Control Freak

It’s usually easier to review a contract than to write one. It’s usually less expensive to review someone else’s draft. And it’s usually bad legal strategy to voluntarily agree to do so.

Once the basic terms of a legal agreement are decided, they are often given to the lawyers to “document” the deal. This is not a formality. This is one of the most critical steps in establishing the legal relationship. It’s so important, in fact, that customs have developed around who gets to “control the draft” (e.g., banks in loan financings, landlords in lease transactions, investors in first-round financings). Sometimes those customs can’t be altered. Other times, an unassuming offer to write the first draft is greeted with pleasure.

Here are five reasons to make sure your lawyer leads the drafting effort whenever possible:

  1. Language affects negotiation. The words used in a draft contract may increase the probability that an important business provision is accepted or rejected. A particular borrower may react more favorably to a clause that says it “cannot borrow more than $100,000 without the lender’s consent”, than to one that says its “debt must always be less than $100,000”, yet (aside from the penny) these two clauses have virtually identical legal meaning.
  2. Language affects future negotiation. Words that don’t have much practical meaning today might have an important impact on future negotiations. If someone’s consent is required to approve a matter, is the consent right modified by the words “reasonable” or “good faith” or “not to be unreasonably withheld” (sometimes adding “delayed” and/or “conditioned”)? In periods of good relations, the bottom line is that consent is required. If bad relations arise, the party who needs to receive the consent will be sunk if the clause does not contain at least one of the modifiers (and which one can sometimes become very important). These simple modifiers might mean the difference between writing the other party a large check in order to obtain consent, or having the right to receive that consent for free.
  3. Language affects interpretation. While this heading is self-evident, it is not always understood that the drafter can greatly influence legal meaning with artful drafting. If you want to be sure that you are contracting only with a specific party, you might insert an “anti-assignment” clause. If you forget to preclude assignments “by operation of law”, in most states the other party will be free to merge with any other entity (irrespective of who ends up with control), and your anti-assignment clause will have no impact. Even further, if the other party is an entity (as opposed to an individual), that entity might have a total ownership change (due to the sale of its shares), and your anti-assignment clause won’t be violated.
  4. Comments attract attention. By definition, specific comments on the other party’s draft get more attention than specific clauses in the initial draft. This is true for two reasons: first, sheer volume – you might have 10 or 20 or 50 comments, while the full contract might be 10 or 20 or 50 pages; and second, inference of motivation – the other party may suspect that, if you go to the trouble to make a comment, it must have special importance to you. Either way, the heightened attention may result in your losing a particular provision or having it watered down by modifiers that benefit the other side.
  5. Negotiation psychology operates against the commenter. If you write a contract, you might consider 500 nuances among the many pages. If you’re the commenter and have 500 requested changes, you’ll be tagged a ‘pain in the neck’. The psychology of negotiations imposes a pressure on the commenter not to impede a deal with needless commenting. Moreover, time constraints may lead to actual or perceived pressure not to have more comments than can comfortably be dealt with in the available time. Finally, after the first one, two or three ‘turns’ of a document, the patience for new comments will all but disappear.

As alluded to at the beginning of this post, being responsible for the drafting will often be more costly, time-consuming and difficult for you and your lawyer. However, in my view the advantages described above almost always far outweigh the costs.