legal validity.
In this context, Contracts are the key commercial documents for the companies to build solid and long lasting commercial and business relationships. As long as contracts are properly drafted and relationships between the parties are cordial, All will be Well between the parties.
Problems arise when contractual disputes start arising between the parties, due to erroneous drafting. A well drafted contract significantly reduces the economic damage or liability on the parties, whereas a poorly drafted contract could put a party at the risk of losing millions in the form of payment of damages, loss of reputation and what not.
Well drafted contracts provide significant advantages to the companies and safeguard legal, compliance, economic and business interests of the companies. Let us summarise some key advantages that well drafted contracts provide:
a) Building relationships: Contracts will help organizations to build business and professional relationships; such relationships are a tonic and lifeline to keep a business going. Most importantly, the negotiation stage of contracts could give a sense of understanding of different parties' traits, expectations and business trajectory.
b) Clear communication: Contracts help parties to clearly jot down the underlying purpose of their relationships and respective rights, duties, responsibilities and obligations. This clarifies what they are supposed to do and lay down the process and consequences of inability of the parties to comply with the terms and conditions of the contracts. Further, probability of misinterpretation and misunderstanding of legal and business requirements of the business relationship and unnecessary disputes based on misinterpretation and misunderstanding could be reduced to a significant extent.
c) Protection of IPR: IPRs are most economically important assets of any company, leaving them unattended / unprotected could mean conflict of interest and / or loss of revenue. Contracts focus on:
i) adequate protection to IPR of a company;
ii) avoding unnecessary conflict of interest and loss of revenue; and
iii) rights to defend IPR ownership in case of conflict of interest and claim damages for breach of ownership rights.
d) Better management: With written contracts between the parties, it is possible to better manage the expectations of the parties out of their relationship in real time. When expectations are rightly balanced and met in a commercial relationship, output will be a fruitful one for all the stakeholders.
e) Customisation: With the assistance of contract lawyers, companies get tailor made contracts suitable to their business or professional relationships or compatible with the requirements of specific industry. Each industry has its own specific requirements, such requirements will be appropriately covered in a well drafted contract.
f) Enhance operational performance: A well drafted contract helps companies in reducing disparities involved in the legal and business operations of the company and significantly enhance operational performance and productivity, which is key to sustain business in long run.
g) Reducing risk of conflict: A well drafted contract balances various legal, economic and business interests of the parties appropriately – this reduces probability of conflict of interest. Eluding prospect of conflict of interest means parties are saved from the embarrassment of facing litigation or other similar proceeding and consequences of paying millions in damages.
h) Dispute resolution process: Any company will prefer to avoid conflict of interests with other parties as any conflict of interest could push parties into disputes and force parties into litigation. However, in some cases, it is highly improbable for the parties to avoid any conflict of interest as a result, parties will end up being in dispute. In such case, a well drafted contract lays down the process to resolve any dispute via litigation or any agreed alternative dispute resolution process and avoid chaos around process that needs to be followed to resolve the dispute at hand.
i) Risk mitigation and management: A well drafted contract plays a significant role in mitigating economic risks and liabilities of the parties to a great extent is instrumental in managing and balancing economic risks and liabilities that come with legal, economic and business interests of the parties.
Some Tips for better Drafting
Well-drafted contracts are the key instruments to derive the advantages of the contracts for the overall benefit of the business. Following are some tips that will help to write and negotiate well drafted contracts:
1) Selecting a suitable template: Selecting a contract template that is suitable to the legal and business requirements of the company is the key step to draft a contract which will balance legal, business and economic interests of the parties. Let us assume that Licensor is in the process of granting a license to its product to the Licensee, the right template is the licensing agreement – Picking up a different template (eg. service agreement) will take the drafting of the contract in an altogether wrong direction.
2) Pre-listing of mutually agreed terms: Prior to starting contract drafting process, it is advisable to list out mutually agreed terms and conditions. This reduces time quite significantly for negotiation process and enables the parties to focus on points which requires specific attention in the negotiation process. Once negotiation is focused on such specific points it will be easy for parties to negotiate quickly and close the execution process of the contract.
3) Client requirements: Prior to start of contract drafting, preliminary focus should be on understanding of the client requirements – lack of knowledge thereof could be a deal killer or even worse could land an economic blow to your client. Legal team or law firm of the company has to make sure that they know the client requirements and understand the serious implications of turning blind eye to the client requirements.
E.g.: Assume that Client is comfortable with a term of maximum three (3) years and will not agree anything beyond that. Without knowing this client requirement, drafting person agreed to term of five (5) years which is against the permitted limit and expose the client to more than the Client is willing to chew.
Lack of knowledge of client requirements could serve deadly blows to Client in terms of legal, economic and business – to save client from such embarrassment one should have clear understanding of the client requirements.
4) Educating Client: In certain cases, implementation of client requirements in contract drafting could result in breach of laws or amounting to any illegal act. It is duty of drafting person to educate client that going ahead with Client's requirements which is against law or public policy could expose client to economic and litigation hardships.
5) Attention to detail: Drafting person should have a sharp eye for attention to detail as any miss hit in critical details could prove to be a costly mistake. Drafting person should list out all key details of the transaction and make ensure there are appropriately incorporated in the contract without miss or any errors.
6) Scope of work: Defining the scope and purpose of the contract in clear terms is very crucial and any sort of confusion or negligence in defining scope and purpose of the contract could have its own deadly implications and could expose parties to legal and economic implications.
7) Sanity checks: Performing sanity checks are equally important to drafting of a well written and balanced contract. Sanity checks may include:
a) Checking the details of parties and their addresses and dates and their formats
b) Spell check, sentence construction check
c) Formatting checks
d) Sections referencing throughout the contract
e) Section numbering
f) Pattern of sections and certain specific obligations covered under multiple sections
g) Definitions
h) Use of defined terms
8) Valid execution: It is crucial to ensure that contract executed is legally valid and binding on the parties as invalidity of the contract will give parties the excuses to deny performance of the contract or their obligations.
9) Amendments: Most important thing is to keep a track of amendments to a contract to have knowledge of latest developments with respect to contracts. It is common for parties to amend contracts from time to time to add or remove certain provisions or clauses to a contract. Lack of knowledge of latest amendments could land a fatal blow in time of legal conflicts.
10) Storage of contracts: With the advancement of technology and availability of innovative contract management system (CMS) tools, it is common for companies to adopt such CMS tools to store and maintain the contracts. It will avoid the requirement of physical storage of contracts and will make it easy for companies to access a contract copy and details of contracts with just a click of few buttons. However, it is crucial to capture details of the contracts accurately in the CMS tools, as any margin for error could trigger legal and economic problems due to incorrect data as in most of the cases, people rely on the information captured in CMS tools and unless it is really required actual contract will not be accessed to know the details of the contract. The best practice is not to blindly rely on the data on CMS tools, but cross check the details on CMS with the details in the contract to ensure there are no inaccuracies in the data.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
