Melody Kramer - Hello, and welcome. Today, we're going to be talking about drafting collaboration agreements for small businesses and startups.

 

There are going to be three steps that we talk about here, and that is understanding objectives of your client, analyzing legal relationships, and then drafting proper paperwork. And we're gonna tack onto that an added topic, which is in the course of all of this, how to avoid lawsuits for your clients whenever possible.

 

Now today, I'm gonna be talking within the context of California law, however, these principles and the practical advice that goes along with it really are applicable across the entire country and other states. So just use the references to California law as a starting point to check your own statutes that apply in each place. So let's start with preparation. I know it's so easy for us, as lawyers, someone will call and say, hey, I want you to create a corporation, or I want you to draft a collaboration agreement for us to just start pulling out those, you know, templates and legal forms we have handy and start drafting in accord with that preconceived idea of what the client wants or needs. I want you to step back and do a much more detailed review of planning and preparation in talking with a client in these type of contracts than you might do in other circumstances. It's really going to pay off. And, you know, went back to rules of professional conduct, we're required to do this anyway. We're supposed to reasonably consult with our clients about the means by which to accomplish the client's objectives in the representation. So that's what we're gonna talk about doing today, making that process effective.

 

Usually, it's good to start with some reality checks for your clients. Usually, they have some idea, somewhat idealistic, usually, about some collaboration with a friend or a colleague or someone they met at some conference and they want to create a business together, perhaps do an event, a writing project. There are a myriad of different types of collaborations that they want to do. And they're very excited about it. So enthusiasm for business, it's like falling in love. I bet you could sit down and have a cup of coffee with anybody and hear about their business and if you have that entrepreneurial spirit, as your clients surely do, they'd love it. And you'd immediately think of some contribution that one party could put in to help another party build their business. It's exciting and you'd have this awesome conversation and it's like a good workout. Our brains release serotonin, endorphins and dopamine, which are the happy hormones. So when your client is coming to you and often with their potential business partner collaborator in tow, they're like a couple getting ready to get married. They're excited, they're feeling good. It is a psychological thing. It's also a physical thing. That is the state of mind during which many people choose business partners. But even though all that stuff sounds wonderful, they need you as the lawyer to bring the common sense and reality into the process. So keep in mind that dynamic as you go through these steps in interviewing your client. Make sure they understand that chemistry isn't everything. As with marriages, chemistry can only take you so far. It's not too long until someone forgets to replace the toilet paper roll or throws their dirty clothes on the floor. One partner spends all week pouring over financials and predicting the future wealth of both of you while the other is making mind numbing cold calls, trying to get sales. If you listen carefully and prepare properly with your client, you can avoid so many of those things for them.

 

So then we go to reality check number two. And that is, who is contributing what to this potential collaboration together. This part of the discussion with your client is talking in big picture to begin with. Whether they're starting a catering business with a friend, creating a strategic partnership with another company or working towards an IPO launch, they need to decide up front what they're trying to accomplish and what each collaborator is bringing to the table. Are they bringing expertise, capital connections or something else? What's the other side contributing that is a value to the other party? They need to write these things down, talk them through, and eventually it'll be part of their written agreements. It may be useful for you to prepare a questionnaire or worksheet of sorts for your clients before they even meet with you in person to walk through these things.

 

So let me tell you a little story about what happens when you don't have these conversations. Some years ago, I was talking with a colleague about creating a business together and he mocked up a website. It looked so professional. It looked so cool, that whole dopamine thing. And we began talking through the various roles and responsibilities in the business. He did most of the talking and he really had some good ideas, but I noticed that though he had a good handle on all of these things, for each category of work, he kept assigning it to me. And by the end of the conversation, we realized that he had nothing but a decent idea and really no willingness to contribute anything of value to the partnership. Your business clients will very much value your ability to look further down the road than they are able to currently see and help guide them into a process that is really going to help them. Now that we have some of those reality checks out of the way, I'm gonna walk through different segments of analysis you need to walk through your client, all of which will end up being put in one document or another, depending on the structure, legal structure that you decide on in the end.

