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Contract Drafting

Disclaimer: This skill provides general guidance on commercial contract structure and drafting best practices. It is NOT legal advice. Always have qualified legal counsel review contracts before signing or sending them to counterparties.

Commercial contracts are the binding agreements that govern business relationships. Good contracts prevent disputes by making expectations, obligations, and risk allocation explicit. This skill covers the structure, key clauses, and drafting process for the most common commercial agreements - NDAs, MSAs, SaaS subscriptions, licensing agreements, and data processing addendums - and the process of reviewing and redlining contracts received from counterparties.

When to use this skill

Trigger this skill when the user:

• Needs to draft a Non-Disclosure Agreement (NDA) or Confidentiality Agreement
• Wants to create a Master Services Agreement (MSA) or Statement of Work (SOW)
• Is drafting SaaS subscription terms or an End User License Agreement (EULA)
• Needs to review, annotate, or redline a contract received from another party
• Is creating a software or content licensing agreement
• Needs a Data Processing Agreement (DPA) for GDPR or other privacy compliance
• Wants to understand a specific contract clause or term
• Is managing contract renewals, amendments, or terminations

Do NOT trigger this skill for:

• Tax, employment law, or regulatory compliance advice - those require specialist counsel
• Litigation strategy or dispute resolution proceedings in progress

Key principles

1. Clarity over legalese - Plain language reduces disputes. Every obligation, right, and restriction should be understandable on first reading. If a clause requires a lawyer to decode, rewrite it. Legalese that obscures meaning creates ambiguity that parties exploit in disputes.

2. Define all terms - Every capitalized term must appear in a Definitions section or be defined on first use. Undefined terms invite competing interpretations. "Confidential Information," "Intellectual Property," "Affiliate," and "Services" are the most commonly contested undefined terms.

3. Risk allocation must be explicit - Contracts exist to allocate risk. Who bears the cost of a data breach? Who indemnifies whom for IP infringement claims? What is the liability cap? If risk allocation is implicit or absent, courts default to interpretations that may not match what either party intended.

4. Standard terms reduce negotiation - Using market-standard positions (e.g., mutual NDA, uncapped IP indemnity, 12-month liability cap for SaaS) speeds up deals. Know which clauses are standard so you can focus negotiation energy on the genuinely non-standard asks.

5. Version control everything - Every draft should be dated and versioned. Track changes between drafts. Maintain a redline history. In a dispute, the negotiation history can be used to interpret ambiguous terms (the "course of dealing" doctrine).

Core concepts

Contract structure

Every commercial contract shares a common skeleton:

• Preamble - Parties, date, and recitals (background/context)
• Definitions - Capitalized terms and their meanings
• Operative clauses - The actual obligations and rights (services, payment, license grant)
• Representations and warranties - Statements of fact each party makes
• Indemnification - Who covers costs if a third party makes a claim
• Limitation of liability - Caps on damages each party can recover
• Confidentiality - What stays private and for how long
• Term and termination - Duration, renewal, and grounds to exit early
• General provisions (boilerplate) - Governing law, dispute resolution, notices, assignment, entire agreement, severability, force majeure

Key clauses

Indemnification - Party A agrees to defend and pay costs if Party B is sued by a third party because of Party A's breach or IP. Usually mutual for IP, one-sided for gross negligence.

Limitation of liability - Caps total recovery at a multiple of fees paid (12 months is standard for SaaS). Always carve out: death/personal injury, willful misconduct, confidentiality breaches, and IP indemnity from the cap.

Representations and warranties - "We represent that our software does not infringe third-party IP." Breach of a warranty triggers indemnification or termination rights.

Governing law and jurisdiction - Which state/country's law applies and where disputes are resolved. Avoid agreeing to the other party's home jurisdiction.

Assignment - Whether either party can transfer the contract to a third party (e.g., in a merger or acquisition). Standard position: neither party may assign without consent, except to an acquirer of all or substantially all assets.

Risk allocation

Amendment process

All changes to a signed contract must be in writing, signed by both parties, and reference the original agreement. Verbal amendments are unenforceable in most jurisdictions. Use a formal Amendment or Change Order template with a sequential number (Amendment No. 1, Amendment No. 2) to maintain a clear audit trail.

Common tasks

Draft a mutual NDA

A mutual NDA protects confidential information exchanged in both directions. Key sections and what belongs in each:

1. Definition of Confidential Information
   - Broad enough to cover all sensitive info
   - Exclude: public domain, independently developed, received from third party,
     required to be disclosed by law (with notice obligation)

2. Obligations of receiving party
   - Use only for the Permitted Purpose
   - Protect with at least the same care as own confidential info (not less than
     reasonable care)
   - Share only with employees/contractors on need-to-know basis
   - Ensure recipients are bound by equivalent obligations

3. Term
   - Duration of disclosure period (e.g., 2 years)
   - Survival of confidentiality obligations (typically 3-5 years after expiry)

4. Return / destruction
   - Upon request or expiry, return or certify destruction of materials

5. Remedies
   - Acknowledge that breach causes irreparable harm - injunctive relief available
     without bond requirement

Mutual NDA checklist:

• Both parties named as both Disclosing Party and Receiving Party
• "Confidential Information" defined broadly but with standard exclusions
• Permitted Purpose scoped narrowly (e.g., "evaluating a potential business relationship")
• Residuals clause reviewed - common vendor ask, weakens protection significantly
• Governing law and jurisdiction specified
• Dispute resolution (arbitration vs. litigation) agreed

Draft an MSA - key sections

A Master Services Agreement governs the overall relationship; Statements of Work (SOWs) or Order Forms attach to it for specific engagements.

MSA core sections:

1. Services - reference to SOWs; change order process
2. Fees and payment - invoicing cadence, payment terms (Net 30 is standard), late fees
3. Intellectual property ownership - who owns work product (customer vs. vendor)
4. License grant - what license vendor grants to deliverables if customer doesn't own
5. Confidentiality - reciprocal, typically survives 3 years post-termination
6. Representations and warranties - authority to enter, non-infringement, compliance
7. Indemnification - IP indemnity (vendor), misuse indemnity (