Common sense tips to negotating and drafting commercial contracts based on over thirty years of dealing with commercial litigation.

1. Common Mistakes Attorneys [and
Their Clients]
Make Drafting and Negotiating
Contracts – Lessons Learned
June 2013
Andrew C. Spacone
Adler Pollock & Sheehan P.C.
Formerly Deputy General Counsel & Assistant Secretary,
Textron Inc.
Copyright 2013, Andrew C. Spacone. All rights reserved.

2. 2
Introduction
• My Background
• My Perspective
• Why I am Doing This
•
Audience:

In-house Counsel
Each faces its own challenges

Outside Counsel

3. 3
Objectives
• Provide practical common sense lessons learned
for drafting and negotiating good contracts
which can save your clients time and money
Although critical, we won‟t be discussing at any
length the mechanics or technical aspects of
contract drafting

4. 4
Ground Rules
• Your perspective or even differences of opinion are
welcome
• Ask questions anytime you like but try to be brief
and stick to the subject
• Let‟s have a little fun

5. 5
What type of contracts are we talking
about?
• Commercial [non-finance] contracts of all
shapes and sizes-materials, products, personal
services, software, IT outsourcing agreements
• This doesn‟t mean the practical suggestions we
discuss today are not applicable to any contract
or agreement, however

6. 6
What is a Good Contract?
[Premise: Most contract disputes are not legal in naturethink about it]
• A good contract is one where each party gets what it
bargained for without any material disruptions during
or disputes post performance
This means more than a legally enforceable document
which sets forth the intentions of the parties-there is a
difference between the two “definitions”
Enforceable implies equitable and legal remedies, which are
fine as far as it goes

7. 7
What is a Good Contract? (Cont'd)
 Without disruption implies no need for enforcement [contracts should
be more than enforcement tools]
• Why is this important to your business clients?
 Precisely because they are business people, which means they need to
run their business, not spend more time with lawyers and the legal
system than absolutely necessary
The cost accounting equation explained
 Cost of non-performance =disruption to the business through delay,
defect or non-delivery of the product or service + cost and uncertainty
associated with litigation
This is the true cost of a bad contract

8. 8
What is a Good Contract? (Cont'd)
• The former (disruption) often results in costs
which can dwarf the latter [e.g. lost profits,
customers, damage to the brand]
Not to mention the fact that litigation rarely
makes your client whole

9. 9
The Business Person/Lawyer Paradigm and
How This Can Affect Contracts and Their
Negotiation
• Business people: risk takers who look for practical and
quick solutions with an overriding desire to obtain
profits to sustain and grow their business [plus, while
they may value lawyers, generally they view you as a
necessary evil]
• Lawyers: risk adverse, prone to legalese to justify their
existence [only half kidding], often not very
knowledgeable concerning their client‟s business let
alone business in general [even in-house lawyers can
suffer from this to a certain extent] and live by the
billable hour

10. 10
The Business Person/Lawyer Paradigm and
How This Can Affect Contracts and Their
Negotiation (Cont'd)
• This gap needs to be closed in the contract
process and it isn‟t easy
But it can be done: both parties need to
contribute to obtaining good contracts

11. 11
Major Themes Which Have Emerged
and Will Be Developed
• Over-arching theme:Contracts should be drafted to avoid
disputes, not just provide mechanisms for enforcement
[although inter rorem provisions can deter disputes]
• A good contract involves the education of both parties
• Know the subject of the contract/and your client‟s
business
• Due diligence of the other side‟s ability to perform can
lead to reduced risks

12. 12
Major Themes Which Have Emerged
and Will Be Developed (Cont'd)
• Early risk assessment can reduce the risk of nonperformance
• Clear and concise terms and conditions, performance
specifications, etc., will solve a lot of problems
• One sided terms and negotiations can create
performance problems, not to mention make dispute
resolution difficult
• Forgetting about the contract once it is executed it is
generally a bad idea

13. 13
APPLICATION OF LESSONS
LEARNED
Not every contract is the same
Not every lesson learned applies
Simple,
mundane
contract
The complex,
multifaceted
contact
*outsourced
product
contracts
Apply 0 Lessons Learned
Apply 100% Lessons Learned?
domestic foreign

14. 14
Hypotheticals
[Contract Administrator; paying attention to internal compliance]
1.
Company A enters into a software license with Adobe. The license
agreement requires that each user-the term is not defined-is
required to have a license for which there is a modest fee. A
penalty is attached to unlicensed use. The contract is let by the IT
department and the company‟s business units are advised that
Adobe is now available across the company. The license agreement
itself is maintained at Corporate and the business unit IT
personnel are provided with basic information. No one at
Corporate or the business units is assigned to administer the
agreement per se. It is one of several the company has and every
one regards it as “pretty standard.”

