Joe Rando
As a young man, my father built an extremely successful and valuable business. He then lost it due solely to poor legal counsel. From then on, he sought out the best lawyers he could find. He convinced me early in my career that I should do the same so I’ve had the good fortune of working with some amazing, top-tier attorneys over the years.
It’s really interesting how, when I work on a contract with a top-tier attorney, I see a very different approach than what I see from average attorneys.
For solopreneurs, it isn’t always possible or cost-effective to seek out this type of top-tier legal advice, so I want to share with you what I have learned from them. I believe that this information can be helpful when working with independent contractors, companies, or virtual assistants, as well as for drafting up your own contract when signing on with a new client.
As solopreneurs, whenever we decide to work with someone in exchange for money (or something else of value) we know that it’s important to have a contract in place. It’s obvious that both parties should agree on what is being done, when it’s being delivered, and how much is being paid, and when.
When we need a contract, it’s pretty tempting to forgo the legal rigamarole and just draft something up, especially when you want to win business quickly. After all, you should be able to agree on the basics, so why spend the money?
But from my experience working with great lawyers, they think about contracts differently than the rest of us do, and here’s what I’ve taken away from these interactions. I know from experience; the knowledge below can be lifesaving.
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The Basics of Good Contracts
Before we dive into what I’ve learned from top attorneys, let’s cover the basics of any good contract:
- Get the legal names of the entities right and specify where they are located.
- State the relationship of the parties clearly, that is, define one party as an “independent contractor” or “consultant” so that the IRS doesn’t decide that they are an employee, and you end up owing back taxes.
- Define how payments will work. Is it fixed price or hourly? If it pay-as-you-go or payment due upon completion, etc.
- Define who’s doing what? What are the responsibilities of each party. Be as specific as possible.
- Define what the final work product is.
- Define who’s supplying what? If some materials are required to do the work, who is supplying them? Who is paying for them?
- When does the contract end or when can it be terminated and by whom?
- Choose a state whose laws govern the contract. This does not need to be a state that either party is located in. I tend to go with Delaware as most attorneys are familiar with their laws. However, if both parties are in the same state then it can be simpler to base it there.
This all makes sense, right? After all, you need to specify what should happen and how it should happen.
I’ve learned that top-tier lawyers think beyond this. They have an approach that makes them worth many times the hourly rate of average attorneys. And the concept is relatively simple, though it can sometimes be difficult to implement.
Solopreneur Contract Secrets - What Great Attorneys Know
Top-tier lawyers know that when things go smoothly, the contract is almost irrelevant and that the most important function of any agreement is to deal with situations gone bad. So, they take this thinking to the extreme. They identify as many unhappy scenarios as possible and clearly define what happens if one comes to pass. And they clearly lay out the processes for dealing with it as well as the liability that can arise. Their brains naturally look for every way things could go wrong and then they try to protect you from it in the contract.
The best attorneys constantly ask, “What happens if something goes wrong?”
Some of these are obvious like:
- What if the contractor is not paid?
- What if the contractor doesn’t deliver the product?
- What if the product is not to spec?
The great attorneys are experts at finding and defining the less obvious ones and then figuring out ways to protect clients from them.
Solopreneur Contract Secrets - Dealing with Disputes
When things go badly, we say that one of the parties is in default under the contract. Let’s look at some of the ways that great attorneys deal with these defaults.
What if the parties can’t agree that there even is a default?
Let’s say you contract me to create a marketing plan for your business. When you receive the plan, you feel it is insufficient and that I did not do what I promised, so I’m in default. I disagree and say this is a standard marketing plan and anyone who knows anything would agree and so I am not in default. We don’t agree. What happens now?
Arbitration is a good idea here. The contract defines that when the parties can’t agree, the dispute goes to an arbitrator, and they determine who is right. Then the loser pays for the cost of arbitration. The nice thing about this is that the party that feels less confident in their position will often fold to avoid having to pay for the arbitration while being forced to hold up their end of the bargain.
Moral of the story, be sure to include a section that covers this within your contract.
Indemnification
What if the actions of one party cause the other party to be sued? Imagine you hire a ghostwriter to write a book for you. But instead of creating original material, they plagiarize the material from another book, the publisher of which then sues you for copyright infringement.
You might say, “Hey, I didn’t do it. It was Bob the ghostwriter that stole your stuff.”
But the publisher sees the book with their words and your name as author. They are going to sue you and you will likely lose and must pay them damages… unless the ghostwriter indemnifies you for the loss in the contract. When one party indemnifies the other, it means that they will compensate them for losses related to certain incidents. If the ghostwriter indemnifies you in the contract for lawsuits related to copyright violations, then you can recover any damages from them.
Indemnification clauses can address a lot of the “What happens if things go wrong,” aspects of the contract. The idea is that the party at fault is responsible to pay.
One thing to note is that you will often see a one-way indemnification. Good lawyers understand the need for this, but they usually only put it in for the benefit of their client. I NEVER sign a one-way indemnification and will insist it be made mutual. Depending on the nature of the transaction, there may be some need to craft the language for each party to be different, but in my opinion, they should be fair and equal in the risk and protection afforded to each party.
Show Me the Money
Great attorneys know that it doesn’t matter what the contract says if the other party can’t make good on it. Let’s say that the ghostwriter’s plagiarism ends up costing me $500,000 in damages. But I have an indemnification from the ghostwriter. I’m all set, right?
Well sure… if the ghostwriter has half a million in the bank. If he doesn’t, I may end up eating some or all of the damages. This is where insurance comes in. By requiring that the ghostwriter have insurance up to a certain amount and then having them add me as an additionally insured, I can feel confident that if the worst case happens, I’ll be covered. Be sure to get copies of their certificate of insurance and require the insurance company to notify you if the insurance is going to be canceled.
The Real World
When you create a contract, you need to consider some things before you go crazy with the approaches I’m describing here. Before you consider how much effort you are going to put into a contract ask yourself:
- What are the risks to each party?
- How badly are either of you going to be harmed if things go badly?
Imagine that I have a contract with you to supply parts to me and if you don’t deliver, I can’t produce my product. Not producing my product will put me in default with my customers, who will then sue me into bankruptcy. In this case, then you really need to get the agreement right. A great attorney is in order or you are putting your business at risk.
But let’s say you’re hiring me to create subtitles for your website videos. This is important but let’s say I don’t do it, or I do it but misspell a lot of words. You’re not happy but it’s not the end of the world. You probably aren’t paying me a lot of money for this so you’re not going to hire an attorney and I’m probably not interested in negotiating a complex contract for the few bucks I stand to earn. Here the risks are low and not worth going crazy on indemnifications and insurance requirements. But I still strongly suggest a solid, basic contract that spells out what is expected of each party.
Final Thoughts
So, when the stakes are high, our list above should continue with:
- A definition of default for both parties
- Agreement to arbitration (lawsuits are expensive)
- Indemnification agreements (mutual in my opinion)
- Insurance requirements
Simply put, contracts have a few purposes in business. We all know the first: to ensure that there is a “meeting of the minds,” that is, that both parties agree on what is expected of them. But the other is to deal with the circumstances of when things go wrong. Great lawyers understand this. You should too.
Disclaimer: I am not a lawyer and this should not be construed as legal advice. Every situation is different and you should consult an attorney for your specific contract issues.