How to draft a contract: use correct words
When drafting contracts, using the correct word to describe your intent is key to ensure that the contract would be (if needed) interpreted in line with the intent upon drafting. While there can be some exceptions, it is generally best to always use the same words to express a given concept.
| Category | LEXR Standard | Example |
|---|---|---|
| Performance of an obligation | hereby + present form | LEXR hereby grants a license to… |
| Obligation | shall + infinitive | LEXR shall pay CHF 100 to ABC on 01.01.2025 |
| Prohibition (i.e., obligation of omission) | shall not + infinitive | LEXR shall not disclose confidential information. |
| Obligation imposed on a third party under the control of a party | shall cause to + obligation | The shareholders shall cause the Company to deliver a certificate of incorporation to ABC. |
| Duty to cooperate | has the duty to + duty | LEXR has the duty to provide ABC with the following information: … |
| Policy (statement of fact) | Simple present | The agreement terminates two years from the signing date. |
| Discretions (i.e., an option is given to a party) | may + infinitive | LEXR may increase the fees. |
| Representations of current state | represents and/or warrants + content | LEXR represents that it is duly incorporated. LEXR represents and warrants that the use of the services does not violate third-party IP. |
| Representations of future state | covenants + content | Buyer covenants that it will maintain a minimum of 30 full-time employees until 2027. |
| Intentions (i.e., used in the preamble) | wish/intend + content | In order to increase its market share, LEXR wishes to acquire ABC. ABC intends to enter into a deal with LEXR pertaining to its purchase. |
Keep in mind that the party to which an obligation is imposed must be part of the agreement, meaning that they have to agree to it (usually by signing it). The purpose of the preamble is to give the context to future readers, more generally, to the judges who will read the agreement if a dispute arises. Drafting it carefully means that the contract is more likely to be interpreted in accordance with what the parties intended.
Be consistent & precise
Consistency and precision are key when drafting a contract. This means:
- Use cross-references to make sure that your internal references are correct (e.g., “Section 8 is reserved”).
- Beware of typos.
- Consistently use defined terms. Defined terms are usually identified by using a capital letter (e.g., the Warranty). This ensures that a concept is defined, e.g., in art. 1, and will be used consistently in the whole contract. It basically works as a “code variable” and helps have a uniform contract interpretation.
- Cross-references: Once you’re done drafting, use “ctrl-A + F9” to update all cross-references. After that, use “ctrl-F + Error” to look for any reference that didn’t update.
- Defined terms: Always double-check your defined terms. If one defined term is not used after it has been defined, there’s no need to define it.
How to review a contract: the checklist
Reviewing a contract is the act of checking a contract that was not drafted by yourself or your lawyers and determining whether it can be accepted as such or if some amendments must be suggested. You should always carefully review an agreement before signing it, and seek help if you’re not 100% confident in understanding its content.
| Variable | Content |
|---|---|
| Type of contract | Qualifying a contract means putting it in a category corresponding to the law. It is relevant to know which mandatory rules apply. |
| Key obligations | A contract lists the obligations of the parties. Be aware that it might be done expressly (e.g., in a section called “Seller’s obligations”) or in various parts of the contracts (e.g., by using the verb “shall”, such as the Seller shall provide the car). |
| Liability | Is it limited? If yes, for which parties? And to what extent? Keep in mind that under Swiss law, liability cannot be entirely limited. |
| Indemnity | Indemnity clauses create an obligation for the indemnifying party to pay the other party’s costs if certain conditions are fulfilled. This is often the case if the representations and warranties are violated. For example, if a software developer warrants that the IP won’t violate third parties’ IP rights, and a third party sues the client, the software developer might have to pay the client’s attorney costs. |
| Non-compete | A non-compete clause prevents one or both parties from working with the other company’s competitors. Key elements to look for are the scope and the duration. |
| Non-solicitation | A non-solicitation clause prevents one party from working with the other party’s clients. Key elements to look for are the scope and the duration. |
| Term | The term is the duration of the contract. Check whether there’s a fixed term (in months/years or related to project completion) or if it is open-ended. |
| Termination | The termination clause states whether the parties can terminate before the term, and if yes, with which notice. A common clause is for the parties to be able to terminate for convenience with a given notice and at any time immediately for cause. |
| Representations & Warranties | Representations are “true statements” at a given point in time (e.g., the seller is authorized to sell). Warranties are future-facing (e.g., the software will not violate third-party IP). Review carefully — there’s often an indemnity clause linked to their violation. |
| Amendments | Some contracts add a unilateral right for a party to amend elements. This is often the case in terms and conditions and might even affect pricing. Ideally negotiate that amendments require the agreement of both parties. |
| Applicable law | The applicable law and jurisdiction plays a role in the interpretation of the agreement in the event of a dispute. |
How to negotiate a contract
Depending on your review, you might have to suggest significant changes. This will lead to a contract negotiation.
Key negotiation principles
When negotiating with corporate counterparties:
- Figure out what negotiation power the other party has.
- Decide how much time you want to spend on negotiations.
- Know the red lines of the counterparty and what they will not accept.
- Do not be afraid to set your own red lines, especially on:
- Wrong service descriptions (often, the other party uses standard templates, which leads to incorrect service descriptions).
- Intellectual property
- Liability, warranty, penalty
- SLA
- Negotiation limits: The person in charge of the negotiation must be aware of what can and cannot be accepted from a product and business perspective (e.g., extent of liability, SLA, discounts).
- Defined terms: The definitions must be carefully reviewed.
- Checklists: To ensure efficient contract review and negotiation, an internal process (e.g., checklist for each type of contract) is in place, and/or a legal partner is hired for the tasks.
FAQs
What should I look for when reviewing a contract?
Key variables: contract type, obligations (look for “shall”), liability limits, indemnity clauses, non-compete and non-solicitation scope, term, termination rights, representations and warranties, amendment rights, and applicable law.
What does “shall” vs. “may” mean in a contract?
“Shall” imposes a binding obligation. “May” grants discretion. Using the wrong word changes the legal meaning. “LEXR shall pay” = obligation; “LEXR may increase fees” = option.
What is the difference between a representation and a warranty?
A representation is a true statement about the current state (e.g., “duly incorporated”). A warranty is future-facing (e.g., “software won’t violate IP”). Both are often linked to indemnity clauses.
Should I push back on a contract from a bigger company?
Yes. Focus your red lines on wrong service descriptions, IP clauses, liability and warranty terms, SLA, and penalties. Even big clients expect negotiation on key terms.
How do I get this done?
We can support you in drafting, reviewing, and negotiating your contracts. Check out our contract review package and book a free call with us. For ongoing contract support, see our full service overview.