This is the third of my series of posts called 20 Contract Questions, addressing some of the most commonly asked contract questions I’m asked as well as the key matters I think you need to know to help you negotiate and manage a contract successfully.
So we’ve talked previously about what a contract is and how to get to the contract stage. Now let’s talk about how to read and write a contract.
The reason I decided to make this the third post in the series is simple: learning how to PROPERLY read and write a contract is one of the most important skills a businessperson will need. You can learn quite a lot by just going through the contract negotiation process of course, but hopefully this will offer both a quick guide to what to do as well as some tips from someone who writes contracts all day, every day. In terms of structure, this post is going to walk through the structure of a standard contract from the first page to the last page.
The contract’s name: sounds obvious, but does its name tell you anything about it? Ideally don’t just call it “Agreement” or “Contract”. Use something descriptive, e.g. development agreement, services contract, IP licence. If it does just have a really simple name like “Contract”, that’s an immediate giveaway that it’s probably a really simple (and not very good) contract.
The parties to the contract: state who they are! State their main residential address if they’re a person, or if they’re a company state their registered office AND company number (if the country in question uses company numbers- some don’t). The reason for the latter is that a company can change its name but its number stays the same (if you have the number you can trace it more easily).
Date of the agreement: state it on the first page of the agreement (makes it easier to look up n the future). By default a contract starts on the date the last party signs it, but a contract can start at any time: it can be retrospective or prospective in its effect (though in practice to make that happen you should write a clause about it, rather than just rely on the date).
Recitals/background: these are usually a few short sentences explaining why the parties are entering not the contract. USE IT: it’s a great opportunity (especially for a non-lawyer) to explain what’s happening, and it’s one of the first things you’ll look at in 6 months time to remind yourself what the contract is about.
Definitions: ah, the mysterious definitions. They can take 2 forms: definitions set out in a specific section at the start of the contract that defines words or phrases used throughout the contract OR simply setting out the definitions in the body of the contract as they crop up.
Any contract drafter should make sensible use of definitions: they help in making the contract shorter and more clear, because you don’t have to keep explaining what frequently used words mean repeatedly. On the other hand, don’t use definitions unnecessarily- if a word or phrase comes up once or maybe twice, it’s probably not worthy a definition.
Like I said, you can put definitions in the body of the contract- that should be your default position for simple contracts. More complicated contracts can use a definitions section- using it means you can have all the definitions in one place for easy reference. Be aware though that the disadvantage it has is that most clauses in the contract only become understandable if you keep referring back to the definitions section. (As a result, most lawyer- drafted contracts are effectively tennis games in which you’re bounced from the definitions to the main clauses and then back again, repeatedly. Sigh.)
One last point: DON’T underestimate the power of defining what you mean by a word or phrase. It’s a powerful weapon if you know what you’re doing- its one of the many ways a good lawyer will try to get his client a better deal, and many court cases have been won or lost based on what the definitions said.
I’m going to say that again because it’s so important: a competent businessperson will think about which words are being used when they write or review a contract. A good businessperson will do that AND use a definition to make it clear to the other party and everyone else what they mean.
Body of the contract: I’m not going to say much about this just yet, because there’ll be a whole bunch of posts later tackling this in detail soon. Generally speaking though, most contracts will be structured like this:
– Key commercial clauses (work to be done, deliverables, timeframe, payment)
– Risk allocation (liability, indemnities, representations and warranties, insurance etc)
– Boilerplate (confidentiality, entire agreement, governing law etc)
Signature blocks: obviously, you need somewhere for both parties to actually sign the contract, to stand as evidence (together with the contract being dated) that the contract was approved by the parties and come into force. A contract doesn’t *have* to be signed or dated to come into force but, like I said, it’s evidence that it has come into force.
There are different kinds of signature blocks depending on what kind of business signs it, e.g. an individual can sign differently to a LTD company. Under most common law countries’ laws there is a special form of signed document called a DEED, used where consideration hasn’t been provided. I’m not going to get into the details now (because it gets very legal quickly) save to say it is worth knowing that deeds exist.
Schedules: are used for pretty much anything you want but don’t want in the body of the contract itself- e.g. calculations, work specifications, photos or even other contracts. Easy. Again, it’s all about documenting the deal that you’ve done, so that down the line there will be less uncertainty – and therefore less chance of a dispute.
Right, so there you have it: a quick guide to reading and writing a contract. This isn’t complete just yet, because there’ll be a future post called “I don’t understand what this clause means?” which will explain a bit further how the third, invisible, party to all contract – i.e. the law – will understand what specific bits of it to mean. That’ll be coming up in the next post…
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