Avoiding holes in the boat – how to make contracts water tight

In essence, a business contract is a legally binding agreement between two or more parties to do (nor not do) certain things. Examples of contracts include partnership agreements, leases of premises and employment agreements. For business owners across the land, contracts are undoubtedly a familiar aspect of working life – but they needn’t be a headache.

Why should contracts be water tight?

While the reasons may well be evident to the seasoned entrepreneur, it might not be so obvious for a novice or recent startup. Here’s the lowdown:

• Water tight contracts help protect your margins, revenue and valuation.
• They give existing and future shareholders and investors confidence in your business.
• Having stringent contracts in place means avoiding disputes – which can be stressful, costly and time consuming.

How to plug the holes in the boat

Regardless of how complex, when handled well with sound legal advice, contracts are a doddle; pitfalls only occur when companies don’t do their homework. And as the old adage goes – fail to prepare, prepare to fail.

These five essential tips should help any small business in putting together contracts, making the process as hassle-free as possible:

1. Write it down. Oral contracts can be binding, but they are harder to enforce and much less certain than those that are written down.
2. Summarise the main terms in an email before you send out contracts – checking for consensus in this way helps avoid misunderstandings, avoids wasted expenditure on advisors and can help advisors on both sides understand the context.
3. Use a lawyer rather than doing it yourself, at the very least to check your drafting. It’s vital for your lawyer use plain English: if it’s easier to understand there is less chance that you (or your contract partner) will make a mistake.*
4. Make the contract reflects the business need, rather than just using conventional legal jargon that suits lawyers but doesn’t actually describe what the two parties are trying to achieve commercially. The law is there to serve you – the legal tail should not wag the business dog.*
5. Mitigate the risk of something going wrong by stipulating a cost-effective and speedy dispute resolution procedure like mediation. It’s much cheaper and quicker than litigation and it can preserve the business relationship, too.

*If your lawyer doesn’t agree with points 3 or 4, choose another lawyer!

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