The best away to deal with illness is to prevent it. The best way to avoid conflicts is to prevent them. To write contracts that work, use this three-part template.
Part 1, the Basics: These are simple concepts, which are very hard to use. These should start every talk about an agreement. This conversation will tell you if the parties agree. If not, it’s better to find out early. If there are questions later, the Basics will make it easier to know what everyone intended.
Parties: With whom are you contracting? Are you dealing with an asset-rich company or a subsidiary that owns only debt?
- Name the Parties to the contract.
- Will they be individuals, corporations, partnerships, limited liability companies, or something else?
- Who is promising to give you what you want from the contract? Whom are you expecting to give you what you want? Is it the same person or entity?
Recitals: This sets the context for the agreement. Anyone reading the agreement later will know the background. It will make it easier to know why the Parties signed the contract.
- List each fact that any Party thinks is important.
- If all Parties agree the fact is accurate, then list it as a fact.
- If only one Party says a fact is true and the other Party does not know, list it here as a representation. It might look like this, “Seller represents that ….” If a Party will not represent a fact is true, it may not be.
- If the Parties disagree about an important fact, that’s a big danger sign.
Objectives: The Parties are signing a contract for a reason. Each Party expects to get something out of it—and should. Otherwise, it’s a recipe for disaster. This exercise will make sure the Parties’ goals are compatible.
- Each Party should state what that Party wants to accomplish, as clearly and simply as possible. If there is more than one goal, each should be listed separately. Here are some examples. “Seller wants to sell.” “Buyer wants to Buy.” “Builder wants to move the property line.” “Neighbor wants to protect an old redwood.”
- If the agreement is for the benefit of someone else, it should say so. For example, “Parent company wants subsidiary to have license, or office space.” “Licensor wants parent company to make or guaranty payment.
- There are often joint goals. For example, “The Parties want to set the terms of sale.”
- Again, this will tell you if the Parties’ goals are compatible. If not, it’s better to know it before starting to perform.
Assumptions: If any Party expects something to happen in the future, spell it out. Also, spell out what will happen if the expected event does not occur.
Conditions to Performance: If something must happen before a Party must perform; spell that out here. Typically, there will be a separate list of conditions for each Party. Each list will be a separate paragraph.
Conclusion re: the Basics: The Basics tell people reading the contract everything they need to know to understand the agreement. The Basics give the Parties a framework to deal with the unexpected. They reduce the odds of a dispute.
Part 2, the Promises: In this section, spell out what each Party will do. This is not the place to show off your vocabulary, education or brilliance. This is the place to be as clear as you can. Use an active voice. Write simply, with strength and precision.
Part 3, the Boilerplate: Boilerplate is language that is in most contracts. Although routine, think about what you want included. Here are some examples, with comments.
- Notice: Who receives the notice? Does a copy go to a Party’s attorney? Should notice go to more than one person? How should it be given?
- Litigation Expenses: Will they be limited to attorney fees, or include other costs? Sometimes, a fight over the litigation expenses may be more expensive than a fight over the underlying dispute. Consider omitting them.
- Arbitration: We dislike arbitration clauses. Arbitration and arbitrary come from the same root. Arbitrators are not required to follow the law. Usually there is no appeal from an arbitrator’s decision.
- Mediation: We recommend requiring a full day of mediation before filing a lawsuit. Mediation allows the Parties to make their own decisions, in a private place. It gives them a neutral that can help them improve everyone’s situation.
- Assignment: May the Parties assign their interests and duties?
- Governing Law & Venue: What state’s law will apply? Where will disputes be heard?
Conclusion: If you follow this template, you will know early on if you have deal. If not, it’s better to find out before you have committed significant time and treasure. Pre-contract mediation can help the Parties get past any rough spots to a mutually-profitable deal. Hit Reply to schedule a Get Acquainted Call.