What we’ve learnt about contracting (Part 1)
June 11, 2018 / Startup / Greg Atkinson
As a startup, we don’t have the luxury of hiring expensive lawyers to handle all our legal matters. But without lawyers, legal matters can sure get expensive. As we’ve contracted our way through a slew of suppliers to find the handful we trust, we’ve learned some things along the way. In this article, we share some broad principles which apply to all contracts. In Part 2, we talk about contracting with suppliers specifically.
1) Get things in writing
Deceptively simple, but somehow often ignored. It’s tempting to start conducting business on the strength of a handshake, or a ‘gentlemen’s agreement’, after all, you know and like each other already, so what could go wrong? In one word: lots.
Verbal agreements are hard to prove, which is a huge problem if disputes arise later. Verbal agreements are also notoriously vague, with parties often nodding along unconsciously even though they might not agree. This means neither of you are clear on what’s really been agreed to. This is a problem whether the agreement is between you and an external party, or between members of your own organisation. You should be as diligent with contracts for your founders, investors, and employees as you are with any external party.
Finally, as your company grows, you can be sure investors and other stakeholders will want to see official paperwork.
2) Read every clause
To make sure there’s nothing in a contract that will come back to haunt you later, read every clause. Every. Single. One. Even the fiddly little bits. Especially the fiddly little bits. Because that’s often where the stuff that will hurt/help you lives.
You should also ensure that all prices given are inclusive of VAT or whatever other taxes are applicable. If prices don’t have taxes baked in, you may be in for a nasty surprise when the bill comes due.
On a related note, never assume that everyone else in your organisation has read the contract. Sure, it’s been circulated to everyone, but people get busy/bothered/bored. You might be the only person taking the time to know your contractual rights and responsibilities. You can lord it over everyone else later.
3) Never blindly sign the contract offered
So, you know you need a written contract. But you’re no lawyer, so you leave it to the other party to draft something. This is fine (and often more economical), but under no circumstances should you blindly sign the proffered document.
Not enough people know, or take advantage of the fact, that you are fully entitled to cross out/add/amend things in a contract. If you see something you don’t like — change it. Just be sure to sign and date your proposed changes. The other party can refuse to accept your changes, and you’ll go back to negotiating. This might seem like a lot of effort, but it’s infinitely better than being trapped in an unfair contract.
Many jurisdictions also operate under something called the Rule of Construction. Simply put, this means the contract is interpreted against the drafter. This could work in your favour if the other party drafted the contract, but prepare for a long legal battle if this is the only thing you’re relying on.
4) Do not accept vague wording
Phrases like ‘best effort’ and ‘good quality’ sound familiar and comforting. But when it comes to actual implementation, people often have different ideas about what they mean. Rather have deliverables explicitly stated. A phrase like ‘We will provide 5 logos by this date’ is much harder to argue with than ‘We will provide you with our best effort’. The clarity of the former will protect both of you, so it’s worth the effort of being painfully explicit.
Remember that when it comes to contracts, simpler is always better (despite what television legal dramas would have us believe). If anything is unclear or deceptive, question it, and demand a rewrite. A contract that’s stuffed so full of legal jargon that no one actually understands it, is of no use to anyone.
5) Have clear rules for termination
Usually the breakdown of a relationship isn’t because of one thing. Generally there’s a pattern of bad behaviour that you put up with over and over again, until you finally decide to call it quits. Having clear rules for termination means you don’t have to put up with getting repeatedly burnt. There is nothing worse than having to put up with someone when the relationship has turned sour, simply because neither of you can afford to break contract.
Your contract should clearly state when either party is entitled to walk away, what compensation is payable to each party in this situation, and whether the termination is with immediate effect, or requires a notice period.
6) Clearly define when the contract has been, or can be, broken
‘Breach of contract’ is a lawyerly-sounding term that means: knowing when someone hasn’t done what they said they would do. It’s important to clearly stipulate all the conditions that need to be fulfilled. For example, let’s say your designer sent you 5 logos by the specified date. But for some reason, she sent them in a strange format that requires some expensive, specialist software that you don’t have to open. Is she in breach? To her, she’s fulfilled her duty. To you, she’s sent you something useless. A good contract would state exactly what you expect her to provide, including the file format, so there’s little room for dispute.
Stipulating conditions that are considered breach, and possibly exit options for the injured party, will save you lengthy wrangling and negotiating in contentious situations.
7) Protect yourself from worse case scenarios before you sign
Run through all possible scenarios in your head, and see if the contract caters for this. Things like ‘What if they take my money and run?’ or ‘What if the work is a giant steaming mound of crap?’ should hopefully not occur, but if they do — are you protected? Of course you can’t possibly guard against every bad thing that could ever happen, so the general rule of thumb is to identify the probability/impact ratio of each scenario. Phrase the question like this: What is the probability of this thing happening and what would its impact be if it does? All things with high impact need to be addressed, no matter how low the probability. High probability/low impact situations should be addressed too. If something scores low on both, you can probably deal with it if-and-when it happens.
These are the general rules we always follow when we sign any contract. You can apply them to your work contracts, your lease agreements, purchase contracts etc. We’ve also picked up a few learnings from contracting with suppliers specifically, which we share in Part 2.