New England Biz Law Update
Nothing is worse than putting a bad standard form contract on the table after the business people have been working together for weeks or months, building a relationship based on common goals and trust.
Each day, they have strengthened this fledgling alliance, finding new ways to expand their horizons, use their product, and bring their skills and expertise together.
Then the cold water hits: 50 pages of impenetrable legalese, overbearing demands, and armor-plated protections. The customer is alarmed, the salesperson is frustrated, and everyone hates the lawyers. Is this the way it has to be?
No.
With a little forethought and drafting skill, the lawyers can arm their clients with standard form contracts that cover the business terms, include reasonable legal protections, and help get the deal done.
Many types of standard form contracts are used in everyday business transactions. The specific focus in this article is on contracts used to sell or license a product in a commercial setting.
The underlying assumption is that the transaction is significant enough so that the contracts will be negotiated — we are not dealing with so-called “shrink-wrap” licenses — but routine enough to warrant development of a standard form contract as the starting place for all transactions. The objective is to draft a contract that is so compelling that individual transaction negotiations are minimized.
Here is the recipe for a strong standard form contract:
• First, collect the facts. Make sure you understand your product, your company’s needs, and the customer’s needs.
• Second, collect the boilerplate language. Do you need all those terms you have seen in other contracts? Do they make sense for your transaction? Can you write them better?
• Third, spend the time to organize the contract. Just putting the terms in a sensible order and making sure the pronouns all agree will start the discussions off on the right foot.
By the time the contract hits the table, the customer is almost always either committed to doing business with your company or seriously considering it. A contract that is organized, balances the parties’ interests, and provides reasonable solutions to potential legal problems reaffirms your company’s professionalism at every level. After that, the deal is in the bag.
Preparation, Preparation, Preparation
Ideally, preparation of a standard form contract begins long before you need it. Giving yourself enough time to plan helps avoid a common pitfall: trying to expedite the process by using a handy — but often inappropriate — model.
Forms from prior negotiated deals, or forms drafted from the perspective of a powerful customer, may already embody compromises that should not be replicated.
In-house counsel should start by meeting with someone who knows the facts about the product and the business objectives. Have them answer questions such as:
What, exactly, is the product?
Who are the customers?
If the product is software, can a customer use it for its own internal purposes, or incorporate it in a product to be distributed to third parties, or distribute it as a stand-alone product, or use it to perform services for third parties, or develop modifications or derivatives?
If the product is a hard good, are there manufacturing obligations? Supply obligations?
Are there services to be provided with the product?
Is a purchase price due in one payment?
Are there payment milestones?
Is it important to be able to publicize the company’s relationship with the customer?
As you are ferreting out the facts, remember that you need to understand the needs of your company and the typical customer. A standard form contract that satisfies all of your company’s objectives but doesn’t meet the needs of the customer will be endlessly negotiated.
Anticipating the customer’s needs, on the other hand, permits you to shape how your company will fulfill them.
Assembling The Boilerplate
The next step is to assemble appropriate boilerplate language. This is undoubtedly the most underappreciated step. Most business people will freely admit that they never read the boilerplate — but it is one of the lawyer’s greatest responsibilities.
Boilerplate actually can be improved with a little thought. For example, “termination” is often thought of as a single type of event, and the termination provision focuses only on how many days notice is required and who has the right to terminate under what circumstances.
But many subtleties should be considered. For instance, should the customer have a right to terminate if you are not in default? If so, should there be a termination fee or a minimum payment obligation?
If the agreement is for a supply of hard goods, what kind of a manufacturing pipeline is involved? What happens to your inventory of parts and materials? Are your supply contracts terminable under the circumstances? If the agreement is for a license of software, should there be a period of winding down to enable the customer to transition to another provider?
In these precarious times, customers frequently want an option for a quick exit, but they will usually agree to reasonable terms that protect your company financially.
Some boilerplate provisions present philosophical questions.
For example, committing to indemnify the customer is a burden that some vendors might prefer to avoid. Leaving an indemnification provision out of the contract entirely could be dangerous, however, if the customer is likely to insist on it. In that case, it is better to offer a narrowly drafted and appropriately limited indemnification than it is to have to respond to a broadly drafted customer proposal.
Other provisions present strategic choices.
For example, making boilerplate provisions mutual — such as assignability and limitations on liability — can seem an unnecessary concession on benefits or protections. However, in reality it can be a relatively low-cost way to signal a sense of fairness and evenhandedness that facilitates the negotiation process. Then, when a substantive reason to make a clause one-sided emerges, the customer is more likely to understand and accept the distinction.
Organization
Finally, there is a question of “look and feel.”
A contract that is well organized and generally makes sense for both parties has enormous psychological value. In many cases, the customer will feel comfortable signing the contract as is or with only minor revisions. Even when the magnitude of the transaction mandates more detailed negotiations, a good first draft establishes an atmosphere of collaboration that facilitates practical solutions and constructive compromises.
Nancy R. Wilsker is a partner in the business group of Brown Rudnick Berlack Israels. Based in the firm’s Boston office, she specializes in the development, licensing, marketing, and distribution of technology products, representing both publicly traded and emerging growth companies. Ms. Wilsker can be reached at [email protected].
