What’s the most important part of a contract?

contract

Disclaimer: I’m not a lawyer and I never even played one on TV. But I did attend Harvard Law School briefly, albeit in utero, as my mother was pregnant with me during her final year there.

What I know about contracts I first learned at Software Arts, when as product manager for VisiCalc, the first electronic spreadsheet, I was given the task of taking all the contracts the company had signed and reverse engineering them into English. Meaning determining what our obligations were, what the obligations of the other company, like Digital Equipment Corporation (DEC) were, and what were the key actionable elements of the contract.

In the years since I spent many hours with lawyers drafting and reviewing contracts. I only wish my hourly rate equaled their’s!

So what’s the most important part of any contract? Is it the signature page? No. The terms and conditions? No. It’s the termination section. Contracts are like insurance policies. You only take them out of the filing cabinet when something goes wrong. Otherwise they are ignored. But many times when things do go wrong you want out of that contract.

There are three major issues in terminating a contract:

  1. Can you terminate without cause? If not, what are the causes that trigger termination?
  2. What are your ongoing obligations AFTER the contract terminates?
  3. What are the other party’s ongoing obligations AFTER the contract terminates?

So when you sit down with your lawyer to either draft a contract or review a contract from another party, make sure that the termination section is clear and actionable and you can live with the repercussions of termination.

I hope you won’t have to terminate a contract – it’s usually a painful process – but think of a contract as a pre-nup, you need to protect your company in the event of a worse case scenario, divorcing your business partner.

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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