You know from my first post that in order for a contract to exist you need to meet some legal requirements: in particular, you need to have made a specific offer which is specifically accepted, and there needs to be an intention to be legally bound on both sides. Bear that in mind now as I go through some key steps on the way to getting to the contract stage.
(1) Get your head together:
Firstly, think about what you want from this contract but also what do you think you’ll get? Equally, what does the other guy want and what you are prepared to give him? Obviously, those two are not necessarily the same: how close you can get to your ideal position is down to your negotiating skills, which we’ll come back to on a subsequent post in this series. To begin with, you’ll want your offer to set out everything what you want (or close to it, depending on your negotiating technique – more on that later).
Think about any practical steps you need to take, e.g. to get any information/assets/deliverables etc you might need when it comes to negotiating the contract. Basic example: if you’re pitching services to a prospective client, what info will you need (e.g. pricing) to get the contract in place? Sounds basic, but you’d be surprised how many people sleepwalk into a contract without really thinking about what they need on their side before they even start talking to anyone else.
Do you need to talk to a lawyer about this deal? Marshall these resources beforehand, or at least know when you’ll need them (if at all). My advice: it isn’t just about them telling you how to do something (or not to do it) or for them to help you write the contract. It’s also about asking their advice about market conditions, what’s doable and what’s not, what the other guy is thinking: in other words, to help you get a good deal. That’s the kind of advice good lawyers are there for (hint, hint).
(2) Ensure the offer and acceptance is set out in writing:
Like I said before, contracts don’t have to be in writing but 9 times out of 10 you’ll be better off if they are. Ditto with the offer that you make to the other guy in order to get the contract process going. You need to be precise and clear about what your offer is when you write it down: ambiguity will seldom help you because it’s likely to be misinterpreted by the other guy (usually in the way most favourable to him). Try structuring it by reference to key considerations like:
Work to be done
Fees to be paid
Equally, if you get an affirmative response back from the other guy, make sure that acceptance is set out in writing (although usually that won’t happen until we’re a fair bit along the negotiation path). Email, letter or whatever – makes no difference, as long as you have a record for future reference.
(3) The early steps towards writing up the contract
Before we have an offer that’s been accepted formally, often you’ll see some legal-ish documents appearing. They have different names and different formats, e.g. Heads of Term, Memorandum of Understanding, Letter of Intent or Term Sheet (the last one is for financing rounds), but they all serve the same broad purpose: to document the commercial deal that’s being agreed by the parties in a non legally binding way.
Why would you want to do this? Because sometimes it’s helpful to record what the parties intend to give each other, say because the parties want something to work off when it comes to writing up the formal contract or because they want to finesse some commercial details once it is in print, BUT they don’t want to be bound to what they write down. Usually (hopefully) it’s because they’d rather rely on the formal contract once it’s been written up.
So, practical advice: use documents like Heads of Terms, Memoranda of Understanding, Letters of Intent or Term Sheets when it suits your interests to have a record of the commercial deal as it’s done, but remember you cannot rely on them legally usually.
The exception is where the parties have expressly agreed that the document is legally binding (this tends to happen slightly more with Heads of Terms than the others) – but in practice there needs to be language about that specifically written into the document for you to stand much of a chance of enforcing it.
As a result, if the other side is only willing to enter into one of these kinds of documents with you but nothing more, then they’re just offering you words without legal force. Always go down the legally binding contract route if you want to enforce what the other side has agreed to.
(4) “Subject to contract”
Another possibility is that you might receive a contract which is marked “subject to contract”. As I mentioned briefly last time around, that’s used as shorthand for “I don’t yet have the intention to be legally bound by this contract yet, so I’m just sending this FYI or just chatting with you about it right now”. So, treat it as such: a contract which might even look like a ‘proper’ contract but is marked ‘subject to contract’ isn’t usually legally binding. Make sure that phrase comes off before you sign up to anything or start relying on the contract.
By this stage, depending on how complicated your contract is, you might either have gone straight from offer to acceptance or (more likely) you’re boxing around each other trying to work out the best deal – this might involve things like Heads of Terms, maybe not. Basically, this is getting us into the negotiation stage (also known as the “??? = Profit!” stage of contracts). There’ll be a whole post on that topic next week…