This week, Wang Yingyu from Taylor Vinters Via shares her experience on the value of good business contracts and offers several tips.
Our Word is Our Bond
Our word is our bond, but the other party may have a different recollection of what our word is. A contract may be entered into verbally. However, verbal contracts often devolve into he-say-she-say scenarios not because the other party is a crook, but simply because parties misunderstood or misinterpreted the terms that were supposedly agreed upon.
Most startups start on a very strong note of positivity and mutual trust, but the prudent entrepreneurs who see the value of long-range planning ensure their businesses get started with such contracts. This becomes even more essential when you deal with external parties in collaborations (where you may be sharing proprietary information and technology) and in mergers and/or acquisitions.
Whilst a written contract does not completely prevent a dispute, it does inform parties of their respective legal positions and rights and reduces the likelihood of a dispute ending up in messy and costly litigation. The costs of consulting a lawyer in the drafting of a contract is generally a lot lesser than hiring lawyers to extricate your startup from a dispute over an ambiguously worded/verbal contract.
In what scenarios are written contracts particularly important for startups?
Shareholder’s Agreements — You should not gloss over drafting your shareholder’s agreements in your haste to get started. Very often, the initial enthusiasm gives way to resentment arising from long hours of hard work without remuneration. There may also be a mismatch of expectations.
Third party tie-ups — Startups may decide to partner with other startups, organizations or businesses. It is particularly important to clearly lay out the nature of the working relationship when it involves external parties, especially if these partners will have access to your IP.
Key employees — If you are making an important hire who will have a great deal of access and visibility to the company’s IP (including confidential information) or will help you build a critical component of your business, you should also make sure that you draft an employment contract that sufficiently protects your rights. This is to protect your business in the unlikely event that the employee decides to leave the company and potentially pursue actions that may be detrimental to the company. It is however important to note that contracts that are unreasonably wide may be voided.
Do I need a lawyer to draft a contract? Can I draft contracts on my own?
While it is not necessary to engage a lawyer to help you draft contracts, you are encouraged to consider the importance and complexity of the contract before deciding to do it on your own.
How can a lawyer help me in drafting my contracts?
Lawyers are not mere draftsmen.
An experienced lawyer will be able provide you with various options, taking into account the relative bargaining strengths. Whilst lawyers typically work with their own templates created and enhanced over the years, they have to spend time understanding your specific situations before customizing the contracts to your needs.
Often, it is assumed that it costs lesser for lawyers to review a contract instead of drafting one for you. This may not be true particularly if the contract is based on a template that is badly drafted or not even based on Singapore law.
Would you recommend using contract templates?
Using contract templates is an increasing popular alternative to engaging lawyers. Some services sell specific contracts while others offer subscription to their full collection of contracts with some support.
It is important not to use these boilerplate contracts without customizing it to suit your specific business situation since templates are by definition generic. You may need to refine the language in the contract, add in additional clauses and remove others.
If you wish to use contract templates, it is recommended to get a qualified lawyer to review your contract and give you legal advice before it is signed. However, as mentioned earlier, reviewing of contracts may end up being more costly than engaging a lawyer to draft from scratch, particularly if the template which the contract is based on is not properly drafted in the first place.
Alternatively, you may wish to seek templates from your lawyers with specific advice subsequently, since the lawyers will be most familiar with their own templates and thereby reducing the likelihood of massive amendments.
What guidelines do you follow when drafting contracts for clients?
Here are some things we watch out for when we draft contracts for our clients:
- Establish parties and parameters of contract — clearly and precisely identify all parties of the contract.
- Specify key dates — when does the contract commence? When / if does it expire or become eligible for renewal? When are specific payments / services due?
- Be detailed — make sure that you capture the small details too since the contract will define your business relationship.
- Use simple, clear and precise language — while the contract needs to be comprehensive in capturing detail, we strive to avoid legalese (unless absolutely necessary) and verbose phrases, writing in plain English leaves less room for interpretation (e.g. say 15 July 20XX instead of mid-month in July).
- Include termination clauses — build in contingency exit plans, discuss specific scenarios which will lead to the business relationship ending or dissolving.
- Spell out potential damages — what remedies will be available for a breach of contract, missed deadlines or incomplete services; this can also include a clause that awards lawyers’ fees to the winning party.
- Dispute resolution clause — In the event of a dispute, you might want to add a provision that requires the parties to proceed to mediation as it is quicker and cheaper than litigating in court and arbitration. However, do note that the mediator cannot compel parties to come to an agreement. As for arbitration, it may end up being more costly than litigation.
- Jurisdiction clause – If you are entering into contract with a foreign party, you will need to consider this properly
Wang Yingyu is Director of Taylor Vinters Via and the only female named by The Legal 500 AP as a leading individual for Technology, Media & Telecommunications (TMT) Law and recommended for Intellectual Property (IP) Law in 2016. Ying is an active litigator who also advises clients on transactional and corporate work regularly.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.