 

So first let's talk about who are the collaborators. You wanna have this specific, and you'd be surprised how often it is not. Who is your client? Are they an individual? Are they an LLC, a corporation? What are they? Non-profit, I don't know. And who is the collaborator? Be specific, make sure they're specific. Ask them if they have incorporated. The reason I ask this is because often business owners, small business owners, don't really understand the meaning and the magnitude of a formal legal structure. So they will do contracts in their own personal name instead of using the corporation, thereby undermining the liability shield that they wanted in incorporating in the first place. So help them in drafting the contract by being specific on who the parties are that are contracting. And of course, that's gonna go in the contract, the beginning and the end of it. Next, talk about the purpose of the collaboration. You wanna have what the joint purpose is.

 

So maybe it's something that's a longer term relationship. Maybe it's just a one-off thing. Perhaps like creating an event, is a common one that I've seen, someone with one area of expertise wants to partner up with someone in another area of expertise and they wanna put on some sort of joint seminar together. What I also ask here is a better understanding of your client's individual purpose and hopefully you can find that out from the collaborator, as well. You want both sides to be on board with what the eventual outcome is. Let me give you a little story to illustrate. Some months ago, I was discussing with another couple of parties, a collaboration on an event. And when we started planning, I had viewed in my mind that this event would be helpful for me to get exposure for my book that I had sold and was selling and for my law firm. I figured that people who attended this event would be interested in buying my book or would contact me for legal work. I didn't go through this process with my collaborators, as I should have, in advance to see what it was that they wanted out of the event. Turns out when we had a discussion about whether this should be a virtual event or a live event, which was important at the time because of COVID, I discovered that one of the collaborator's main goal and interest was to live book sales at the event. For my purposes, the event could be virtual. It was just fine. For the other collaborator, it wasn't meeting the needs that she wanted in this collaboration. Had both of us realized that at the start, it would've saved us a lot of time and effort that we had put in planning something that wasn't going to meet our individual goals, even though the joint purpose seemed very simple and straightforward.

 

Next, talk about contributions to the collaboration. Again, this is a two-sided thing. What is your client going to be putting in this collaboration and what is the collaborator putting into it? You'd be surprised how often businesses are not that specific on what they want. I had this example of the first business I ever created. I ended up not having these conversations with my co-business owner and 24 hours after we incorporated this brand new business, I discovered that he seemed to expect that I was contributing capital to the business that I didn't have and didn't intend to contribute to it. You need to have this even-sided. This step helps your client clarify what they want, what they need and what they're willing to give to get it.

 

Next, talk about the length of collaboration. Is this an ongoing long-term working together proposal, or is it something short-term, project-based? These will make a great deal of difference when you're drafting some sort of agreement between them. Then you start digging in a little bit deeper. What is the structure of the relationship? Are they trying to have a joint business ownership together? How is revenue going to be shared? How are liabilities gonna be shared? What will the work product ownership be regardless of what they're collaborating together to create? Sometimes it's an event. Sometimes it's a product, various things, but what are the expectations on that? Control of the outcome. Who gets to control that? Which side wants to do that, control of contributions? Can one side force the other one to contribute money or time or certain things to whatever is being worked on? What are the obligations to contribute revenue? Can one force the other one to contribute more money?

 

Next and this is very important and this is where you really get into the specifics of what the legal relationship can and should be between the parties. And this is what I call balance of power. Who is going to make operational decisions? And this is not necessarily for a full-on business. This could be for a one-off project. Who makes those operational decisions? For example, the example I gave before about an event, who decides whether it's be virtual or live? But there are myriad of other operational decisions. Who's gonna make financial decisions? We gonna rent this hall for, you know, a thousand bucks. And now it's gonna cost 1500. Who gets to decide that? What decisions require joint agreement? What happens if there is a disagreement? With these sort of details from a client interview, you're now gonna be in a position to discuss, to evaluate for yourself and then discuss with your clients what the potential legal structures are for the relationship between these parties. Keep in mind that when your client comes to you, they may only have a general idea of what they want to accomplish. Sometimes some friend has told them, oh, you need to create an LLC or you don't need to incorporate. Just do a partnership agreement. They may have all sorts of ideas when they come in the office. So it is gonna be up to you to help guide them through the different types of relationships that are available under the law. We can't discuss every single variation of those, but I wanna go through some of the basics with you, just sort of a reminder of how to handle this information that you've gathered from the client.

