Drafting Commercial Contracts: The Problem

Too many companies drafting commercial contracts focus solely on the legal necessities, “winning” the negotiation and covering all of the possible risks.

None of the above are bad things, though achieving all of them is unlikely in a fair transaction. My arguments are that there are practical situations that must be taken into account as well and that a masterful document will not serve if it is drafted without the commercial realities considered. Some of the terms may not be as strong when you are done, but they will work to both party’s advantage.

Drafting Commercial Contracts: Examples of Built-In Problems:

  1. Payment terms are on acceptance of a service or deliverable. This only works if “acceptance” is defined and codified carefully in advance. If there is to be an acceptance test, it should be agreed to in writing before the relevant contract is signed. The hardest part is often determining against what standard the service or the deliverable will be measured.Complicated-Agreement
  2. Parts of the commercial contract do not tie. One example would be where what is being purchased/sold is separate from the pricing schedule. The item is described in one place, but not called exactly the same thing in the pricing section. While this may not kill a deal, it can introduce confusion.
  3. Indemnifications are not parallel or at least equitable. Common practice seems to be for the drafter to make the indemnification unilateral for the first pass. All this accomplishes is a delay; few companies will actually accept a unilateral indemnification. The indemnification for intellectual property infringement, for example, may be unilateral. But, the drafting party should not ignore indemnifications for which it should be responsible, such as violation of confidentiality, death, or injury.
  4. Non Disclosure requirements are clumsy. These often have unworkable terms. One is that information must be marked confidential, with oral information reduced to writing and stamped accordingly. Assume the companies work together on the project for six months. How many times will this provision even be remembered? My preference is that whatever could be reasonably assumed to be confidential information is confidential. This reduces the record keeping burden tremendously.

These are only a handful of examples in which drafting commercial contracts poorly wastes time and money for both parties involved.

Posted in Business Practices, Uncategorized

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