If you're launching a business, you're going to have to face facts that reviewing contracts is often going to feature heavily on your to-do list.
Most commercial activity of your business will be accompanied by a contract. You might be entering into partnering, cooperation, or distribution agreements or you might just be doing plain old "selling" of your goods or services.
But examining pages of complicated clauses is the last thing you want to do, right? The trick is not to become overwhelmed. Knowing how to tackle a contract is important and when you've mastered the art of it, you'll have the tools to prevent your business landing in hot water.
Here are my top tricks, and traps, that can be contained within commercial contracts:
Look out for concepts such as "exclusivity" and anything that involves a degree of permanence, such as words like "perpetual" or "irrevocable." Proceed with caution.
Be wary of clauses that "assign" or "transfer" ownership, particularly if you're in the tech space. Keep your business model is exclusive to you, unless you're ready to share.
Make sure you are crystal-clear about how you (or the counter-party) can terminate the contract on a no-fault basis. Signing up to a 10-year contract which gives your customer a right to terminate on 30 days at any time is not a 10-year contract at all -- it's a 30-day contract. Similarly, signing yourself up to an awful contract is always somewhat less awful if you've the right to pull out at any time by giving notice (assuming of course you’ve not given-away your business in that contract).
Bear in mind that a contract deals with many topics, but broadly speaking everything falls into one of two buckets:
Things that will happen. Focus on these. If you’re selling something there will always be: (a) terms specifying what is being sold (and the specification); (b) payment terms; (c) a start date and termination rights. Get these terms absolutely right.
Things that might happen. The only limit to these clauses is a lawyer’s imagination. It’s what makes a seemly simple deal end up in a 200 page contract. Whichever way you look at it, these clauses are just not as important as the "will happens," and if you're sacrificing time on the "will happens" to argue over the "might happens" you’re making a mistake. Most liability and risk flows from the “will happens” and the vast majority of disastrous contracts are defective in this area (due often to hopeless and lazy oversights).
As part of London Tech Week I am hosting a free of charge "Legal Essentials for Start-ups" session on 13th June -- to register click here.
— Tim Sewart, Partner & Technology Sector Head, DAC Beachcroft