Legal contracts are the lifeblood of a business. Every purchase, every sale, every deal has written contracts behind it, whether express or implicit. A company, especially as it grows, needs to have a stable of contract templates on hand for the decisions it makes on a daily basis.
The most common contracts used in every industry are:
- Non-Disclosure Agreements (NDAs)
- Purchase agreement
- Master Services Agreements or Master Agreements (MSAs)
- Freelance contracts
- Work Orders
- Prenuptial agreements
- Confidentiality agreements
- Change Orders
- Service contract
- Rental agreement
- Separation agreement
- Licensing Agreements and Letter Agreements or Memorandums of Understanding
- Sales agreements
- Promissory notes (in some cases)
- Sublease agreements
- Partnership agreement
This article is the first in a series that will go over types of contracts your company should consider for self-service completion that will speed time to business. We will follow up with articles on individual contracts and best practices of terms, conditions, and provisions to include.
1. Non-Disclosure Agreement (NDA)
A non-disclosure agreement is often the first agreement entered into between two parties at the outset of a relationship. It defines what information will be protected and kept secret by each party (payment terms etc), the length of those obligations, and the nature of those obligations. Parties will enter into NDAs to explore possible long-lasting transactions, to explore possible acquisition deals, or simply to begin any negotiation.
NDAs are commonly used legal documents. Many possible transactions die before reaching a definitive stage but still involve an executed NDA. Yet what they have in frequency, NDAs lack in enforceability. NDAs rarely involve high-stakes, as they are rarely relied upon by parties for breach of contract claims, and even fewer are enforced by courts. Instead they are used by companies as a sign of goodwill before either company has committed considerable resources to the relationship.
However, NDAs can contain provisions that raise significant risks. For example, an NDA can contain a fully enforceable non-solicit of employees before a company is ready to make such a commitment. Or, an opposing party’s NDA can cover too little or too much information as confidential. Perhaps most importantly, many NDAs are drafted as one-sided, only protecting the confidential information of the opposing party. These are often drafted as more favorable than absolutely necessary. Having a two-sided NDA template on hand can immediately create a more favorable balance between both parties involved at the beginning of their relationship.
2. Master Services Agreement (MSA)
A master agreement is a definitive agreement governing the business relationship between two parties. It contains all the terms pertaining to the provision of services between one party to the other, including term, remedy, intellectual property, warranties and representations, indemnity, liability limits, service level agreements, and others.
MSAs are used when two parties are past the preliminary stages of a relationship. In other words, they have moved past the stage when one party buys isolated instances of services from the others. Instead, they plan to continually buy services from one another for either a defined period or indefinitely.
MSAs generally replace a party’s standard purchase order terms or website terms of service with a set of terms more specific to the transactions entered into between the two parties and more balanced between the two parties involved. Purchase order terms or website terms of service are often favored towards one-side, and the lack of clarity on which side terms govern can result in costly litigation just to determine which terms should be used.
3. Work Order/Change Order
Work orders and change orders are contracts representing a single transaction between parties. A work order is the initial order form for a specific set of goods or services. A change order changes the scope of an existing transaction, adding more goods or services, which may fundamentally differ from those originally ordered.
Work orders typically do not contain much legalese beyond a reference to the governing terms of the transaction. However, if a specific transaction requires different terms from the governing terms originating in the MSA, work orders or change orders can contain new legal contract terms. In addition, work orders and change orders will contain basic information like the parties entering into the transaction, the term of the agreement, and the consideration offered by each party in the deal. Without a standard work order or change order form, it will be difficult for a company to scale. Customers will expect such business contracts, especially as deals grow bigger and more complicated.
The biggest risk associated with not having a work order or change order template is the risk of having the sale be governed by the other party’s standard terms. For example, if the other party issues a purchase order containing its standard terms for every purchase, these would likely become the governing terms without a work order or change order referencing a different set of governing terms. Purchase order terms and conditions are often ill-suited for the services provided and are constructed to be most favorable to the opposing party, absolving them of liability in almost any situation and maximizing the provider’s liability.
4. Licensing Agreement
In some ways, a licensing agreement is similar to a master services agreement. It contains the governing terms for a specific set of transactions between parties (usually between buyer and seller). However, unlike a services agreement, licensing agreements deal with the seller giving the buyer permission to use certain forms of property for its own gain – e.g., a logo, proprietary software, or other intellectual property. Licensing agreements can be tailored for a specific transaction, or they can be master licensing agreements meant to govern all intellectual property use between the parties.
Licensing agreements need to cover important topics like what property can be used by the other party, for how long that property may be used, permissible uses of the property, where the property may be used, and similar terms governing derivative works made through use of the intellectual property. These topics should be covered in as much detail as possible.
Intellectual property is often a business’s most valuable asset. Its use or misuse can drain a company of significant resources. A company should have its own licensing agreement templates because only they can grant the specific type of license best suited for their intellectual property.
5. Letter Agreement or Memorandum of Understanding (MOU)
Letter agreements, sometimes called memorandum of understandings, are not true contracts in the sense of the word. Rather, they are “handshake” agreements, outlining the terms that may or may not become the eventual binding agreement. They outline the parties’ vision of the eventual deal or relationship and may contain goals for the eventual deal, like a completion date. The key characteristic of letter agreements is that most if not all of the terms contained are not meant to be binding.
However, therein lies the greatest risk associated with letter agreements. Letter agreements, without careful wording, could be construed by a court to be binding. For example, if a party fails to clarify in the agreement that the terms are not meant to be binding, and by their words or actions indicate a willingness to abide by the terms of the agreement, a court may rule that the agreement is binding, and any breach thereof would result in liability.
In addition, many letter agreements include a mix of binding terms and non-binding terms. For example, many letter agreements have sections on confidentiality that are meant to be binding. Having a letter agreement template on hand can ensure that a party does not enter into any unwanted agreements while protecting the party’s important interests.
For more information on contracts or contract management software, reach out to a professional for more information. If you enjoyed reading this article then take a look at “Factors driving legal ops during the pandemic” or “Drafting advice for commercial lease agreements”.