Whether you’re in-house or serving as outside counsel, the task of drafting a commercial agreement offers considerable latitude (and uncertainty) to the drafting lawyer. The drafting lawyer can help his or her business counterparts think more concretely about the structure of the underlying commercial arrangement—as well as help facilitate the negotiation of the agreement—by drafting a logical, flowing structure that captures all of the rules by which the buyer and seller are to operate. The purpose of this article, therefore, is to help manage the latitude inherent in commercial contracts and to offer a cheat sheet of key terms from which the drafting lawyer should seek guidance before preparing the initial draft. Importantly, these considerations apply whether you represent either of the parties, and in both products and services (as well as potentially, licensing or partnership) contexts.
- Scope/Pricing. Almost rising to the level of a truism (but forgotten enough by business parties to mention here), you’ll want to ask your client what is being purchased, how frequently it is being purchased, and if the pricing and payment mechanics have been agreed to. Additionally, if the agreement is intended to involve the purchase of products or services over multiple iterations, it may be best framed as a “master agreement” to eliminate the need to enter into multiple, separate agreements for the same products or services over a given time period. Pricing can be affected by any of these considerations, since it may need to be based upon a per-unit (products) element, a labor usage (services) component, or some combination of the two.
- Term and Termination. Also fundamental to the contractual relationship is how long the contracting parties will (proverbially) be married, and under what circumstances they’d divorce. While the term is often tied to the contemplated length during which products will be provided or services performed, business parties often give short shrift to the circumstances under which either party could walk away before the scope of the contract is completed. Specifically, parties may wish to negotiate for a termination upon a breach, possibly with a cure period. Further, the buyer often requests a termination “for convenience” (i.e., for any reason) right, which may cause a seller to resist or ask for a lengthy advance notice period prior to the buyer exercising this right.
- Warranties. If your client is the seller, you’ll want to think about what types of warranties, and the length of warranties, it wants to offer and include in the contract. With regard to types of warranties, many clients often have “standard” warranties from which they deviate only for the rarest (and largest) of customers, so asking for the standard warranty is a good starting point. The durations of standard warranties often vary (e.g., one year, two years), so informing the business principals that they shouldn’t offer anything lengthier can be extremely helpful. Finally, again if representing the seller, I recommend including a “disclaimer of warranties” section—if not already included in the standard warranty—so that there can be no argument of implied warranties applying that would expand the scope of your warranty, such as implied warranties of merchantability or fitness for a particular purpose in the context of a sale of goods.
- Indemnification/Limitations of Liability. While whether an indemnification provision is included in a commercial contract varies widely upon the type of contract and the particular client’s preference, I recommend at least posing the question, since an indemnification provision (whether as the buyer or seller) can provide a quicker (and potentially broader) set of remedies in the event of a dispute, in lieu of filing or threatening suit. Indemnification can relate to not only breach of contract by the parties, but associated third-party claims and potential infringement of intellectual property, whether by or against the contracting parties. However, whether or not an indemnification provision is included, I strongly recommend proposing some form of limitation of liability—especially as the seller—to help circumscribe the risk associated with the contract. The limitation of liability includes, in its many flavors, the possibility of an overall cap in damage exposure to the other party (which can be framed in terms of a hard- wired number, amounts paid under the agreement or myriad other formulations) as well as a limitation of the types of damages that may be sought, including an exclusion of consequential, incidental, punitive, special or other damages.
- Ownership of Intellectual Property. As we continue to move into a world more fully dominated by technology, contract terms related to the usage and ownership of intellectual property will become more important. The scope of these issues far exceeds, in both description and complexity, the scope of this article, but I’d recommend presenting the following short list of questions to your clients to understand the universe involved: (1) is there any intellectual property that is, or could be, involved in performing the contract, (2) if so, who owns the rights to that intellectual property, (3) is there any need for any intellectual property, whether generated by the parties or involving third parties, to be licensed in order to actually perform under the contract, and (4) how will the parties treat the ownership of any jointly-developed intellectual property? Use these questions as a start and you’ll likely find further discussions to be necessary.
The task of drafting a commercial agreement can, at first glance, justifiably seem daunting. Indeed, while the M&A world offers a relatively predictable set of provisions in purchase agreements and often provides “market” standards for those provisions, the realm of commercial contracts does the drafting lawyer no such service. But it isn’t all bad. While M&A lawyers are often constrained by a letter of intent prior to drafting, the above hopefully offers a meaningful, if non-exhaustive, list of categories from which lawyers can develop their own “term sheet” for commercial transactions. You’ll be surprised at the issues the business counterparts will want to—and indeed, need to—consider thoughtfully and discuss with you prior to putting pen to paper.