Article Corporate Counsel

3 Questions to Ask When Drafting Any Contract

This is part of a series of articles on transactional contracts issues by Prof. Michael L. Bloom and students in the Transactional Lab & Clinic at the University of Michigan Law School.

When drafting an agreement, there are a few fundamental questions that are easy to forget, but vital to the diligent attorney's process. These questions all are variations on knowing your client: What are your client's goals for the negotiation process? How does your client wish to structure the deal? Who will be managing and otherwise using the contract after signing?

1. What are the client's business purpose and objectives?

Part of understanding your client and the business purpose driving a particular contract means understanding: Does your client want maximum coverage regardless of the number of rounds of negotiation that are necessary? Or, on the other end, does your client want to minimize transaction costs and get whatever level of protection is possible in a time-boxed/limited-round negotiation? Understanding the client's desired posture for drafting and negotiating should drive drafting decisions the attorney makes-and should help the attorney to earn credibility as a partner in the deal process (and to avoid a reputation as a "deal killer").

The client's leverage is likely a key consideration undergirding the answers to these questions. A company selling a unique product to a variety of eager buyers is probably able to put contract terms to its buyers with little negotiation. A company selling a new product to a famous buyer-with reputational benefits expected to result in future sales with future customers-is likely less able (and motivated) to draft or negotiate aggressively (except perhaps with respect to publicity terms). Understanding the client's goals and options, along with the counterparty's, will help the attorney to understand the power dynamic between the parties and to focus negotiation capital on the appropriate calibration of deal terms.

2. What are the structure and operations of the deal?

Before a lawyer may craft a document that properly contemplates the business deal, facilitates the realization of the benefits of the deal and allocates properly the risks of the deal, the lawyer must understand the business deal-including the process and operations of the exchange that is central to the deal. For example:

· Business acquisitions often occur (i.e., close) at a time and place after the contract is signed only if certain conditions (e.g., obtaining financing) are satisfied.

· Goods and services often are purchased and sold through a series of orders each executed after, and under, a master agreement. There often will be a process of inspection, testing and acceptance operating as a prelude to the parties' other rights and obligations under the contract (e.g., payment, warranties) with respect to accepted goods or services.

· Buildings often are constructed under contracts with several phases and milestones, the satisfaction of each triggering payment and progression to the next phase and milestone.

Understanding the process and logistics of the contemplated deal enables the lawyer to build a contract that operates as the scaffolding for that process, explaining each party's role and obligations in facilitating that process, providing when other aspects of the contract come to be operative at which stages of that process (e.g., perhaps a buyer's obligation to pay follows the satisfaction of a certain phase of the process), and anticipating and allocating risks adherent to each stage of the process (e.g., who bears the risk of damage to goods that occurs during delivery, before inspection).

Too often contracts contain appendages and artifacts from other contracts that perhaps served a useful purpose for a prior deal but that are not "fit for purpose" for the specific deal at hand. For example, in an asset purchase agreement for a simultaneous sign-and-close acquisition, covenants for an interim period between signing and closing aren't useful for a deal that does not have a period between signing and closing.

3. Who will likely use the document going forward?

It is important for the drafter to consider who will be using the document. It's often the case that the users of the document will include people who were not involved in the drafting and the negotiation of the document. Writing for this audience (and all other potentially relevant audiences) in mind should yield a more useful product. Clear drafting that will be understandable and usable for a document's future users (e.g., contract managers, juries) should help minimize time later spent debating the meaning of language and managing relationships in the context of potential disputes or, worse yet, litigation. Of course, the values served by any particular drafting edits should be weighed against any costs of seeking those changes in the throes of a negotiation.