Contracts Drafting and Negotiations – Introduction and Snippets

Contract drafting is like script writing. Every contract has the specific ingredients of a story – characters (parties), setting (recitals), plot (purpose), theme (clauses that govern the commercial relationship and record the give and take) and conflict (clauses that govern if the relationship is to sour) and is to be drafted like a script – for the good times as well as bad.  If you are one of the authors drafting the contract or are only reviewing it, you must know how you want to plot the story well, how it should pan out for your client. Once you know that, you have the grasped the very soul of the Contract. Simply put, understand your client’s position, requirement and end goal very well. Understand the client’s industry, its unique functioning, its present scenario well. This will help you build what we call the best-case scenario and worst-case scenario for every contracting engagement. Never go worse than the worse-case scenario and aim for better than the best one. You will achieve, if not a win-win contract for your client, but a better balanced one.

I have tried to put in perspective some of the finer learnings that have emerged over time:

1.    Know the other side well, purpose of the contract for them and their position in the industry. While their lawyers may come at you as gladiators with a sole purpose to win and you may have to play a bit of that role yourself, your client is doing this for commerce, to co-exist with the other side – never lose sight of this. Commercial interests of both the parties ought to always remain the ultimate aim. 

2.    Your knowledge of contract laws is of paramount importance. There is a jurisprudence to this law. Contracts are not singularly dependent on commercial goals alone. Law is the mold in which the commercial relationships needs to fit. If your client is being asked to sign up for unreasonable restrictions, it is important to know the extent of enforceability of such restriction. If your client is being granted a legal right, one needs to know extent of enforceability of such right as well as the expense that will be incurred in enforcing such rights. If advising on cross border contracts, always understand enforceability issues in the foreign jurisdiction. You need not be an expert, but you need to know the legality of each clause and proviso in your drafts. Recently in a transaction that had part acquisition of a business in Mexico, we had to advise changes to the structure of acquisition itself to accommodate the stringent labour laws of the country.  In another cross-border transaction, we had to deep dive into tax impacts in a foreign jurisdiction to be able to advise effectively on the proposed documentation. While it was not truly our forte or expertise, the effort (days and weeks of it) of understanding the regime, and revising our work was well worth when the outcome was a truly impactful contract for both the parties.

3.    There is no standard contract concept. There can at best be very robust check lists. A must-have clauses list for every contract. As you progress in contract practice this becomes your data bank, your contract checklists. There can be many different scenarios that you will experience when practicing contract law and each time a unique clause or proviso will need to be built in. It is like cricket, or any sport for that matter. Rules are the same for each match, yet each game has its own unique setting and its own unique way of tackling situations. Yes, I know there exists a world of templates and they are important too, but not to take as you need, but to read and see the flow of the draft and use it more as a study material and knowledge-building exercise to be used when drafting your contracts.  Contracts cannot be standardized, a checklist can.

4.    Contract drafting language. This is an art in itself and mostly untaught. Legal language of a contract varies differently from most other documents of legal nature. In a legal notice you will use a different style to that from a petition and in a contract it will be different. Even with different agreements the language will differ, an agreement always records, “shall ….” while a deed always states, “does hereby…”” Your knowledge of legal drafting is as much important as the knowledge of contract laws itself. In fact even more. Many a dispute are won and lost on language alone. A bank guarantee payment guaranteeing clause was challenged solely on a badly worded repayment clause. A guaranteed Earn-Out mechanism was challenged solely because it didn’t emphasize the guarantee part leaving it open to be interpreted as conditional payment. One cannot accentuate enough the importance of drafting language and accuracy of recording intent, obligation and the ensuing liability. A whole book can be written on drafting language and skills, but suffice to say for now, that which is written needs to enumerate that which is agreed and that which not agreeable too.

5.    Every clause you build in the contract, be it an obligation, representation, warranty or a mere statement of purpose, each such clause has an independent character as well as a character it assumes when read together with other clauses and when interpreted as per the applicable laws. Representation and warranties are always accompanied by indemnity clauses but even when certain indemnities are not spelt out in writing, they find a place in a dispute, specifically in cases of equitable relief. Similarly, a clause on transfer of ownership in a sale of goods contract needs necessarily be spelt out to estimate the cation that triggers transfer of ownership. In most disputes, that is the deciding factor when the matrix of liability in certain cases shifts.

6.    Not every liability can be the same for each party, for the one obligated to pay consideration, if you attract a penalty of service, it’s a frustrated clause. For the party obligated to provide a service, if you delay payment, it can attract penal interest, but for delay in delivery you cannot have a similar liability. You thus have to equate a counter keeping in mind the nature of each party’s role. Also, penalty plays two roles, one that of a deterrent and one that of adding to damages calculations, if the need arises. The business owner looks at it from a deterrent perspective, a lawyer however, needs to keep in mind the damages and liability claims and understand the impact of these clauses if things were to ever go sour between the parties.

7.    The contract is your game only till such time that it is finally signed and duly executed. After that, remember the contracting parties will only look at it of they are disputing. Your contract though made for the good times, has to withstand the bad ones too. All contract negotiations are before signing. I am asked many times to advise on executed and signed contracts and I always start by saying, ask my advice before signing and if you haven’t, ask it when you want to dispute it. The point is, till it is signed, you can negotiate. Once executed the game is over.

One can go on and on but then again Contract drafting, and negotiations are complete subject matters in themselves. A much more detailed take on Contract drafting and negotiations will follow soon. In the meanwhile, self and a close friend of mine, Advocate Yugandhara Jha have discussed many a times certain legal clauses and it has always amazed me how the same clause is viewed differently while drafting and negotiating, but may have a complete opposite impact while it is being disputed in courts. Yugandhara, with her years of experience in commercial and civil litigation has always been able to give a court or a tribunals perspective on these clauses which has helped us immensely polish our language while drafting. We have made an attempt to write about certain legal clauses from these two different viewpoints. I write about these clauses from a drafting and negotiation’s experience and perspective and Yugandhara gives us the perspective of how these clauses are seen by courts or by an adjudging authority. Neither outlook is complete without the other. Thus, we make a modest attempt to put forth different sides of the same coin, so to say. We will put up snippets on each clause everyday morning beginning coming Saturday at exact 1100hr India time. Just one disclaimer – we do not claim to know it all, but what we do, we think is worth talking about.