15. 15
Hypotheticals (Cont'd)
Over a three year period the following happens: the company
installs the software on group workplace computers that have
multiple access, that is, several employees can access the
computer and hence the software. Also, the company does not
keep good records concerning who installed the software on their
individual computers, even though the internal policy requires
that installation be approved by the IT department and avows
adherence to license requirements. Thus, the company loses track
of which employs actually are licensed to use the software, which
means that Adobe is not paid the actual amount it is owed in
license fees. The company has thousands of employees who use
Adobe. In year four, Adobe exercises its rights under the license
agreement to do a compliance audit.

16. 16
Hypotheticals (Cont'd)
[Due Diligence of new business partners; building in
mechanisms to avoid non-performance]
2. Company A decides to switch forgers for its cast iron
crankshafts which are used in its piston engine
aircraft. They have done business with the former
forger for thirty years and never had a problem with
the crankshafts. The new forger-who they haven‟t
done any business with and has only been in business
for a few years-is willing to do just in time delivery as
opposed to sell off an inventory of crankshafts, which
means less overall cost for Company A. It is critical
that crankshafts be properly heated/treated to a very
specific temperature so they don‟t fail in operation for
obvious reasons. Company A gives the new supplier
the specifications for forging and waits for delivery.

17. 17
Hypotheticals (Cont'd)
The contract does not provide for quality control
certification by the company prior to acceptance and
installation nor is there a provision for on-site quality
control by a Company representative. The crankshafts
come in „certified‟ by the supplier‟s quality control
department and the company pays (acceptance) and then
installs the crankshafts in its engines for piston aircraft. In
due course, crankshafts begin to fail from over-heating;
planes crash and over 10,000 crankshafts are recalled
world-wide, all at great expense to Company A. As it turns
out, the forger has limited insurance and assets.

18. 18
Hypotheticals (Cont'd)
[Knowing the subject matter of the contract]
3.
A young Associate is asked to draft a „simple settlement agreement
and release‟ by a senior partner who provides about twenty minutes of
explanation and provides a few documents discussing the underlying
business transaction which involves a complex series of companies
and several foreign transactions involving the client and certain third
parties. The Associate is given the client‟s telephone number and told
to call him if he has any questions. The Associate begins outlining the
document then decides it is time to call the client because he doesn‟t
fully understand the issues let alone the facts, not to mention the
parties. This leads to a series of short conversations with the client
each of which result in new facts, which results in a revised settlement
agreement and release and comments by the client. Some fifteen hours
and ten drafts later, the Associate manages to get the client‟s approval
on a final draft of the document. The Associate never learns whether
all his time was billed to the client let alone whether or not the client
paid for whatever time was billed.

19. 19
Hypotheticals (Cont'd)
[Lack of clear and precise performance specifications and standards]
4.
Company A [again; when will they learn?] enters into a
tailored software contract with a developer which contains a
myriad of performance specifications and time tables for
delivery which are not clearly understood by the business
person let alone the lawyer who is drafting the contract. In other
words, the Statement of Work [SOW] lacks precision and clarity
on the deliverables. The business person says this is a fairly
simple matter and doesn‟t spend a lot of time with the lawyer on
the background and gives her a SOW and says go with it. The
vendor isn‟t much better and basically adopts the SOW with
little modification. Time goes on and the business person is
unhappy with the project and says to the lawyer: “ The other
side has breached the contract; what are my options”?
*Based on my direct personal experience

20. 20
Lesson #1
Know your client‟s business but most importantly, understand
the subject matter before you begin drafting let alone
negotiating
 Do you and your client understand the subject matter
 [see hypo 3]
Need a specialist?
Are you experienced enough?
Are you talking to the right person?
 Have a game plan beforehand – major objectives and give points
on anticipated issues
You wouldn‟t fight a military battle without an operations order
(OPORD) so why would you start the contract process without a
game plan?
Preparation is critical

21. 21
Lesson #1(Cont’d)
Who is going to negotiate the contract?
when a lawyer negotiates a contract privilege is
imperiled
is a senior representative from the client with
authority necessary?
What are your client‟s imperatives;
What can he give on?

22. 22
Lesson #2
Due diligence of the other side concerning their
ability to perform (business background/history =
“track record”) and otherwise stand behind the
contract is imperative for “unfamiliar” partners or
those new to the industry [Hypo 2]
Especially critical for outsourcing contracts here and
overseas
And don‟t forget third-party vendors hired by your
supplier
Well, I am just the lawyer so shouldn‟t I rely on my
client to do this?