 

So obviously, there are formal legal entity structures, such as corporation or limited liability company. There are partnerships, which has a less level of formality, but they're partnerships. Then there are independent contractors, employees, or sometimes just a strategic collaboration partner. I like to keep all of these on the table and until we have done a detailed client interview because sometimes they'll want to bring on people as co-business owners, when they really have no business being there. Sometimes they wanna exert a lot more control than they are allowed to under law with a, for example, independent contractor relationship. There are all sorts of factors that go into this and you need to walk carefully through that with them so they can pick the correct structure. Now let's talk about those structures a little bit, so you can keep fresh in your mind what's available.

 

So let's first talk about corporations. In corporations, if you recall, back from law school, owners are shareholders. The corporation is run by a board of directors. They have officers as well, president, secretary, and treasurer, at least, maybe some other officers. There are usually annual reporting requirements. There's a liability shield so money that's invested, if there is eventually liabilities that exceed that, then the investors only lose the amount of money that's within the corporation. A C Corp and S Corp, people talk about the differences between those. C Corp is directly taxed. S Corp, the profits and losses flow down into the shareholders tax returns with a K-1 and so those are considerations that are important.

 

Before even getting to corporations, let's talk about evaluating options and this I come... Next, let's talk about limited liability companies. With limited liability companies, there's a little less formal structure than corporations. The owners are members. It can be either member managed or manager managed. There's usually, in California, anyway, only biannual reporting requirements. There's still a liability shield and it is taxed like an S Corp, meaning it doesn't get taxed separately. The profits and losses flow through to the members of the LLC. This is sometimes better for a less formal sort of arrangement and with lesser legal requirements to fulfill every year. Then there are different types of partnerships. There are limited partnerships and there are general partnerships. Owners are partners. In a limited partner, there are general partners or limited partners. There's all sorts of structure there. There's pro rata sharing of revenue and expenses. There is no liability shield for general partnerships, though there is for limited liability partnerships. And it also passed through taxation like S Corps and LLCs. If you wanna do a partnership, that's a whole other topic, but just keep in mind some of those general possibilities that you have.

 

Now, where it starts getting really interesting is if you realize that what your client needs is not some sort of strategic partnership per se, but really they need an employee or an independent contractor. That can get a little complicated because, especially small businesses have this crazy habit of not wanting to call people who work for them employees because they know that involves a lot of legal compliance and documents and tax withholding and all sorts of things that they don't want to do. Don't let them get away with that. They need to do the actual analysis of whether who they want to have working for them and for whom they're going to have control over what they're doing, whether there is so much control that it is an employee and it legally triggers that employee status and all the obligations that go with it, or whether it can be someone that's treated as an independent contractor that doesn't have the same level of legal reporting requirements that employees do.

 

If you are in California, I need to alert you to the fact that this has changed dramatically within the last couple of years with legislation that's referred to as AB 5, it's really now AB 2257, and the ABC test in there that leans very heavily in favor of anyone who works for you for money being called an employee instead of an independent contractor. Here on the slide, I have the discussion, sorry, the statute showing the ABC test, which is the kind of core test to be considered on the difference between employees and independent contractors. And basically those elements, is a person free to work from the control and direction of the hiring entity, both under contract and, in fact, and then all of these requirements need to be met. The person performs work, that's outside the usual course of the hiring entity's business and the person's customarily engaged in independently established trade, occupation, or business of the same nature.

 

Now this means that most relationships that businesses have, whatever they call it needs to be analyzed really closely for whether they are considered employee under California law. If you are in another state, be aware that this same law and same general ideas are already being proposed with a PRO Act on the federal level and are also at play in a number of other states. So get up-to-date on those things, at least having a general idea of what the legal status is in your state so you can help guide your client in the right direction. If you are more of a business lawyer than an employment lawyer, make sure you have on, you know, speed dial, someone within the employment area of specialty that can help advise you on these things if with your analysis with your client, if it looks like what they really need to do is hire an employee and follow through all the steps for doing that.

 

In addition to this ABC test, in California, there is the Borello case and the Borello standards, that one... I don't wanna stray too far from the topic for this course, but the Borello case is very important in terms of the factors of distinguishing independent contractor from an employee. And that is if the ABC test is met, you also need to meet to the Borello test. But assuming you've gone through these other structures and disregarded them for some reason or another, and you've come down to what you're really talking about is a strategic collaboration, then here's some of the things that you need to look at. You're not gonna have any shared ownership of any company. Maybe that's just not what the parties are wanting here. This is especially the case for short-term or project-based work. If it's a long-term setting, then a formal entity creation might be more appropriate. Neither controls the other sufficient to be an a employee.

