As a business owner or executive, have you ever been given a long, one-sided business contract that had your head spinning and left you wondering “Is this worth it? How badly do we need this business?”
Over the years, I’ve worked on hundreds of vendor and customer business contracts with formats ranging from an 1-page informal document to a 100 plus-page standard supplier agreement which took several years to negotiate.
There’s usually a correlation between business sophistication and contract size and complexity. Short and informal says “unsophisticated, doesn’t work with lawyers and doesn’t manage its business risks” and when a standard agreement is long, legalistic and one-sided, it says “over-protective and possibly over-lawyered. It also tells us this negotiation is probably going to take a lot of time and with the other side taking unreasonable “take it or leave it” positions.
Our impressions of our future business partners are formed the moment we open that contract file.
What’s the right approach to developing your company standard agreements? How do you ensure your standard form contracts protect your business interests while delivering a positive first impression and helping to get the deal closed quickly?
Below are some recommended drafting and business strategies for a business’ standard contracts that will resonate positively with your business partners and pave the way for prosperous and hopefully long-term relationships.
1. Be clear and concise in business contracts
Contracts don’t have to be overly legalistic to be enforceable. Modern drafting principles promote drafting in plain language to make contracts easy to read and understand. General guiding principles for clear contracts are:
- Use plain language;
- Use clear headers;
- Confine the subject matter to one place in the document – for example, don’t deal with confidentiality in several provisions; and
- Avoid contracts that use spaghetti drafting – meaning avoid referring the reader to other places in the contract which then refer to other sections.
2. Keep it professional, yet concise
Keep the contract as short as possible, focus on the key business and legal terms most important to your business. A concise agreement is digestible in one sitting, keeps your negotiation transaction costs down and facilitates closing on the contract in a reasonable period of time while adequately managing business risks.
Brevity does carry a higher risk of future disputes over what “something really means” so when giving up on a longer more comprehensive format for an agreement, it’s important to take the time to understand what you’re not covering and to deliberately accept the risks of being silent on those items. To help with the management of future disputes on what clauses really mean or on matters not covered by the agreement, include a friendly dispute escalation clause.
When using a more concise agreement, it becomes all the more important to promote a culture that values your vendors and customers and to engage regularly on the quality of these relationships through pre-planned business review meetings, ideally at the decision-making (ie. executive) level. Issues are always easier to resolve when the parties work in a healthy and positive business climate and routinely discuss the state of the relationship.
3. Stay balanced and fair
A balanced template agreement which shares risk, rather than unreasonably transfers all risks to the counter party, is seen by most hardline businesses as a bad “going in” strategy: why give the other party something, right out of the gate, when you don’t have to?
I would argue one-sided agreements can have limited business benefits because sophisticated parties will always want to negotiate them which only increases transaction costs and delays closing on the business deal. Unsophisticated parties who ignore these one-sided terms are not likely to be sophisticated enough to offer meaningful liability coverage should something go wrong, no matter what the contract says. For example, if you have a small supplier indemnify you for all liability, chances are they will go bankrupt before you can recover full payment so the value of the one-sided clause may be limited.
I’ve worked with many one-sided commercial agreements that end up balanced after days, months and, in a few cases, years have elapsed due to the time spent by parties negotiating and exchanging revised versions of the agreement. If you’re going to end up there, why not save yourself the time and start with something reasonably balanced?
That being said, the argument for maximizing business protection with one-sided clauses is worth considering in your strategy and a worthy debate to have.
4. Use master agreements
Why negotiate a new agreement for every sales and customer transaction with the same party? To promote business efficacy in your dealings, as much as possible, construct your contracts using master agreements under which standard purchase orders can be issued or which use template statements of works that the business people can complete as new requirements arise without any lawyer involvement. This saves time by giving the business people the tools required to close on business easily without having to engage the lawyers again.
While a business’ template agreements might not necessarily reflect the way the company will interact with its vendors and customers once the agreement is signed, it does create a first impression that colours interactions with these important stakeholders from day one. Organizations that want to project a culture of customer friendliness and trustworthiness or who care about maintaining healthy and positive vendor relationships should not ignore the importance their template agreements have on first impressions.