March, 2016

Hi everyone…

Over the next few blogs we will be looking at the area of contract law and contract law drafting.

The job of the contract-drafting lawyer can be difficult and I dare anyone to say anything to the contrary! An old partner of mine, once compared businesses entering into a transaction to a young couple intent on getting married and the consequences be damned. The couple, young and in love can only see the positives and considers anyone bold enough to raise potential negatives as party poopers, wishing only to ruin an otherwise perfect situation. In the same way, businesses once they have taken the basic decision to enter into an agreement, often concentrate too much on the positives and not enough on the negatives.

There are a number of reasons why businesses at contract negotiation stage can be overly optimistic.

• Everyone needs to do business Businesses are there to do business and so doing nothing is not an option; sometimes a deal, even not a very good one, may, at first glance, appear better than doing nothing. Moreover, once a business has chosen a particular course of action, energy and momentum have already been committed to the deal. At this stage, there is an understandable reticence to pull back, once the ball is rolling so as to speak. Indeed, there are risks attached to every course of action but the real question is whether the risks, when compared to the gains are reasonable or not.
• Don’t forget my bonus The commercial people running the deal are frequently on bonuses that will probably be negatively impacted if the deal fails to go through. Thus, if eyes can be shut to the existence of a problem, then they frequently are as in the short-term identifying problems is in nobody’s interest.
• No one wants to be associated with a smelly dog There is a genuine worry that face will be lost if what appeared to be a sweet deal turns sour. People don’t want to be seen to have backed the wrong horse and so are inclined to keep supporting a deal, even when it no longer necessarily resembles what they had in mind, when it was first introduced.

The result of this is that sometimes no one wants to hear that an apparently attractive transaction is turning sour. Consequently, the drafting lawyer raising legal impediments will frequently find himself/herself giving a message no one wants to hear. Indeed, often (s)he will find himself/herself wondering whether (s)he should be ringing the alarm bell, when clearly no one wants to hear the message. The party is in full swing, but apparently only (s)he smells smoke. It can be a lonely place to be, but only if the drafting lawyer has forgotten who (s)he is and what role they are meant to play; the reason for which they have been invited to the party.

Indeed this brings us to a number of basic rules the successful contract-drafting lawyer should never forget. The lawyer, even if working in-house, is not there to:

• be part of the deal;
• say it is a good deal, a bad deal or an OK deal;
• make people feel good or bad about the deal.

The contract-drafting lawyer is at the negotiating table to do two things and only two things. (S)he is there to:

• advise on the legal consequences of the choices his/her employer may wish to make; and
• once that advice has been given and fully understood by the client to draft a quality unambiguous contract, reflecting the client’s wishes.

Anyone who expects more from his/her lawyer has not understood what a lawyer is paid to do. This is not a cop-out or a selfish bid by lawyers to limit liability; it is just a fact of life. A lawyer has not completed a fancy business degree with Harvard or HEC and so is not qualified to give business advice. Neither is the lawyer there as a representative of the law. It is not his/her fault if the law says a party can or cannot do something, (s)he is just telling a client how it is. After all there is no use in shooting the messenger, especially when the client is paying for the message!

A lawyer is there to advise on the law and to draft the contract that the client believes will serve his/her interest for the term of the agreement. This is already a lot, but the nature and importance of the lawyer’s role can often be underestimated or misinterpreted. It is the nature of legal advice, that although good advice often goes unnoticed, bad advice is never forgotten. Put another way, a good contract allows people to avoid problems and so goes unremarked, whilst a bad contract only causes problems, but by then it is too late. This is because in the common law system the contract is not just another document; it is THE DOCUMENT.

It is important to recall that in civil law jurisdictions, the notion of freedom of contract is often just that, a notion, with many issues that would normally be dealt with by the parties, in reality the subject of legislation. Thus, it is not only the parties but also the legislature that are drafting contracts. The approach of the common law is different and so every word in a contract is there for a reason or at least should be there for a reason. This is because in the common law, the contract is the law. Indeed, non-common law lawyers and clients often find common law lawyers to be pedantic and overly concerned by detail but what they don’t realize is that in the common law the contract defines the scope of the parties legal rights and duties.

Think about this, the parties effectively have the freedom to create their own law. This is both a great opportunity but also a great responsibility and one that makes contract drafting a serious business and explains the length and detail contained in the average common law contract. Over the next few months we will be looking at how we can benefit from this freedom and avoid the potential dangers that it implies. The first rule is that every word counts or should count and if it doesn’t count, then it should not be in the contract….

OK see you next month.