 

Like I discussed above, California law is draconian right now in terms of calling people employees rather than independent contractors and businesses have to really carefully navigate to make sure that they're making the right decision on that. Doesn't mean you can't do a strict strategic collaboration. You just have to be very careful in doing that. And then you need to make sure the respective rights and obligations are set forth in the contract, but this has less interplay with like employment laws and corporation and LLC legal requirements at play. You have a lot more leeway in drafting your contracts. So now we get to drafting the documents that are going to go along with what information you got from your client interview, and also the selection of the legal relationship that's going to be between these parties. Just touching really briefly, if you're going to do some sort of more formal entity, you have for corporations, LLCs or partnerships. There's certain specific documents that need to be filed. We don't need to discuss those there.

 

Corporations, you got the articles and bylaws statement of information, and then you're gonna need a shareholder agreement. So for purposes of the rest of this course, you're gonna wanna pay attention to the guidelines. When you do a shareholder agreement, it'll just be in a little different format. Same thing with LLCs. You've got the articles, operating agreement and statement of information, which is separate from what we're doing here, but you're gonna have a member agreement. How are they gonna interact between each other? And for that, the principles we're talking about here will apply. Partnerships, same thing. You're gonna have a partnership agreement that's gonna establish the relationship between the parties. Employee or independent contractor, same thing. You're going to have an employment contract. You should have an employment contract written or an independent contractor agreement, both of which are going to use the same principles of agreement drafting that we're going to talk about here. So now we get next to the strategic collaboration agreements and how to draft those. We're gonna talk about the basic contract structure, talk about planning for problems and exits, and then also the overriding thing that you need to consider, which is avoid the most common causes for lawsuits. This provides an immense benefit to your client and makes the difference between just a lawyer or one of our competitors,

 

Legal Zoom, or other types of online drafting of legal documents and your expert services. This is the place to distinguish yourself. As you recall from first year of law school, there's a basic contract structure, basic elements that need to be included in the contract. This is gonna be in state statute in every state. In California, it's Civil Code 1550. It's essential for a contract to be parties capable of contracting their consent, a lawful object and a sufficient cause or consideration. That's the basics, but your client can get a contract that meets those basics anywhere on the internet. It may not be a good solution for them, but they can find something with that. So you need to up your game. So I recommend a better contract structure and this is what I use for drafting all my contracts. And I'm breaking it down a little bit and have a little fun, pull out out every contract that you have on your desk, on your computer and see if it follows these same principles and these same pieces in each one. So you're gonna start out with a title and identification of the parties. And I know this sounds trite, but it's not. You wanna have an agreement that, a title, that describes the agreement in a way that makes both sides wanna sign. You could do this all the way through. You want to be descriptive. You want to be... Make an agreement that they want to sign.

 

Identification of the parties. Sounds like a no-brainer, but it's not. I see mistakes in this so often. As I said earlier in your client interview, you wanna make sure you're properly identifying the parties, which is, is it an individual? Is it a corporation, LLC? What is it that is making the contract? That is who the obligations are to. Don't be casual about that and make sure it's appropriate. It's also best practice in there to put principle place of business. It's not required, but it's useful to have that in there because it's a kind of a necessary thing if the contract ever goes into litigation. So you might as well just do it well and it gives that address up front for the parties. I'm gonna jump to the end. Signature block, I would do at the same time. Make sure those two match. Again, I can't tell you how many contracts I reviewed that do not have matching between the first sentence of the contract, identifying the parties and the signature blocks, needs to be the same, needs to be accurate. Description of the purpose. It's usually called recitals, you know, back from whenever. Lawyers love to use old English or old anachronistic ways of describing things. I like using that section of the contract to describe the purpose of the agreement. I know a lot of us love to just jump over that section, but it actually can be very helpful in making sure both of the parties are on the same page on what is going on there.

 

So what you wanna have is company A, for example, is an expert in this topic and company B does this work and the two are joining together to create a new product, whatever it is. This is so helpful to spend time on those few initial paragraphs, because it advises both parties of the contract before they read anymore, before they get bogged down in the details, what they're really agreeing to, what the idea of the structure is. Now, where I see a common problem in this is contracts for marketing design, SEO, things like that. Is the one of the parties consulting on these things or are they actually doing it? For example, if you hire a social media marketing person for your business, the business who's hiring them may think, oh, this person is both going to create a strategy for me and then they're gonna get on every day and they're going to put some new posts on Twitter and Facebook, and they're gonna respond to any comments and they're gonna do all of these things.

