Common Contract Drafting Mistakes

There are numerous ways to make mistakes when negotiating and drafting a contract. Here are the top mistakes that small businesses make and that you should avoid. If you feel insecure heading into the contract drafting process, consult a lawyer and read Legal Requirements for a Contract

Not Drafting the First Draft

You always want to volunteer to draft the first draft of a contract. Doing so can give you a tremendous advantage in the negotiations. This allows you to structure the deal initially on your own wish list with terms most beneficial to you.

Moreover, from a legal cost perspective, drafting the first draft often is more cost-effective than responding to the other lawyer's one-sided draft. For drafting tips, see What You Want from a Contract.

Not Including Explicit Payment Terms

Almost everyone understands that payment terms are an essential part of an agreement and should not be omitted or left to be decided until after the agreement is signed.

Good drafting requires that the payment terms be clearly laid out in the agreement. Avoid ambiguity as to what the amount owed will be, or provide a clear formula for determining the amount owed. Put terms that explicitly state how much is owed and when, as well as the form of payment, and also throw in what will happen if the other party doesn't pay or pays late. Make sure to allocate who pays any taxes involved.

Not Including All Deal Terms in the Agreement

All "deal terms" should be included in the agreement. This means that you should not only include all the legal boilerplate, but also the key items upon which you relied when entering into the agreement.

Deal terms to consider including:

• What is the reason for entering into the agreement with the other party?
  
• Did the party state that he or she has been in business a long time or has a particular type of expertise in a particular field?
  
• What did the other person agree that he or she would do for you and what did you agree to do in return?
  
• When did the parties agree this would happen?
  
• Were special circumstances discussed in negotiating the agreement, which led you to agree with this particular company?
  
• Is there a critical deadline for receiving goods or services?
  
• Was there some key event or condition that was to happen before you became fully obligated?
  

The answers to all of these questions can be included within the agreement so that if at any point the deal falls apart, it can be shown that you relied on specific answers to these questions.

Making Assumptions

Don't make any assumptions when drafting the agreement; you should spell out all the obligations and assumptions under the agreement within the agreement itself.

For example:

• If you are purchasing equipment, do not assume that the other party will deliver the equipment with any related software or attachments. Spell it out explicitly.
  
• Don't assume the other party will know that if you receive the goods late that you will lose thousands of dollars. Put a time is of the essence clause in your agreement if this is true.
  
• If the parties agree to have goods shipped and delivered to a certain location, make sure that you both are in agreement about the delivery location and who pays for shipping costs.
  

If you don't understand something in the negotiation phase, ask. If you are unclear on any portion of the agreement, get an explanation — don't make the mistake of assuming that the other party understands all of your points. Conversely, if it appears that the other party is unclear on something you are talking about, then explain it and spell it out in the agreement.

Not Paying Attention to Boilerplate Terms

Boilerplate terms are an essential part of any agreement and affect the rights under the agreement as much as any other terms. These terms can be negotiated in the same manner as all other terms in your agreement.

Key boilerplate terms to really focus on include:

• The prevailing party in any dispute will be awarded its attorney's fees
  
• Amendments to the agreement can only be made in writing
  
• The contract may not be assigned.
  
• The contract includes all representations, warranties and agreements of the parties (the "integration" clause)
  

Not Negotiating Everything

Everything is negotiable. Everything. Even the things the other party tells you are not negotiable are negotiable. Even preprinted forms and boilerplate terms are negotiable.

Some portions of the agreement will be more important to you than others, but everything can be important in the event of a problem. There will be give and take in negotiating the agreement — it is important for you to decide in advance which things you can't live without and which things you can live with. Negotiating everything means that you discuss, argue, deliberate, and ultimately agree upon all terms of the agreement. Not only are you allowed to do this, you should.

Rushing Through the Agreement

Businesses are often in a hurry to get certain deals done. However, it is never a good idea to negotiate and execute an agreement hastily. The results could be unfavorable terms, ambiguance language or even an unenforceable contract.