Strategically assessing a contract

I’m now in that part of the semester when I teach contracts. It’s ironic that contracts was one of my least favorite subjects in law school but now it’s one the areas I most enjoy teaching. I’ve gained a strong interest in the subject since I’ve seen business success, contract drafting and negotiating all go hand in hand. None of that was taught in law school. Instead, we focused on abstract theories and cases that seemed far removed from everyday life and how business people engaged in the process of negotiating and deal making.

My approach to teaching contracts to business people integrates important doctrines with real-world examples and applications. From my perspective, contracting is another example of how the law can be used strategically. This leads me to the topic of how I teach people to engage contracts in a strategic manner. I view this as a fundamental business skill that can be followed in 5 steps:

1. Don’t be afraid to engage the document with a focused and critical eye. Read all the terms carefully and appreciate that nothing in the document is there by accident. Every word has a purpose and will have either a negative or a positive impact.

2. Not all terms are equally important. Identify the most important terms and rank them in order of most to least important. For example, in an employment contract it may be that salary, duration, the non-compete and termination are ranked among the highest. Be prepared to spend more time assessing and negotiating the key terms.

3. Assess the language of key terms to determine vagueness or specificity. Vague language offers more room for interpretation, which can be a good or bad thing depending on the circumstances. The opposite can be said of specific terms.

4. The best contract negotiators mark-up and edit the document with changes that reflect their preferences. This includes changing the language to be more specific or vague, striking unfavorable terms or modifying terms. Negotiating style and strategy can play an important role in this step.

5. Add language that’s missing. There is no such thing as a perfect or complete contract.

I always advise business people to engage in this practice to develop a strategic contracting legal capability, and of course to review the document with capable legal counsel just to be safe.

A perspective on contract terms

After teaching contracts for several years, I’m fairly convinced that the following axiom applies whenever anyone enters into a contract:

Any agreed upon and legally binding contract terms will either work in your favor, or against you.

Contrary to popular belief, contract terms are never neutral. Instead, they will either further your goals and interests, or they will not. In ideal situations, the contract terms benefit everyone. In the worst situations, they detriment you and benefit the person or entity sitting across the negotiating table. In the vast majority of cases, some clauses further your interests and others do not, yet the bargain as a whole is worth entering into for both parties.

Each particular word, or clause, however, will have a variable impact on the outcome or value of the bargain. That value, however, as deduced from the contract axiom will always either be positive or negative. The sign (positive or negative) and the size of the quantified outcome will largely depend on things like: information, bargaining power, experience, legal knowledge and negotiating prowess.

Starting this term, I’ll start using the contract axiom whenever I introduce the subject of contracts to business students.