 

Meanwhile, the social media consultant may say, no, no, I'm just giving you strategy. You find your own person to actually execute the strategy. You can solve problems like that within that first part of the contract explaining in very simple sentences, what each side is doing for the other side. I like putting in a definition section to contracts, although it isn't always necessary. When I think it is necessary is when the parties are from different industries or different specialties. And also for very long contracts. The reason for definitions is you want both sides to be on board with what is going on. And if you are describing things in something that is familiar to you in your profession that you recognize this terminology, or you recognize this certain mode of doing business, those may not be understandable to the other side of the contract who doesn't use that terminology day-to-day, who may very well misunderstand what you're trying to convey.

 

Let me give you another example from real life. The first time that I hired someone to create a website for me, I had absolutely no understanding about how a website was created, what went into it, what tools were used, by developers. I knew nothing, nothing of that. What I had in my head, which was not in the contract, what I had in my head was that the person I hired was going to be doing actual coding for creation of the website. I had no idea that they were going to utilize some of these pre-created sort of modules, and then were gonna customize that for you use for me on the website. Why this was important was number one for the price, I thought I was paying someone to do original coding, which in fact they were not. And number two, I thought that I owned the underlying code to the website, which I did not and could not because of how they were compiling the website. Now, these were obvious things, no-brainers, to anyone who is really computer literate and savvy and understands how websites are built. But I didn't know that as the customer and wish that I had known that.

 

Other examples are when there are commonly used words that are used differently by one party within their industry. In other words, it looks like something the other party would understand, but at the end of the day, really isn't something that they would understand. Another reason for doing definitions is if you are perhaps referring to some other documents and they have a really long title, and you wanna have the date and like maybe agreement that was signed between party X and party Y on January 6th, 2006, and all addendums there, too, whatever. Some thing long and hairy, and you're gonna refer to that throughout the agreement, then you wanna define those sort of terms. It just makes simpler as you go along.

 

Then you're going to put in the detailed outcome or sorry, the detailed list of expectations and obligations both before, during, and after the term of the agreement. Be as specific and clear as you can. Party A is going to to do X, Y, and Z. Party B is going to do X, Y, and Z. When you have payment provisions, be specific, how much is to be paid by whom, where, when and how. If it's going to involve electronic payment, wire transfers, who's gonna bear the fees for that? If it's something where someone's gonna put the check in the mail, does it have to be received by a certain date or it has to be sent by a certain date? When the relationship between the parties is something that's going to involve give and take, back and forth, one party does one thing, and then they send it to the other for approval and then they go back, go to the next step and do something else and then the other one needs approval, walk through in detail, what that process looks like. And for each, you know, turn in the path, as it were, each level of those things, say what happens if the other side doesn't complete what they're supposed to do. If they don't make a payment, if they don't give an approval, explain what happens when that happens so you see a smooth process that flows through the entire course of the contract. Depending on the nature of the contract, of course, you're also gonna have to consider whether are things regarding confidentiality, work product, who's going to have ownership of things that are created? Who's going to provide mailing lists? Who's going to do all sorts of things? Be as specific and concrete as possible.

 

At the end of the day, you wanna have a contract that anybody can understand who reads it. This way, both parties to the contract have a clear understanding of what they're supposed to do and what the other side is supposed to do. Next, you're going to have a number of clauses that deal with what-ifs. And each contract's gonna be unique on these what-ifs. But you wanna think through proactively, likely problems, issues, or complications that can come up. You want to say what happens if there's a breach. What happens if there's impossibility of doing, of following through with the obligations of either party? What if there are delays that are not a result of either party's malfeasance at all?

 

One very important what-if is a plan for exits. Every collaboration is going to end at some point, either because it no longer works or because it's fulfilled its purpose. What happens when the collaboration ends? Who gets the mailing list? Who gets the intellectual property? Who gets the money? Who gets the bills? You wanna decide in advance or your client and their collaborator surely will fight later on about these things. I have a philosophy about this in the sense that it is a lot easier to plan for these things, even for potential disputes, when everybody is a friend. If you doubt me on that, take a look at the case involving Facebook and the litigation over who had the original idea for it. Part of that what-if planning goes into the dispute resolution mechanism. What if the parties disagree on something? What if one party breaches the contract? What if both parties breach the contract? What happens then? You want to plan for problems within the contract because problems will arise. And I can assure you from long experience that if this bit of pre-planning is done, it will save your client a world of hurt in the long run, emotionally, financially and time wise. Don't draft a contract with the expectation that both sides will agree on everything all the way along. It's not realistic. It may happen, but often, it doesn't.

