The Business Advisor Drafting Contracts: The Pros and Cons of Doing It Yourself by Mary Hanson

Business owners engage in contracts all the time. Letter contracts, verbal offers, purchase orders, letters of intent, and order confirmations are all contracts or potential contracts.

Obviously, not every contract or potential contract is prepared by an attorney. So how do business owners decide when to have an attorney draft or review a contract?

Business owners seem to use the following factors to decide whether to draft a contract themselves or to have it drafted or reviewed by an attorney:

• The business importance of the contract;
  
• The dollar amount of the contract;
  
• The perceived risks associated with the transaction;
  
• Whether the business activity is a common business activity;
  
• Whether there are industry standard contract terms;
  
• The cost of having the contract drafted or reviewed by an attorney;
  
• The comfort level of the person handling the contract - whether related to the size of the contract, the nature of it, or concerns about the party on the other side of the transaction.

If a contract has been used before by the business, the concern about having the contract rewritten or reviewed by an attorney seems to drop. If the contract appears to be working, there’s little incentive to change it, until a problem arises indicating inadequacies in the contract.

Legal Review

When you have an attorney draft or review a contract, there are really several ways to go about it. The choices include:

• Having an attorney draft the contract from your information;
  
• Having an attorney redraft your contract from a rough draft prepared by you;
  
• Having an attorney review similar contracts from your industry and redraft it after suggesting improvements over those contracts;
  
• Having an attorney review your contract with you and then make changes based on your discussion;
  
• Having an attorney review your contract with you and suggest changes for you to make.

I suggest beginning with a brief review of an agreement with the attorney. After this brief review, the most appropriate approach can be determined. Most important, it may take only 15 minutes for an attorney to see that a contract is a bad deal for you and recommend that you discard the proposed contract. That 15 minutes’ worth of advice can save you a lot of pain.

It should rarely be necessary to begin by leaving an agreement with an attorney for review. If the attorney says he or she must review it and get back to you, only do so after you and the attorney have briefly reviewed the agreement together.

The attorney should want to ask you a number of questions about the business deal and he or she should be able to answer many of your questions without having to refer to anything else. If the attorney just wants you to leave the contract and then get back to you, he or she may not be experienced enough to help you with your contract.

Reviewing vs. Drafting

Is it better to have an attorney draft or redraft a new agreement or just make modifications to your prepared agreement? The key to this dilemma is that it can be time-consuming for an attorney to review a contract and then try to make changes to it. It almost always takes less time for an attorney to prepare a fresh agreement. The old agreement may be used as a source of information on the business arrangement.

Another concern is whether to have your attorney draft a contract or have the "other side" prepare the contract. It can take more time for an attorney to review someone else’s agreement than to start from scratch. In this situation an additional consideration is that the drafter of the proposed contract may write it to benefit the drafter’s side.

Because of the danger that an agreement is drafted to benefit the drafter, a rule of thumb is to never accept any contract prepared by the other side. Only agree to the proposed terms after making modifications as necessary to make the deal acceptable to you.

If you are developing a contract to be used as a standard in your business, get professional help early on. Why limp along on an inadequate contract and only get a good contract to cover the 100^th transaction? Get the benefit of a good contract for all those business transactions.

Using Someone Else’s Contract

A common practice is to use a contract drafted by or for another business. There are benefits to this approach if the pitfalls are avoided.

Key questions for assessing the pros and cons of this approach include:

1. Is this a standard type of transaction for which one contract will really suit all situations?
   Some contracts, such as purchase orders, may fit many different businesses. A contract for the purchase of a business, on the other hand, is a unique business transaction in which every provision needs to be negotiated.
   
2. Is the contract you are proposing to use written from your side of the picture? One of the most common mistakes is using a contract written to benefit the other side. Instead of having a contract that makes sure the other side performs, you end up with a contract which burdens you with all sorts of obligations and penalties.
   
3. Was this contract drafted by someone who is both knowledgeable about the business transaction and good at drafting contracts? If the "prototype" is just someone else’s do-it-yourself project, why rely on it? Because of this concern, this approach of using someone else’s contract is only a good one when the source of the "prototype" contract is some large company with a very capable legal staff preparing their contracts (and preparing the contract from the same point of view as yours).
   
4. Is this business arrangement unimportant enough that you are willing to rely on someone else’s contract terms?
   
5. Do you know enough to check it, and add, delete, or revise provisions that are not right for you?
   
6. Are you strong enough to avoid the temptation to get creative and rework the contract, deleting the original provisions and adding your own until it is really your own do-it-yourself contract?

What to Cover

However a contract is prepared, the following are overall key considerations for preparing a good contract:

• Make sure all issues involved in the business transaction are covered. A common error is use of a "simple" contract, one which does not clarify all aspects of the business arrangement.
  
• Make sure all parts of the contract make sense when read together. Any contradictions must be resolved. Conflicts between provisions or conflicting positions taken by the parties must be worked out prior to execution of the contract.
  
• In the process of negotiation, if one part of the contract is changed, the rest of the agreement must be checked to make sure all provisions in the agreement based on or related to the part which was changed are modified as necessary.
  
• Set out what action each party will be entitled to take if the other party fails to perform its contract obligations. A common error is assuming each party will do exactly what is required by the contract. A good contract provides what will happen or what can be done if a party fails to perform.
  
• For a "standard" contract, be prepared to update it. Collect contracts of competitors and others who provide the same goods and services. Maintain a file of contract samples and notes on issues the contract should cover. Having a library of similar contracts and issues that need to be covered makes drafting and updating a contract much easier.

If a deal is an important one, do not draft the contract yourself. Have an attorney draft it. If you are an attorney, still have another attorney draft it, or at least review it. When a business transaction is important enough, a "do-it-yourself" contract is not good enough.

© 1997 Mary Hanson All rights reserved.