How to write a contract like a commercial lawyer: questions to ask and 3 drafting tips

In my opinion, the real task when writing a contract is to properly reflect the understanding of the parties. A contract that does not match what the two sides actually agreed is not doing its job, however polished it looks. So the way to write a contract like a commercial lawyer is to understand the situation and the requirements first, and only then start drafting. Here is how I approach it, followed by my top three drafting tips.

What to ask before writing a contract

The best thing you can do before writing a contract is to fully understand the situation and the client's requirements. If you are drafting for your own business, the client is you, and the questions are the same. Too many contracts are written by picking up a template and changing the names. That produces a document, but not one that reflects the deal.

The answers to these questions feed into and inform the drafting process. The reason for asking them is to properly understand the risks and the goals, so that the contract can protect the business and its future rather than just fill a page.

These are the questions I would ask:

• What is the goal of the agreement? What are you trying to achieve here? This tells you what is important to the client and therefore what the contract needs to get right.
• What risks do you anticipate? What risks do you expect to face when this agreement is performed, and what risks have you faced in the past?
• Do you expect any representations or warranties from your customers? Statements of fact the customer confirms are true when they sign.
• What is the termination process? How the contract ends and on what notice.
• How do you get paid? The payment mechanics and timing.

Of course there will be other things to ask. As the conversation flows, you need to ask follow-up questions to better understand the goals, the business and the business model. The rest of this article looks at the four areas above in more detail.

Limiting liability for known risks

The risks the business has faced, or is going to face in the future, are very important to know about. That is because the contract needs to protect the business as much as possible, and the way to do that is to draft clauses that either limit liability for those risks or disclaim against them.

In other words, past problems are the best guide to what the contract should defend against. If a particular issue has cost the business money before, there should be a clause in the new contract dealing with exactly that issue. The same goes for risks the business can see coming on this particular deal, even if they have not happened yet.

Warranties and authority to sign

It is worth asking whether the business expects its customers to provide any representations or warranties. Here is a very obvious example.

If the business enters into contracts with legal entities such as limited companies, you want a warranty in the contract, given by the customer, that the person signing has authority to sign the contract on behalf of that entity. The person signing will need to be an individual, a natural person, and ideally that person would be a director of the limited company.

Without that warranty, you are relying on an assumption that whoever put their name on the document was entitled to commit the company to it. With it, the customer has confirmed the point in the contract itself, and that confirmation can be relied on if the authority is ever questioned.

Termination clauses and notice periods

Next, you need to understand the termination process the business wants. The questions to work through are:

• Is the contract indefinite, with no fixed end date?
• Is it for a fixed term, and does that term renew automatically?
• How much notice needs to be given to terminate the contract?

A contract that renews automatically unless notice is given behaves very differently from one that simply expires, and the business needs to decide which it wants. The answers go straight into the termination clause. Getting this wrong is a common source of disputes, because one party thinks they can walk away on a month's notice and the other thinks they are locked in for a year.

Payment terms in a contract

Finally, how does the business get paid? For example:

• Does it set up a direct debit with the customer?
• Does it invoice in advance?
• How many days does the customer have to pay a specific invoice?

Again, these are practical questions about how the business already runs, and the contract should reflect that rather than impose a payment process nobody follows. If the business invoices in advance, the contract should say so. If customers are given a set number of days to pay, that number should be written in.

Tip: draft your own obligations narrowly

Now for my top three tips when writing a contract. The first concerns the obligations of your own side, say the supplier or the seller.

When listing those obligations, make them very specific. If the obligations are set out as a list, ideally make it an exhaustive list, and say so: if something is not within this list, it is not an obligation of the supplier. That way the other side cannot argue later that something extra was implied in what you promised to do. Your side knows exactly what it has to deliver, and nothing more.

Tip: draft the other side's obligations broadly

The second tip is the opposite. When listing the obligations of the customer, make that list a little less specific and a little more open-ended. Ideally, do not state that the list is exhaustive.

The effect is that your side's commitments are tightly defined, while the other side's commitments have room to cover things that come up during the relationship. It is a simple drafting asymmetry, but it makes a real difference when something goes wrong and each side is looking at the contract to see who was supposed to do what.

Tip: use bespoke contract definitions

The third tip is very important: include bespoke definitions for the key terms used in the contract.

The definitions you create for the contract do not need to match the Oxford dictionary or the Cambridge dictionary. For example, if your business sells goods, you do not need to define "goods" in the way a dictionary defines goods. You define it to mean exactly what your business supplies under this contract. Definitions written for the deal in front of you make the whole document clearer and remove arguments about what a word was meant to cover. Once a term is defined, every clause that uses it carries that precise meaning, which is far safer than leaving each reader to interpret it their own way.

Next steps

Before you draft anything, write down your answers to the five questions above: goal, risks, warranties, termination and payment. Then draft with your own obligations narrow, the other side's broad, and the key terms defined for your business. Writing a contract well matters, but it is just as important that the contract will actually be recognised as legally binding, so have a commercial solicitor check it before you rely on it.