 

Let me give you a little example of what can happen when you don't plan things out carefully this way. I remember one afternoon, two people came to me and were planning to start a new business. They declined my proposal for drafting the documents, creating their LLC. But several years later, they were back in my office. Well, one of them was. Their business relationship had broken down to the point the police had been called on at least one occasion. Clearly, they needed to not be in business together anymore. And I'm sure either one would be happy to blame the other one for that circumstance. However, when I reviewed their operating documents and I'm guessing they were created by one of those online platforms, I discovered that every decision had to be made jointly in this business, which probably sounded like a good idea at the time, even the decision to shut down the business. And because they were hopelessly deadlocked in disagreement on everything, there was nothing short of court intervention that could dissolve their partnership, even though both would readily agree that it was not working. A few carefully worded paragraphs can save them from problems such as this and will make your clients eternally grateful to you. The next item of, of course, in this better contract structure is the miscellaneous paragraph section at the end of every contract. It's easy to dismiss this section of the contract as unimportant, but actually, it can be very important in many ways.

 

While I'm not gonna go through every potential paragraph you can put in that section, a few are worthy of note. First of all, keep in mind that these paragraphs usually are things that govern how the contract is interpreted. You can have such nitpicky paragraphs as plural and singular being treated the same or his and her or them being interchangeable terms. That level of detail is certainly your personal decision to make. The ones that are more important, however, are ones such as jurisdiction and venue. We're gonna talk in more detail in a minute about dispute resolution mechanisms, which need to be within your contract structure. But assuming there might be a court action, even if you have an arbitration clause or something like that, you wanna have that, jurisdiction and venue, that is favorable to your client. Don't be casual about that choice. Make sure that the court where a case could be brought is convenient to you and your client and doesn't run a foul of any sort of legal restrictions that you're trying to get around.

 

Jurisdiction and venue clauses can also be a powerful disincentive for people to sue if the jurisdiction is far away from where they are located. So if you're a California business and you're doing business with someone who's located in Connecticut, without even reviewing the respective laws that might be different with respect to the subject matter of your contract, your California client has no desire to go and be in a court in Connecticut. And the same is true of the Connecticut company, not wanting to come to court in California. There are a lot of costs involved in having to be in court in another state, assuming that you are the one drafting the contract in the first place and with ability to continue the negotiating process. Unless there's a compelling reason, otherwise, you want to have jurisdiction and venue local to where you are. Another clause you might want to have in the miscellaneous clauses is one that flips around legal responsibilities.

 

For example, if you want to disregard the legal assumption that the party drafting the contract is responsible for any ambiguities or basically the ambiguities get resolved against the party drafting the contract, you can put in a clause that eliminates that presumption. Another frequent clause is to have permission for signatures being done electronically. You'd be amazed what sort of things get disputed in courts of law relating to little details like that. I also like adding and usually the last paragraph and in all caps is that both parties have had an opportunity to review this contract and consult with legal counsel before signing it. It goes a long way to head off problems later where parties may say, well, I really didn't understand the language of the contract.

 

And finally, the signature block, which as I mentioned before, needs to match that first paragraph of the contract and who the identification of the parties are and who's going to be signing on behalf of the parties. Now, by this point in the process, you should have a pretty solidly written contract. But I think there is another level that you can add to the entire process of preparation that is a value added to your client. And that is taking specific steps and review and review again, to see that you've done everything you can to mitigate the chance of this contract, your party, your client, ending up in a lawsuit. Having practiced law for over 25 years and fighting out business dispute... Having practiced law for over 25 years in courtrooms around the country, I have seen the essential elements of what causes disputes to end up in a courtroom.

 

Almost exclusively, those disputes have had the following things in common: unmet expectations, poor communication, and no alternative dispute mechanism. That is what the recipe is for lawsuits and something that you want to avoid for your clients. Lawsuits can be and often are the death now for a business, especially a small business. If you can craft contracts that dramatically mitigate the risk of disputes ending up in a courtroom, you've provided an immense value to your clients.

