The Art of Contracts – Predicting the Future
As you might imagine, this firm writes and reviews a LOT of contracts. Oftentimes, I think this firm could make more money by charging a client for every time they utter the phrase “I just want something simple” or “I just need a one-pager,” versus charging our standard rates.
Of course, I get it. No one wants to spend a zillion-dollars with an attorney just to be encumbered with a 60-page burdensome document that takes 6-months to read, and will scare aware the other party, simply for accepting water for the water cooler.
What is the Purpose of Your Contract?
A contract is a means to an end, not the end itself. In other words, the point of a contract isn’t to get it written, but to help achieve a specific, long-term aim or objective.
The problem is when a client comes to us with a need for a contract, what is it they are really asking for? Is the “end-game” merely a document with words on it? Or, is the “end-game” protection from “getting screwed” or otherwise ensuring their expectations are met?
A contract is a means to an end, not the end itself. In other words, the end-game (or end-goal) is to ensure you are protected from harm, and/or your expectations are fulfilled. The means to that end-goal is a contract. The length and complexity of the contract depends on a number of factors, with the two biggest factors being the relative importance of the deal and its complexity.
One problem confronting us attorneys when drafting a contract, is that the relative importance of a deal and/or its complexity isn’t always apparent to the entrepreneur or business owner, let alone us attorneys. This requires rubbing the crystal ball and looking out into the future. Unfortunately, many business owners and entrepreneurs who are otherwise struggling to meet payroll, can only perceive a time-horizon of a few weeks, maybe a few months if lucky.
Why the Future Matters When it Comes to Contracts
A contract is written to our future selves, in an attempt to communicate our current intention for future issues.
As I’ve said in previous blog articles, spending money on a good contract will either be viewed as a complete waste of money if it’s never looked at again, or it will look like a very wise investment if the deal falls apart, with every word, comma and semi-colon carefully scrutinized and picked-apart.
We attorneys must write the contract with the assumption it will be scrutinized in detail, and we must write assuming people of the future will ask themselves, “what was this attorney thinking??!?”
In other words, a contract isn’t a document about “today’s weather.” It’s a document specifically written for and to our future selves, if the unfortunate happens and a deal falls apart. If so, the contract will then be dusted off, read very carefully, and the facts and circumstances (that are past events when reviewing a contract, but are actually future events to whomever is writing the contract) will be applied very carefully to the language of the contract.
Therefore, a good contract is actually written assuming our future selves are sitting down reviewing the document, and that to be truly outstanding, the contract addresses all possible outcomes and scenarios, so there is a clear and unambiguous understanding of what to do when the deal falls apart in one way or another.
Writing a Good Contract Requires an Ability to Predict the Future
The better contracts are better suited to the needs of the future. This requires an accurate understanding of where your business is going.
For example, what happens if you’re licensing a trademark for use on your products? Today’s goal is to “get the ability to use the trademark.” However, what does the future hold? Your efforts at marketing your own products may add value to the trademark, changing the economics for the trademark licensor who may demand more money from you in the future or perhaps may decide he no longer wants to license you the trademark. Then what do you do? Suppose the trademark licensor sells his rights to someone else, and your business is left out in the cold? Suppose the trademark licensor exercises very bad judgement in some way, rendering the trademark worthless or attributing significant negative goodwill to your products? Then what?
Or as another example, suppose you’re a tenant and you really desire a particular location in the local mall. You’re negotiating a particularly onerous lease with the landlord. Today’s goal is to “open your store,” and the lease seems like just one more obstacle to overcome. However, what does the future hold? If this is your first rodeo, the chances are high your business will not succeed (approximately 75% of new businesses fail in the first year). How will you pay for an expensive lease for years, that a personal guarantee is tying you to, if your business fails? What happens if the landlord permits a nuisance that keeps customers away? What happens if the landlord fails to repair the HVAC? What happens if the landlord continually makes accounting errors in CAM, rending your monthly payments too high for you to cover? Then what?
As a final example, suppose you’re trying to sign up referral partners. Today’s goal is to “get them signed up to get new business.” However, how can things go off the rails down the road? What happens if a referral partner brings in a lot of business, and then leaves taking his business with him? What happens if the referral partner simply stops working, yet continues to demand recurring payments for the business brought in, in the past? What happens if a referral partner attempts to unfairly compete with your business? How do you handle these situations? What happens if you want to sell your business? How does that affect the referral partners and the overall cash-value of your business?
The list of examples can go on and on. When writing a good contract, I try to find answers to the following questions as a means to try and help predict the future (depending on the context of the deal):
- What are the important components of a deal? Revenue? Intellectual Property? Products or Services? Quality? Confidentiality? Customers? Something else?
- What happens in extreme cases? What happens if one or more of the important components of a deal becomes a liability (i.e. worth less than zero), is worth nothing, or becomes hyper-valuable beyond anyone’s expectations? How do the parties want to handle such circumstances?
- What is the performance required of the parties? What is each party expected to do or not do? How do you measure the performance?
- What extrinsic or external factors can impact performance or the important components of a deal? Who is is responsible for dealing or mitigating against such factors? What happens in extreme cases?
- What happens when one party doesn’t perform? Or, what do you do if a party wants out of a deal, or becomes unavailable (through death, incapacity, strike, weather, etc?)
- What happens if the one person you trust is gone from the equation? Similarly to the previous bullet, what happens if the person you were dealing with dies or is no longer a part of the deal (because they sold their company, for example)? What happens if the new party is downright hostile to your deal? How would you want to see yourself protected?
One of the biggest obstacles I face trying to write a good, comprehensive contract is the perceived notion by the business owner that the parties will simply “work it out,” if an edge-case becomes reality. Unfortunately, I’ve seen that over time, personalities change, interests diverge, attentions deviate, and you may not be dealing with the same person in three years, that you are dealing with today.
If you had the opportunity to jump into the future three years from now, to talk to your future self, what do you think your future self would say?
Answer that question correctly, and we can write you the perfect contract with the least amount of cost, pages and complexity. The art of contract writing is part attempting to predict the future, so that the contract of today stands the test of time and properly addresses the exact, specific situation that arises in the future.