I was a student at a certain online contract drafting and due to severe miscalculation on my part, I ended up with a unique opportunity to complete some forty drafting exercises in a span of twenty-five days. Of course, there were the occasional breaks for well, baking cakes, binge-watching some Kung Fu Panda movies, but that aside, I have finally put this list together.
In this article, we shall discuss the initial, important and most common pitfalls and errors one encounters while drafting for the very first time and even sometime after.
Ten Most Common Contract Drafting Errors:
1. Appropriate Template:
Firstly, I know the urge to google and utilise the first template you come across is insanely tempting but please, never do so. That would be the first and the gravest mistake you would be making that could make the agreement fall apart at the end.
Unless you have been made obligated to follow a certain template(by your senior/ firm etc. etc.), the idea to follow is to look through four to five templates at the very least, assess their respective strengths and then furnish them into one that would be most helpful to you. I would also recommend using a fresh document to draft your contracts instead of editing a template; this would ensure that no unnecessary clauses are retained in your new Agreement.
P.S. Hold on to your new, shiny agreement. You have successfully made your own template and hence deserve the benefits. This will help when you have to do your next drafting.
2. Checklist of Clauses for a Contract:
Construct a checklist as to what needs to be included in your contract according to the Client’s requirement. In this way, you shall not miss out any of the requisite clauses that are essential to your contract.
The importance of a checklist has been ever so underestimated and that shall never be the case again when you experience the comfort and relief that a checklist brings while you have completed your drafting and have your checklist available to ensure nothing has been left out.
Recitals are the introductory part to any given Agreement. One of the very first mistakes I made while drafting Agreements was not set down the recitals correctly. The recitals identify the parties involved in the transaction in a definite manner and also set the tone for the contract at the initial stage. Hence it is supremely important to get those correct.
4. Clear Definitions of Terms:
Ambiguity in the definition of terms is a slippery slope no client wants to be on the receiving end of. Ambiguous terms make a party vulnerable to dispute, liabilities, breach and an extraordinary amount of mess. A clear precise definition of terms is needed. For example, what shall constitute as Confidential Information, what shall be meant by Services, who shall be a Shareholder, etc. shall be required to be spelt out and these words, whenever used in the contract shall start with a capital letter. Such meticulous definitions go a long way into securing the interests of the client and provide for a better understanding of the contract drafted.
5. Conditions which qualify as Breach & Termination Clause:
A drafter should always take into consideration as to what qualifies as a breach in the terms of the present agreement which they have been drafting. This shall be accorded according to the interests of the client. All the circumstances under which the client may wish to terminate the relationship shall be taken into account such as non-payment of timely considerations, non-delivery of services within the stipulated time, the revelation of confidential information or setting up of a competitive business. It would be the drafter’s responsibility to make such a clause watertight and reduce chances of disputes.
In certain instances, the client might wish to terminate its relationship with the other party, irrespective of whether any breach was conducted by either of them, purely for reasonable business purposes. Hence, besides the clause which provides for the termination of agreement due to breach or termination in the event of tenure being over, each contract should have a clause which allows the parties to terminate their contract after giving reasonable notice.
6. Meticulous Mechanism for Payments and Consideration:
One of the essential points to be kept in mind while drafting is to assign a comprehensive mechanism with which the party is to undertake its payments and consideration to the others. Without proper consideration in exchange for a service rendered, there exists no contract. Stipulate the dates, intervals, amount, medium and also provide for the process for compensation in case of late payments. This shall assure the existence of a contract and also prevent further disputes with regards to payment.
In the case of start-ups, where the co-founders are initially not able to pay themselves, the grant of sweat equity shares in the company shall be recognised as consideration. Failure to grant such considerations will eventually lead to disputes and the contract may become non-binding.
7. Internal Dispute Resolution Mechanism & the Arbitration Clause:
Every proper contract requires a specified format of resolution of disputes. No contract is entered into by anyone with the intention of causing problems and raising disputes. They are entered to secure mutual benefits and a smooth process of achieving such.
A well-drafted contract should have a proper internal dispute resolution mechanism and only when such a mechanism fails, there should be a provision for the parties to go to an arbitration panel. This is preferred as litigation can prove to be inordinately costly for the parties in the long run.
An arbitration clause shall contain how to appoint the representatives, the language in which the arbitration is to take place, the venue of such arbitration, the seat, applicable law. The jurisdiction of the court under which such a contract comes to force and under which the arbitration is to take place shall also be required to be mentioned. It should be further clarified that the decision of the arbitration board is to be undertaken as final. The clause shall include within itself the provision that any party refusing to participate in such proceedings automatically surrenders their rights to be heard.
8. Boilerplate Clauses:
Boilerplate Clauses are standard clauses which remain almost the same in every contract or agreement. Proper consideration of the boilerplate clauses is indispensable in a well-drafted contract. These clauses are common in most contracts but need to be negotiated carefully while drafting a contract. Clauses such as the liability of the payment of legal fees in the instances of disputes arising between the parties or through a third party claim; how amendments to the agreement can be done; and, the ability to assign their contracts to another, are some of the important instances of boilerplate clauses which might lead to long-standing ramifications for the clients.
9. Intellectual Property Rights (IPR)
In a contract, it is important to enunciate what is considered as intellectual property for the clients and to devise ways to best protect and acquire it for them. Forgetting to assign proper IPR for the parties would lead to ambiguous clauses with a possibility of disputes and losses. Hence, it is the responsibility of a drafter to pay attention to not forget to assign IPR.
Schedules go at the end of an agreement. You should always take care of how you draft schedules for your contracts. More often than not, the schedules contain all the essential components that make or break an agreement. This is the place where the numbers and the project details go. Failure to cohesively include all the requirements of your clients and the manner they want such to be included would be one of the biggest defects a contract could have.
In conclusion, I would recommend for you to make a sample draft and then improve upon it as you go along, adding in the details and requirements as expected and enumerated; and revise upon it as many times as required to be able to reach your necessitated objectives and organic satisfaction.