 

So let's talk about those items in a few more details. Setting expectations for both sides. The clearer you can be in your contract language, the better off you are. And that is because both sides need to know what they are expected to do, when and how. When you have clear expectations, then you also have clear lines of when a breach occurs. Let me give you a little example of how that can play out in real life. I am dealing with a lawsuit right now where one side is saying that she had an agreement with the other to make a home pristine and aesthetically pleasing for a certain amount of money and a certain timeframe. Now, setting aside the disputes between the parties on how all of this transaction went down, you've gotta admit that any written contract that had such vague qualifications of what one side was supposed us to do, pristine and aesthetically pleasing, that may not even meet the criteria of clarity to be a contract. But even if it is a contract, you wanna avoid those sort of ambiguities that people can argue about later. It happens more often than you would think.

 

Second thing is when you are writing your contracts, keep in mind that your audience is more than just the party signing the agreement. There are going to be other business partners, shareholders, investors, lenders, who knows what, that may be looking at the business records of this company. Another example is a potential buyer for a company. You want to write a contract such that other people can understand it, not just the people who are signing it. And at the end of the day, you never know if your contract is going to have the querying eyes of some nit-picky lawyers and you know how we can be, trying to find holes in the contract and maybe it might be in front of a judge or jury. So the clearer you can have the language such that other people can understand it, as well, you're doing your client a much better service. Another thing that often is applicable is defining or explaining terms that are you used in the contract. I find this a lot with contracts that are heavy on some sort of tech or some sort of specific expertise, what the person or entity on the side within that technical expertise may understand certain words to mean may not be the same as, for example, a customer that isn't experienced in that same tech language.

 

So if you have definitions, it helps explain to the other side, what you're talking about in a language that they understand, not just something that you and your client understand. It's also a great opportunity to educate the other side to the contract and sometimes sort of establish the value to the other side. If you explain that doing task A involves these 10 different steps that are routinely done within this industry, then when you use a single phrase throughout the rest of the contract that you need to do task A, it doesn't look like it's a small, small matter. It involves a whole bunch of different things that you are providing. So those are very helpful things in terms of the clarity of the contract and so that both sides know what the expectations are. It's written down. No one has to forget what all that meant. It's very clear what the expectations are on both sides.

 

Next, let's talk about paths of communication. When you have a contract, you have the negotiations, you have the sign of the contract, and then you have all sorts of communications throughout the course of performing the obligations of the contract. Obviously that's different depending on the type of contract that you're writing, depending on the type of parties that are doing the contracting. However, the more you can set that out in the contract, the better off everyone will be. So one of those things is, especially when you're talking about a company that's larger than just one person, you wanna have a contact person and decision maker designated either directly in the contract or that is a specific notice that's given after signing of the contract. You wanna have this so that both sides know who they can communicate and rely on and don't get pelted with requests or decisions or input from people at the other company that don't have authority or don't have permission to make decisions on the project.

 

Now, I see this very, very often in contracts involving website development, is a common one. And there's some other ones of that type of service being provided. And what happens is the website developer will do like the first step, which is like maybe mapping out some pages for the new website. And they'll send it out to everybody on the board. So maybe that's five or seven people. And each one of those will come back with some different thing like saying, well, we wanna have the text in blue on this page. And someone else says, no, we want it red. And another one says, no, we want a picture here and all sorts of things. And they're all someone who speak on behalf of the company, but there's been no designation of who actually gets to make the decisions. So have that laid out so everyone knows if I talk to this person, I can rely on that, I can act accordingly to that. Obviously you're also gonna include the sort of generalized notice provisions that are used more for like notice of a breach of contract. You wanna have a formal notice given. Or maybe there's a change of address. Maybe one party or the other has been acquired by another one and need to give notice of that.

 

So we wanna have those formal notice provisions. Sometimes, it's in the miscellaneous section. Sometimes, it's elsewhere in the contract. But you do wanna have that official notice. What I would recommend very much so is to have that notice of something formal relating to the contract, to be copied to someone who knows what to do with it. In other words, preferably like the legal department. But the problem is if you have a go-to, for example, the CEO of a company, even a mid-size company, they get so many communications from so many places, they don't necessarily know what a notice under a pending contract is going to mean, what the timeframes are to respond back. They're just not gonna know what it is. But if it goes straight to whoever is handling legal for that company, even if it's just like a fractional general counsel, something like that, usually, you're in better shape because the notices are going to the right person. Another part of communication that I think should be weaved into your contract is a cooling off period for disputes.

