Paul A. Swegle - Contract Drafting and Negotiation for Entrepreneurs and Business Professionals

This book is dedicated to my wife Serena and to my children Matthew and Stephanie.

Thank you Serena, Kurt Zumdieck, Jim Swegle and Johanna Fuhr for the unique perspectives each of you provided in reviewing and editing my manuscript.

Contents

Chapter One
CONTRACT LAW

Chapter Two
COMMON MISTAKES

Chapter Three
NEGOTIATION

Chapter Four
DRAFTING

Chapter Five
COMMON CONTRACT TERMS

Chapter Six
IMPLEMENTATION

Chapter Seven
AMENDMENTS AND ADDENDUMS

Chapter Eight
DISPUTE RESOLUTION

Introduction

The Unforgiving Law of Contracts

In 1990, a massive floating bridge between Seattle and Mercer Island used by thousands of cars every day sank in a storm while being refurbished. The states agreement with the contractor was apparently unclear on who should pay for the sinking. After years of litigation, the contractors insurers agreed to pay $20 million without admitting responsibility.

In 2013, Bertha, the largest and most expensive drill ever built, overheated and ground to a halt under Seattle. Again it was not clear who should pay the resulting repair and delay costs, estimated at one point to be $480 million.

In 2006, the Canadian Radio-television Telecommunications Commission weighed in on a very expensive punctuation dispute between Rogers Cable Communications and Aliant Telecom. The CRTC ruled that Aliant could terminate an agreement between the two parties much sooner than Rogers believed was permitted under the following passage:

[the Structure Support Agreement] shall... continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.

Rogers had written the above passage intending that Aliant would not be able to terminate the agreement until after the initial five year term.

In its ruling, the CRTC found that placement of the comma before the phrase unless and until terminated by one year notice in writing by either party permitted termination of the SSA at any time, without cause, upon one year's written notice.

The CRTCs ruling allowed Aliant to terminate years earlier than Rogers had expected, apparently costing Rogers $2.4 million, all because of an errant comma.

Obviously, even professional contract negotiators and drafters miss important issues. Missteps like these happen both in government and in business. In business, cost constraints can limit access to competent legal counsel. Sometimes in high pressure business environments there is also pressure to act quickly and apologize later.

But commercial agreements are unforgiving. No apology will raise a sunken bridge, unwind an agreement that unexpectedly transfers your intellectual property, or otherwise re-write a deal that calls for the wrong goods or services or that spawns legal or regulatory liabilities.

Hidden Hazards

Unfortunately, many contract drafting traps are invisible to non-lawyers. It takes much less skill to critique what is in an agreement than it does to identify and correct what is not things like remedies for breach, rights of termination, intellectual property protections, or correct descriptions of what the other party is supposed to do.

As a result, entrepreneurs and other business persons can overestimate their ability to competently negotiate commercial agreements without legal assistance. Sometimes this leads to painful surprises.

Leveraging the Business Mindset

On the other hand, entrepreneurs and other business persons with strong contract drafting and negotiation skills can be the most valuable individuals at the table. They often understand the economics and business logic of commercial relationships better than attorneys, and they usually take a more pragmatic and creative approach to finding the compromises needed to get deals done. And unlike counsel, who bring professional malpractice concerns to any project, sophisticated and well-informed business persons can be better positioned to weigh calculated risks regarding novel and complex commercial relationships.

Perspective

Most commercial agreements involve one party purchasing some type of good or service from another party, or a combination of goods and services. Thus, one party is often considered a buyer, customer or client, and the other a seller, vendor, provider or supplier. For simplicity, well think in terms of buyers and sellers.

Many of the topics in this book are discussed largely from the perspective of the buyer. One reason for this is brevity. There are several others though.

• First, sellers often have standard contracts that they routinely present to buyers. In many cases, these standard contracts were drafted by the sellers lawyer months or years earlier and were loaded up with terms, both relevant and irrelevant, that favor the seller. Consequently, it is often the buyer who is faced with reviewing a new and potentially confusing agreement.
• Second, the buyer is often at an informational disadvantage. This is because sellers generally know more than their buyers about the goods or services being sold and about how to protect their interests in transactions involving those goods or services.
• Third, sellers might be slightly more apt to breach their commitments than buyers, given the generally more significant performance challenges facing sellers e.g., producing and transporting goods on time, developing software on time, competently providing specialized services, and so forth.

In most contract situations, therefore, it is the buyer who needs more coaching on how to protect his or her interests. That said, where relevant, issues of particular importance from the sellers perspective are also addressed e.g., developing solid but workable template agreements, avoiding over-promising, and limiting downside risk through warranty and liability limitation clauses, among others.

Keep perspective in mind and consider both sides of each issue. The ability to evaluate the other partys concerns is an advantage in contract negotiations, as discussed in Chapter Three, Negotiation.

Caveats

Nothing in this book is legal advice. Legal advice is always based on specific facts and requires an attorney-client relationship.

Also, this book also does not address the Uniform Commercial Code (UCC) in detail. Article 2 of the UCC, adopted in varying forms by every state, applies to all contracts for goods. Goods are defined as any tangible thing that is moveable. Readers who regularly buy or sell goods should work with counsel to ensure UCC issues are covered.

Chapter One
CONTRACT LAW

Contracts as Private Law

Contracts create private law between two parties. Courts enforce valid contracts in order to provide predictability in private relationships and to facilitate commerce. Enforceability is a double-edged sword though, rarely distinguishing between good deals and bad.