23. 23
Lesson #2 (Cont'd)
Maybe, but remember, you are more than just a lawyer, you are a counselor
 What to look for in the other side
 experience and expertise – “track record”
 financial capability
 quality workforce
 suppliers, other third-party vendors
 litigation history
 insurance coverage
 lots of stuff
 Just knowing the risks presented by the other side will allow you to
draft contracts that anticipate the risks and provide incentives to
performance and protection [e.g., termination, escrow accounts,
milestones, automatic attachment/retrieval of owned equipment]
 Knowing the other side‟s level of sophistication will better allow you
to anticipate how much time you need to spend educating the other side
concerning the performance standards, etc.

24. 24
Lesson #3
Early risk identification and drafting to minimize
or eliminate [enough said above] [hypo 4]
but there may be potential legal issues which
are unresolved that are likely to come up
And you may be able to draft to them

25. 25
Lesson #4
Drafting clear, concise and „simple‟ contracts
with emphasis on precise and easily understood
performance requirements and specifications
Use the contract itself to further educate both sides
of what is expected of them
Clarity and brevity will make life easier for both
parties
Spend as much time educating as you do drafting

26. 26
Lesson #4 (Cont'd)
Plain “English” is preferred as opposed to
legalese for the sake of legalese [besides, if the
judge and jury can‟t understand it, this is generally
not a good thing for at least one of the parties]
The simpler the better-and don‟t say that it can‟t
be done because it can if you understand the subject
matter
cross referring to a myriad exhibits and attachments;
combining multiple contracts into one, just make life so
much more difficult

27. 27
Lesson #4 (Cont'd)
Clear and concise performance standards and specifications
are really important
 Performance
e.g. software hosting service agreements (e.g. uptime guarantee and
recourse for failure to achieve)
Enforcement
 Drive out ambiguity (unless there is a very good reason not to)
The “foreign factor” briefly discussed
 Risk factors go up considerably with outsourced production
(event service) agreements

28. 28
Lesson #4 (Cont'd)
In sum, can a layman [okay, an educated
layman] pick up the contract and figure out what
each side needs to do? If so, you have a good
contract.
And remember, if all goes to hell in a hand basket,
a judge or jury or both will be looking at the
contract

29. 29
Lesson #5
The importance of internal compliance mechanisms and
early dispute identification and resolution-The Contract
Administrator as Gatekeeper [hypo 1 and 4]
All too common mistake: filing the contract away
and forgetting about it until severe problems arise
[and then it is often too late because the problems are
too big to solve or the parties hate each other or both]
this is a particular problem for outsourcing contracts, especially
in China and the Far East

30. 30
Lesson #5 (Cont'd)
 Monitoring performance
ensure managers/employees responsible for fulfilling the
contract have a copy of it and thoroughly understand it
pay attention to the performance phase
build into contract on site representative at vendor‟s
facility to monitor quality control, compliance with specs,
etc.
The Contract Administrator-The Gatekeeper [minicooling off period”] [Hypo 4]

31. 31
Lesson #5 (Cont'd)
both sides
monitor performance
identify and solve little problems before they become big
problems
„control‟ course of conduct, admissions, etc.
make sure a clear line of communication to management
before the situation gets out of control
when the lawyer –in-house or outside – needs to get
involved

32. 32
Lesson #6
One sided contracts and negotiations may be great now
but can lead to problems later
Good contracts are win-win propositions [or at least
should be but you can‟t ignore the human condition
entirely]
Makes performance too difficult
Create distrust or a least “revenge”
Other ramifications

33. 33
Lesson #7
If all else fails, there should be mutually-agreedupon and realistic dispute resolution mechanisms
If handled openly and in good faith, a conversation
worth having
Lesson #7A-don‟t wait until the end to negotiate
dispute resolution provisions
sloppy dispute resolution provisions create obvious
problems

34. 34
Options
• Cooling off period works more in theory than in
practice, but worth a try
• Litigation
• Alternate Dispute Resolution

35. 35
Conclusion
A good contract is one where both parties get what they
bargained for without major disruptions or disputes
Contracts can [and should] be vehicles for dispute
avoidance
You as lawyers can play a significant role in drafting and
negotiating good contracts if you keep these practical
suggestions in mind
Hopefully, all or some of these practical suggestions will
save you and your client time and money [the cost
accounting equation]

36. 36
Questions