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What are the best ways to reduce risk when drafting a contract?

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When you negotiate with a vendor, you want to make sure that the contract you sign protects your interests and minimizes your exposure to potential disputes, liabilities, and losses. However, drafting a contract is not a simple task, and it involves many legal and technical aspects that require careful attention and expertise. In this article, we will share some of the best ways to reduce risk when drafting a contract with a vendor, based on our experience and industry best practices.

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Carmela D'Angelo

Strategy Consulting- Partnerships
Arindam Mukherjee

Group Lead @ iMerit Technology | Master's in Marketing, Data Integrity, KPIs

1 Understand the scope and objectives

The first step to draft a contract is to clearly define the scope and objectives of the project or service that you are hiring the vendor for. You need to specify what deliverables, milestones, timelines, quality standards, and performance indicators you expect from the vendor, and how you will measure and verify them. You also need to clarify the roles and responsibilities of both parties, and how you will communicate and collaborate throughout the project. By doing this, you can avoid misunderstandings, scope creep, and unrealistic expectations that could lead to conflicts and disputes later on.

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Carmela D'Angelo

Strategy Consulting- Partnerships
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Ensure you plan for changes, variations, changes of direction, acts of god, things that will inevitably happen the more lengthy and complex a contract is. While SLAs in principle, and in the past, could be managed with the carrot/stick method, reality today is different. Break down the project and contract into smaller chunks, build in a system for changes, tweaks, small and simple reviews, and go all out on vendor governance. Elevate contracts to becoming a relationship matter, where solutions and purpose are shared, where people feel valued and accountable for finding solutions. Risks can be anticipated and mitigated when there's a will to think and bring about innovation.

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Arindam Mukherjee

Group Lead @ iMerit Technology | Master's in Marketing, Data Integrity, KPIs
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In my experience with this industry, we should follow the below: - Understand the local laws with whom you are signing the contract. It will be the best option to hire a local lawyer who knows the law of the land in the best way. It will tighten your compliance part. - Arbitration or mediation clause has to be included per se Dispute mechanism has to be in place. - Remember that the specific details of the contract will depend on your organization's needs and the nature of the vendor relationship. It's important to work closely with legal experts and relevant stakeholders to draft a contract that minimizes risk effectively.

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Elizabeth Addison

Senior Commercial Counsel | Process and Compliance
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What I don't see discussed here that you want to get a handle on early is what are the most important risks that you want to address. Is it budget? Compliance? Schedule over-runs? Information security? Defining the areas you're most concerned about will help your attorney focus on issues more strategically when it's time to draft, redline, and negotiate.

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Mayank Singh

Deputy Manager at EXL (Global Procurement)
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Be clear with the expectations, project scope, objectives, deliverables, timelines, quality standards. It's equally important to outline roles, responsibilities, and communication protocols to prevent potential conflicts and ensure a successful partnership with the vendor and their contracts.

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2 Review the terms and conditions

The second step to draft a contract is to review the terms and conditions that the vendor proposes or agrees to. You need to make sure that they are fair, reasonable, and consistent with your goals and requirements. You also need to look out for any clauses that could expose you to unnecessary risks, such as indemnification, limitation of liability, warranties, dispute resolution, and termination. You should negotiate with the vendor to modify or remove any terms that you find unacceptable or unfavorable, and seek legal advice if you are unsure about the implications or consequences of any provision.

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Elizabeth Addison

Senior Commercial Counsel | Process and Compliance
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Avoid the trap of assuming the lawyer is the only person who needs to read the contract. The lawyer is great on legal risk, but the lawyer is responsible for contracts across all business units in your org and cannot possibly keep up with everyone's business goals and objectives. Best practice is to read the contract yourself before handing it to the lawyer and already have comments for them on what you want changed (like, take out the auto-renew and we need something for disputing invoices), and where you have questions (like, do we have any recourse if they keep missing their SLA?).

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3 Use clear and precise language

The third step to draft a contract is to use clear and precise language that leaves no room for ambiguity or interpretation. You need to avoid vague, generic, or subjective terms that could create confusion or disagreement later on. You also need to use consistent and accurate terminology that reflects the nature and context of the project or service. You should avoid jargon, acronyms, or abbreviations that could be misunderstood or misinterpreted by the other party. You should also use plain and simple language that is easy to read and understand by both parties.

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Mayank Singh

Deputy Manager at EXL (Global Procurement)
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This is a crucial aspect of any contract drafting. Employing unambiguous and precise language is paramount. Steer clear of vague, subjective terms that might lead to misunderstandings down the line. Ensure consistent and accurate terminology to accurately represent the project's nature. Avoid jargon, acronyms, or abbreviations to prevent potential misinterpretations. Opt for straightforward language that's easily comprehensible by all parties involved. This approach lays a solid foundation for a contract that stands on clear terms and mutual understanding.

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4 Incorporate relevant documents and references

The fourth step to draft a contract is to incorporate relevant documents and references that support and supplement the main agreement. You need to attach any appendices, schedules, exhibits, or annexes that contain important details, specifications, or information that are not included in the main body of the contract. You also need to reference any policies, guidelines, standards, or regulations that apply to the project or service, and ensure that they are aligned and compatible with the contract. You should make sure that all documents and references are properly labeled, numbered, and dated, and that they are signed by both parties.

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Elizabeth Addison

Senior Commercial Counsel | Process and Compliance
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Other than DPAs, most contract exhibits and attachments are not "signed by both parties". They are attachments, so they are part of the contract and usually the contract is only signed in one place. Also, the attachments and schedules, etc., should have been attached prior to reviewing all of the terms and conditions (2 steps above), otherwise you're only reading part of the contract.

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5 Review and revise the draft

The fifth step to draft a contract is to review and revise the draft before finalizing and signing it. You need to check for any errors, inconsistencies, or gaps that could affect the validity or enforceability of the contract. You also need to verify that the contract reflects the true and complete intention and agreement of both parties, and that it covers all the essential aspects and contingencies of the project or service. You should solicit feedback and input from the relevant stakeholders, such as your team, your manager, your legal counsel, or your external consultant, and incorporate any changes or suggestions that improve the quality and clarity of the contract.

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6 Keep a copy and monitor the execution

The sixth and final step to draft a contract is to keep a copy and monitor the execution of the contract. You need to store and secure the original and copies of the contract in a safe and accessible place, and keep track of any amendments, modifications, or extensions that may occur during the project or service. You also need to monitor the performance and compliance of the vendor, and report and resolve any issues, problems, or disputes that may arise. You should maintain regular and open communication with the vendor, and document and acknowledge any changes or deviations from the contract.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best ways to reduce risk when drafting a contract?

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1 Understand the scope and objectives

2 Review the terms and conditions

3 Use clear and precise language

4 Incorporate relevant documents and references

5 Review and revise the draft

6 Keep a copy and monitor the execution

7 Here’s what else to consider

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