 

What I mean by that is it's easy sometimes for one or the other party to get upset with the other side, think they're in breach, some problem with some aspect of the contract and depending on personalities and depending on how much they're running on adrenaline or some other emotion, people might run to the courthouse and file a lawsuit when really things could be resolved if they actually just sat down and talked about it. So what I recommend and what I put into contracts very often is something that says, if you think the other side is in breach, you give a written notice to the other side in saying, here's what I think is going wrong and here's how you should fix it and have a built-in period of time, maybe it's 10 days, maybe it's 30 days, depending on the length and nature of the contract. And then the other side can respond back and then have a built-in time of, that the parties will engage in 30 days of good faith negotiations to try to resolve the matter before resorting to legal recourse. It can save the parties from jumping into litigation, fueled by emotion, instead of really thinking it out.

 

This helps parties go through their paces of really calmly thinking about how do we resolve this matter? I have seen this type of clause help many, many times. In fact, I would venture or guess that I don't think any contract that I've dealt with that had a clause like that ever ended up in the courtroom. So it's a very powerful thing, quite the value added to your client. Next is something I like to call walk away with dignity clause. And what I mean by that is, as I said, litigation can be very emotional. And the truth is that sometimes people enter into contracts, companies enter into contracts, and then they find out a week or two into the contract that this was just a really bad idea. And I see this most frequently with contracts that involve a lot of personal interaction. So like coaching contracts, something where there's like ongoing advice giving, that sort of nature of services.

 

Either side may discover that it is just not a workable situation. And instead of having draconian, you can't get out of this contract without this punitive sort of consequence to it, if you have something that says if for any reason, within the first 30 days or with a seven day notice, something that doesn't too dramatically affect the other side, a party can give notice that they wanna get out of the contract. I know it sounds kind of crazy. You wanna lock people in to, you know, a year long contract or five years or whatever it ever it is and expect that to go through.

 

But the fact is that sometimes there are parties that have contracted together that never should have. Give them a way to walk away without having to point fingers, without having to blame the other one and it will save your clients a lot heartache in the long run. I've also seen this help avoid uncollectable bills. For example, there are times when someone has entered into a contract and this especially happens with small business. We have fluctuating cash flow and just a lot more sensitive to various factors going on. If you have this walk away with dignity clause and maybe one party to the contract suddenly is having some real cash flow issues that came up after they signed the contract and they just aren't gonna be able to make the payments that were called for. They'd like to, they'd like to have the services that are in the contract, but they just know they're not gonna be able to do that without bankrupting their company. You might as well have them walk away with dignity. Otherwise the option is to have an uncollectable debt or them go into bankruptcy, neither of which helps you out at all.

 

Next let's briefly talk about mediation, arbitration or court. As you probably already know, these are not the same processes. Mediation is voluntary, informal, private, but also you aren't necessarily going to have a final resolution. It's kind of expensive and it may not resolve the issue between the parties. However, you might wanna put a clause for that in a contract before an arbitration clause, or just having the parties resort to court if they need that. Arbitration, voluntary and it results in a binding decision, it's also very expensive, but it's private so there may be, all those considerations you need to look at and choose something that works for your clients. Honestly, sometimes just having the parties resort to court is just fine. And just leave it that way, although make sure your jurisdiction venue provisions don't put your client off in some strange venue.

 

And finally, there's no end to the potential alternative dispute resolution processes you can put in place in a contract. I put rock paper scissors here in my outline, because honestly this has been used by courts more than once to resolve issues and for your client and the type of contract that you're drafting, you can have all sorts of types of dispute resolution that you craft something that will get a binding decision on whatever the matter is between the parties that's private and hopefully not very expensive.

 

 Just to recap what we've talked about in this session, when you're working on collaboration agreements, you wanna conduct a very detailed client interview. You wanna ascertain exactly what they want and what they need. Then take that, those needs and those wants, compare them with the many available legal structures and decide which one makes the most sense before you start drafting documents. Then when you start drafting them, make sure you're using the correct documents and include those necessary clauses for good contract construction and then draft everything with this eye towards mitigating the potential of this matter, going into litigation.