Many companies use contract templates in their day-to-day operations. When drafted properly and tied to the appropriate use case, templates can be a tremendous time and money saving resource. As outside general counsel to companies of all sizes, the review of existing contract templates comes up quite often. Some clients are looking for an upgrade, while others may be seeking a quick, validating green light or help with a contract negotiation utilizing a template as the foundation. Unfortunately, many templates do not accomplish the intended purpose, or worse.
Typically, the most common pitfalls related to contract templates are related to questionable source, improper use, and noncompliance with applicable laws.
Template source
It is extremely important to know where the template originated from. Ideally, it was drafted by legal counsel (whether in-house or external) specifically for use by your company and for the situation in which you intend to use it. Alternatively, many contract templates that my clients use are literally copied from another company or most recently, prepared using AI, with little consideration given to the specific details of the parties or the transaction for which it is intended. Finally, it may have been created by an attorney that did not know or understand the goals or their business. These approaches may save money, but they fail to account for the many nuances of commercial contracts, and it is common to have to advise even some of the most sophisticated clients that their contract templates do not accomplish their expected outcomes.
Improper Use
Even templates drafted by competent counsel can still miss the mark if used improperly. For example, the template may fail to reflect a company’s current stage of growth, or it may be written for the sale of a specific product and unlikely to work for the sale of another. Likewise, a company’s pricing model, payment schedule, renewal strategy, use limitations, and so on need to be reflected in its agreements. No two companies are likely to have the exact same risk tolerance or leverage. And, customer expectations tend to vary not only by industry, but also by product offering. Ultimately, a company must be prepared to defend and negotiate the terms of the contract it puts forward, but certain language can make this very difficult or even impossible. For example, a company might be using what it believes is a templated customer agreement, but in reality, is merely an end-user Terms of Service agreement between the company and the individual users of its software. This common oversight can leave a company with little or no protection as it relates to their actual customer relationship.
Noncompliant Templates
Contract templates may overlook important changes in applicable laws. As a matter of process, templates should be reviewed at least annually to ensure compliance. A major real estate firm recently agreed to pay a $375,000 fine to the Securities and Exchange Commission (SEC) to settle allegations that its separation agreements prevented potential whistleblowers from reporting to the regulator. Essentially, the language in their separation agreement template, which was once considered to be fairly standard, no longer complied with the law.
When I discuss templated contracts with my clients, I like to use the following analogy: while it is true that most commercial airplanes are flown on autopilot, under the watchful eye of two highly competent and trained pilots who are fully engaged and ready to manually step in when needed, the pilot is always in control of the auto settings and responsible for ensuring the safe landing of the plane.
The same rationale should apply to the use of contract templates. A well-drafted template, when used properly and with appropriate attorney oversight, can help a business run efficiently. But, just as you would never get onto a flight without pilots in the cockpit, you should not expect to use templates without some level of attorney involvement.
I have helped many clients come up with effective solutions for their agreements and contracting processes that meet them where they are. With the above in mind, consider whether it is time for your company to revisit some or all of the templates being used across your business.
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Amy Duvanich provides outside general counsel services to companies in a variety of sectors and stages. She enjoys being a strategic partner who can help drive value through the role of legal, including by designing and implementing a solid contracting process to allow her clients to scale while managing risk. Amy’s prior experience in-house, including running the legal function at a SaaS unicorn, allows her to provide practical and efficient guidance to her clients. If you would like help with your contract templates, contract negotiations (with customers, partners, service providers, contractors, employees, etc.), or outside General Counsel services, please reach out to Amy Duvanich at aduvanich@scalefirm.com.
