Measuring the effectiveness of the contracting process

Alan S. Gutterman, Gutterman Law & Business

The primary measure of performance in the contracting process is whether or not the final contract clearly and completely delineates the intent of the parties with respect to the particular transaction. It is not sufficient for the parties to have good ideas about the goals and purposes of the relationship if the contract does not provide a clear and unambiguous roadmap for the parties to follow in order to achieve their objectives. In order to prepare an effective contract, counsel must fully understand the key details of the transaction and have access to all of the important background information relating to the negotiations, and prior relations, between the parties. In addition, counsel must have sufficient information and experience to make sure the contract fulfills the following roles and purposes:

• The contract must cover all of the essential elements necessary for formation, interpretation, and performance of a legally binding agreement under applicable laws. In order to meet this requirement, counsel must fully understand the client's intent with regard to all material terms, such as goods covered by a sale-of-goods contract and the pricing and delivery terms.
• In cases where the contract is intended to govern a continuing relationship between the parties, it should include all necessary policies and procedures for managing the exchange of performances between the parties. Parties are often able to achieve this goal in a simple, shorthand fashion, such as by incorporating INCOTERMS to identify delivery terms in an international contract. In other situations, however, the parties may rely on detailed operations manuals that are more extensive than the original contract and cover a variety of issues in detail.
• The contract should clearly state all of the rights of the parties necessary in order for them to achieve their underlying business objectives. This can be as simple as defining the right of the seller to receive payment within a specified period of time; however, counsel must carefully consider all relevant and reasonable rights when preparing the contract.
• While the parties obviously anticipate, and hope, that the exchange of performance between the parties will flow smoothly, counsel does a disservice by not anticipating potential problems and crafting remedies in the contract before it is signed. For example, a default in payment obligations will certainly trigger collection rights in favor of the party expecting payment; however, consideration should also be given to charging interest and allocating collection costs to the defaulting party.
• Counsel should be able to provide reasonable assurances to the client that the contract will be enforced and interpreted in the manner described by counsel before the contract is signed. In order to provide effective counsel in this area, it may be necessary to engage experts to review particular provisions and provide an opinion regarding the enforceability of a particular right or remedy included in the contract.

Counsel should also understand and acknowledge that a contract may serve other purposes for a particular transaction. For example, in complex transactions, a master contract, which incorporates a number of other contracts by reference, may serve primarily as a way to organize the transaction and identify the conditions that will need to be satisfied in order for all of the contracts to be executed and delivered.

Other agreements, such as a letter of intent, may have limited legal effect; however, they can have great symbolic value to the parties as evidence of a willingness to devote further resources to negotiating and consummating a definitive agreement. A security agreement or guarantee is rarely the primary contract in a transaction and is most typically used to provide additional collateral to induce a lender to provide financing or a vendor to offer goods on credit. In addition, clients may require contracts, such as a noncompetition agreement, that may not be enforced in their entirety by a court but which may deter the party subject to the covenant from engaging in certain acts thought to be harmful to the client.

Finally, counsel must recognize the modern reality that, in the eyes of the client, effectiveness is also measured by the cost of the representation and the amount of time that it takes to complete the contract and the related transaction. In many cases, counsel will not have the time, or the benefits of a sufficient budget, to negotiate and draft all of the provisions that should go into the contract in the absence of economic constraints. If counsel believes that its representation is being compromised by the limitations imposed by the client, consideration should be given to memorializing any potential issues in a memorandum to the client. This creates a record of the risks assumed by the client in opting for a less detailed contract provision on an area that might ultimately pose a problem in the relationship between the parties.

Counsel should set aside time early in the client relationship for assessing certain issues relating to the client’s processes for formation and performance of contracts. Counsel may use a contract formation and performance questionnaire and diagnosis form similar to §100:126 in Business Transactions Solution on WestlawNext (BTS-Westlaw) to get a better sense of how the client approaches the contract process and how much time and effort is invested in negotiating and documenting business relationships. Questions regarding whether there is sufficient time to consult counsel before entering into a contract provide valuable information on the internal contract review process and opportunities to develop contract templates that clients can use to move quickly to consummate deals while still being comfortable that key terms are covered.

Clients should be given tools to ensure that all the important issues of a particular type of contract have been addressed and should be instructed on how to communicate with the other party during the negotiation process and create and maintain contract files that can be referred to in the future in the event questions arise during performance. Clients must also be reminded that most oral agreements are either unenforceable or difficult to prove at a later date and that the preferred approach is to be sure all essential understandings are reduced to some form of writing.

Counsel should work with clients to develop their preferred positions, and accompanying contract language, on common contracting topics such as the term or time limit of the agreement, pricing and payment terms, security for performance, events which trigger performance and proper performance criteria, events of default and remedies for breach, risk of loss and insurance, and representations and warranties. Finally, counsel should make sure that clients include clear and objective standards of performance for both parties in each contract.

Counsel should build upon the communications during the questionnaire and diagnostic period described above by providing clients with tools they can use to develop and improve their contract management process. Examples include an executive summary for clients regarding contract management (see BTS-Westlaw § 100:127) and an overview of recommended procedures for contract review and approval (see BTS-Westlaw § 100:128). In addition, counsel should use the results of the diagnostic process as a guide for developing new templates for contracts that the client will likely be negotiating as the attorney-client relationship moves forward (see BTS-Westlaw § 100:131).

Want to learn more about "contract management"? Consider participating in the January 2016 program on the subject being presented as part of the West LegalEdcenter Business Counselor Institute series. The program will be presented on Tuesday, January 12 at noon (CT) and you can visit the West LegalEdcenter homepage for registration information.

About the author

Alan S. Gutterman is the founder and principal of Gutterman Law & Business, a leading provider of timely and practical legal and business information for attorneys, other professionals, and executives in the form of books, online content, newsletters, programs, training, and consulting services. Mr. Gutterman has three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers, and intellectual property. He has also held senior management positions with several technology-based businesses, including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. His publications are available on the Legal Solutions website. Mr. Gutterman can be reached at agutterman@alangutterman.com.

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