Drafting Your Own Contract

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“John, I need a contract for a deal that I’m doing.  It’s for such a small dollar amount, and it’s so low risk, that I can’t really justify having you draft it.  Do you have a template I can use?  What advice can you give me?”

Many of you may be in the same situation as my client.  You’re doing small, low risk deals, and you have a very limited budget for outside counsel.  How should you document these deals?

Obviously, if you will be doing numerous transactions that don’t vary much from deal to deal, it may be cost-effective to have your lawyer create a template for you.  He or she may have a good template to work from, so modifying it to create your template may be very inexpensive.

Unfortunately, my client’s deal was a non-standard, “one-off” transaction, so the template that I had would have required a lot of modification.  So we explored whether it would make sense for him to draft the contract himself.  Some of the questions we discussed were: what’s the dollar amount of the deal?  What are the possible downside scenarios and how likely are they to occur?  What’s the term of the contract?  How well do you know the other party?  Will intellectual property be created?  Will either party need an IP license from the other?

Once we determined that the dollar amount ($2000) and risk were very low, and there were no IP issues, my client made the decision to draft the contract on his own.  He really just wanted to get a “meeting of the minds” re: what each party was to do.  He was not concerned about creating legal rights or negotiating leverage in the event that the deal did not work out.  He was content to document the business terms, but not the legal terms, of the deal.

So I advised my client to describe in his contract, with as much specificity as possible, the following business terms:

1.  TRANSACTION (“Who delivers what”): What is the transaction?

2.  RESPONSIBILITIES (“Who does what”): What does each party have to do during the term of the agreement?  When is performance required?

3.  COMPENSATION (“Who gets what”): What is the compensation?  When must it be paid?

4.  TERM AND TERMINATION: When does the contract expire?  Can a party terminate for convenience?  If so, how many days’ notice must they give?  What are the consequences of terminating for convenience?

I can’t recommend that you take this approach without knowing more about your risk tolerance and the specifics of your transaction.  But I do recommend that you engage in an ongoing risk-reward (i.e. cost-benefit) dialogue with your counsel.  Corporate and transactional lawyers are, to a large degree, risk managers; part of their job is to help you make informed decisions re: when to use their services and when the more prudent course is to take some legal risk.

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