How do you keep a contract as simple as possible but still ensure it offers protection for your business? Grid Law founder David Walker outlines the essential considerations entrepreneurs need to be aware of when signing business contracts.
“Why do contracts have to be so long and complicated? All I want is a simple one-pager.”
Clients frequently ask this question and I’m sure you’ve thought it too when faced with pages of small print you have no intention of reading.
The simple answer is that most contracts don’t need to be long and complicated. They only become long and complicated when they try to cover every possible eventuality and that’s not usually necessary.
So, if we don’t try to cover every eventuality, can we remove all of those clauses that most people never read and rarely understand?
Surely it would be better to have a simple one-page agreement that people do read and can understand?
To answer this, we need to appreciate what clients really mean when they tell me they just want a “simple one-pager”. My view is that they’re effectively saying two things:
- They know that they need a written contract because it gives them better protection than an oral agreement; but
- They’re concerned that if the contract is too long and complicated it will undermine the trust between the parties and take too long to negotiate.
So, how do we ensure a contract gives the protection we need whilst at the same time keeping it as simple as possible?
Legally binding
First, we have to ensure the contract is legally binding. To be legally binding, a contract must include five essential elements. There must be:
- An offer;
- Acceptance of the offer;
- Consideration (i.e., some form of payment);
- An intention to be legally bound by the contract; and
- Certainty as to what has been agreed between the parties.
A contract that covers just these five points can be very simple. But, to protect my clients, the contract must include more than just the very basic terms. For example, risk and potential liability under a contract can be dramatically reduced by including extra clauses but this will increase its length. (I explained more about the benefits of these clauses in my previous article, “Using a contract clause to reduce risk in commercial transactions”.)
Therefore, we have to find a balance. We have to include the clauses that we really need to protect our businesses but, as we will see below, others can be safely removed or simplified.
Standard terms and conditions
Let’s use standard terms and conditions of business as an example as they’re frequently used and most people will be familiar with them.
The clauses of the terms and conditions will be divided into two categories – commercial clauses and legal clauses.
The commercial clauses will set out exactly what the parties are going to do for one another. They will describe the services being provided or the products being sold. There will be clauses explaining the price, when payment needs to be made, delivery dates etc.
To reduce the length of the commercial clauses, you could refer to another document. For example, you could refer to a tender document where you pitched your services or your catalogue where your products and their specification are clearly described.
The risk in reducing the commercial clauses too far is that the contract will lack certainty. If you take out too much detail, it won’t be clear what is expected of either party and this can lead to misunderstandings and disputes.
The legal clauses tie the contract together and make it legally binding. They also explain, for example, what happens if something goes wrong and how the parties should try to resolve any problems they face.
Read back over David’s contracts articles:
- “Can a non-compete clause protect the exclusivity of our product?“
- How to deal with unfair business contracts as the owner of a small company
- A definitive contract review checklist every business owner needs to read
Boilerplate clauses
Many of the legal clauses in the contract will appear to be pretty standard and as lawyers we refer to them as “boilerplate clauses”. However, just because they seem standard it doesn’t detract from their importance.
Before removing any legal clauses, we need to take a broader view of the contract’s purpose and the risk tolerance of the business.
If the contract is low risk, low value or if you have no intention of ever taking legal action to enforce it, we can remove more “boilerplate” clauses. The higher the chance that you may need to take legal action to enforce any of the terms, for example to recover a late payment, or, if there’s a risk you may be sued and wish to limit your liability, the more “boilerplate” clause should remain.
So, assuming your business is relatively low risk, which clauses could we remove or simplify?
If a clause only repeats what the law specifies, it can usually be removed without any problems.
For example, most contracts contain a clause that says the contract is governed by English law and the English courts have jurisdiction to deal with any disputes. If you and your clients are all based in England and Wales you don’t really need to specify that the agreement will be governed by English law.
It’s obvious. It’s also obvious that you would deal with any dispute in the English courts so this clause could be removed
Dispute resolution clause
An example of a clause to simplify may be a dispute resolution clause. I see some clauses that specify that if a dispute arises the managing directors of both parties must meet to discuss the issues. If they can’t resolve the problem the next step is mediation. If mediation doesn’t resolve the problem, a claim can be issued through the courts.
Most business owners will try to resolve a dispute informally and going to court will always be a last resort. So, it shouldn’t be necessary to spell this out in the contract and the dispute resolution clause can be much simpler.
Other clauses to remove are those that aren’t relevant. For example, a confidentiality clause is often included as standard. But is any confidential information actually being exchanged? If not, you can remove it.
If you really want your contract to be as short and simple as possible, you must study each clause and think carefully about whether or not it’s really needed. (Please speak to a lawyer about this if you are unsure.) This can be a time-consuming process and you have to accept that there will be a compromise. As you reduce the length of the contract, you will be losing some of the protection it gives you.
In my experience, reducing the length of the contract as far as possible shouldn’t be the objective. A reasonable length contract, so long as it is written clearly and in plain English, isn’t going to be off putting or undermine the trust between the parties.
On the contrary, it can be used to build trust and relationships as both parties will enter into it knowing exactly where they stand.
If you have any questions about your business contracts please feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.
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