Perhaps one of the most misunderstood aspects of drafting documents relating to corporate transactions is the function of the documents themselves. Many business owners believe two widely-held myths:(1) that the contracts signed in connection with a transaction are documents designed to be used in court if and when the deal goes sour, and (2) that in litigation over a contract, it is as least as likely that the jury or judge will find in their opponent’s favor as in the company’s favor.For these reasons, many business owners feel that the cost/benefit analysis when deciding on whether to hire and pay a lawyer to accurately document the transaction comes down clearly on the “costly” side.After all, the reasoning goes, there’s only a 50/50 shot that the company’s interpretation of the contract will prevail in court, so why pay lots of money to a lawyer up front for only a 50/50 shot of recovery later on?
However, corporate transactional documents are less road maps to litigation than they are memorializations of the transaction and guides to performance in the future. If a transactional document is drafted well, it will precisely delineate the responsibilities of each party going forward, and serve as a written reminder of exactly what the parties have agreed to do. This may seem self-evident, but it is surprising how often a poorly drafted or incomplete contract will actually result in confusion or bitter arguments over which party is responsible for what performance and when, all of which can lead to, rather than prevent, litigation.
Whether you conduct business with estimates, proofs, invoices, electronic orders, or purchase orders, you must identify the crucial terms for each transaction and make sure they are contained in a writing signed by the customer. These terms include:
- What each party is supposed to do (or not do)
- When the deadline is for doing it
- What happens if one party doesn’t do what it is supposed to do
- How much you are to be paid
- When you are to be paid
- What happens if you are not paid (e.g., are there interest charges or reimbursement for attorneys’ fees, etc.)
- Who is responsible for payment
In many cases, businesses would do well to develop a “Master Account Agreement” which contains the so-called boilerplate terms which are common to each transaction. These terms would include such things as finance charges, reimbursement for costs of collection, limitations on your company’s liability in case something goes wrong, and where suit must be filed, among other provisions unique to your business. Once the customer signs this Master Account Agreement, each subsequent transaction can be documented by a much more simple purchase order, estimate, or even invoice containing information more specific to that particular matter. Well coordinated documentation will confirm that each transaction is governed by the terms and conditions set forth in the Master Account Agreement.
The decision to examine and reinvent the way a company does business is one of the most important decisions an owner can make. With very few exceptions, the expenditure of some upfront time and money in this effort will save tens, if not hundreds, of thousands of dollars in the years to come.
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