You know your business better than anyone else. You negotiated the particulars of an upcoming deal, and you know the numbers and the people. You developed a positive working relationship with the other party and are optimistic this venture will be mutually profitable. You don’t hire an attorney because you fear signaling distrust to the other party and scaring them off, plus you want to reduce overhead. You therefore summarize the deal points in a document you drafted yourself, both sides sign, and you get to work.
A few months later you are frustrated that the other party isn’t holding up their end of the bargain, is underperforming, not communicating, or not making promised payments. Perhaps the other party is saying these things about you. Goodwill between the parties is replaced with bad blood. Now you find yourself in a lawsuit, where this DIY contract is the most important piece of evidence, and it has gaping holes and ambiguities.
This totally avoidable scenario happens all the time. If you had only consulted with an attorney before signing, you would likely be in a stronger position in the lawsuit, or perhaps it could have been avoided altogether.
Worst Case Scenario
This is a case I recently defended. A manufacturer spent years building his brand and growing his business, and he wanted to expand into a new territory by contracting with a distributor. The parties negotiated deal points and memorialized them into a term sheet.
The term sheet provided performance benchmarks and a one-time distributor fee, and the owner had broad termination rights, but the agreement said little else. The owner terminated the distributorship a few months into the deal, but he had been paid a multi-year distributor fee up front. The term sheet said nothing about a prorated refund of the distributor fee in the event of early termination. The distributor wanted his money back, but the owner refused, claiming he canceled within his rights. This created a contractual ambiguity and one party lost money. Cue the lawsuit. Now the parties must testify about their interpretations of the contract terms, and the judge must weigh the evidence to sort through the mess. These cases aren’t cheap to defend.
Rather than getting an attorney review before the distributorship began, the owner did not hire me until after getting served with a summons and complaint. Instead of paying about $1,500 to have counsel review (and rewrite) the contract, he paid tens of thousands of dollars in defense fees and settlement payments. This killed his cash flow and growth trajectory, and the business was shuttered.
The distributor’s hands weren’t clean and the case was potentially defensible, but the term sheet did not contain an attorney fee clause. This means the owner could not recoup his defense fees even if he won the case.
Do I just Hate Term Sheets?
Please don’t read this article as me hating on non-lawyers writing agreement terms. By all means, memorialize the terms of your agreements in writing. You can call it a Term Sheet, Letter of Intent, or Memorandum of Understanding, but the enforceability of the document depends on the wording and circumstances.
In fact, when clients engage me to draft contracts, the first thing I ask is, “What are the deal points?” I can negotiate deal points myself, but business owners often have this part locked down before they come to me. I then merge the deal points into a formal agreement. Ideally, the draft would then go to the other party, where it would be reviewed by their counsel.
Consider the Optics
When you tender a contract draft to a sophisticated party, and it was not drafted by an attorney, it shows. Believe me, I can tell. If you submit a sloppy and unprofessional contract, with typos and ambiguous language, it reflects poorly on you. It makes you appear unsophisticated, inexperienced and cheap. In contrast, if you tell your negotiating counterpart that you will submit the contract draft once your attorney has completed his/her review, the other party will be more inclined to respect you and honor the contract terms. In fact, I recommend letting the other side know the contract was vetted by counsel. You will have better leverage and the other side will be less likely to play games.
What About Contract Templates?
Couldn’t you just find a contract template online, or copy the terms of a contract a colleague or competitor uses? It’s a reasonable place to start. In fact, I usually employ some form of template when I draft any contract. I almost never write a contract beginning with a blank word processor screen.
Having said that, even with a template you would still find yourself preparing your own contract, with all the resulting risk. The template you’re using may or may not be in your favor, and you might not even understand it. If the template is junk, any derivative contract will also be junk.
I once revised a contract for a wedding coordinator. The terms were all over the place and self-contradictory. The client got the template from a colleague, and she just put her name on it. She had been using a junk template for years, so I threw it out and started over.
If you are going to use a template from a colleague or competitor, at least ensure the contract was originally written by an attorney.
In closing, you are free to write your own contract, and you can (and should) use a template. However, you do not know what you do not know, and a desire to cut corners and costs could cost you much more in the long run. Hire a lawyer for your contract needs. Once you have a standard contract in place, drafted by counsel, you could then modify as needed for future use.