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Negotiating and drafting contracts

Q: What is a good process for developing contracts?

A: Negotiating and drafting a commercial contract is a top-down exercise similar to the process of developing software. If you discuss issues with the other party conceptually before reducing them to concrete language (i.e., design before you code), you’ll establish a process that leads to a finished document to which each party can easily make a legal and emotional commitment.

1. The Requirements Analysis. Start the contracting process with a requirements analysis that identifies conceptually what each party brings to the table and what each party wants out of the relationship. Identify contributions and benefits, as well as dangers and concerns for each party.

By staying conceptual and focusing on interests (rather than concrete positions in a contract), the parties are better able to steer around potential deal killers. For example, each party may want to own the resulting custom work product. Upon further probing for their reasons, the customer may only be trying to protect its R&D investment, while the developer may only want to reuse generic code on projects for other industries. It may be possible to reconcile these interests by conveying ownership to the customer, but reserving a license for the developer to re-use generic code on projects that do not compete with the customer. Again, stay conceptual and probe with questions to understand the other party’s real interests.

2. The Design Document. Once major points of agreement are negotiated at the conceptual level, the next step is to reduce those points to a design document or "term sheet." Exchange the term sheet with the other party and adjust it, as necessary, to reflect issues that may have occurred to a party since the first meeting. If you hit a sticking point, revert to the conceptual level and probe for the reasons.

3. Drafting the Agreement. If feasible, volunteer to prepare the first draft of the Agreement. If you steered the transaction toward a conceptual structure that you have used in the past, you may already have a standard agreement that reflects your interests down to the details. If not, you will at least control the initial drafting process to ensure your issues are addressed. Protect your interests, but also be sure to address issues of importance to the other side fairly. Their lawyers will be looking for that.

4. Attention to the Details. If the parties stayed "conceptual" initially, reduced those concepts to a term sheet and then fairly translated those terms into a contract, then reviewing and debugging the contract should be quick and congenial. If you find a party has inserted language that appears unfair, step back to the conceptual level and ask them to explain the business purpose behind the clause. Explain your own concerns to see if each party’s competing interests can be reconciled conceptually. Then translate the adjusted concept into new language and debug.

5. Sign the Agreement. It is usually a mistake to begin a project without a signed written agreement. Premature commencement of work often signals a lack of consensus on important issues. This breeds disputes. ("What do you mean I don’t own the software; I paid for it!). At the same time, outstanding issues may reflect work to be done far in the future. If project work must commence, consider breaking it into phases, starting with a "Preliminary Engagement Letter" to perform some initial consulting or analysis work, while negotiations on the larger agreement continue. If the larger deal falls through, at least issues important to the preliminary work will have been addressed in writing.

6. Legal Drafting Systems. If you can’t afford to hire experienced counsel to negotiate and draft custom agreements each time, consider using a legal drafting system. QuickForm Contracts Online (http://www.quickforms.com) automates designing and drafting 30 types of agreements for computer industry and web site transactions. The system focuses you on conceptual design-level questions, then automatically drafts a near-custom agreement that can be reviewed by legal or contracts professionals. It can also quickly generate a collection of standard agreements that reflect your preferred business model. QuickForm Contracts is available on a simple pay-per-use basis.

 [from John Newman, legal@aol.com]

 

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