So, you’ve come to your lawyer with a potential deal. The terms are straightforward and fit on a two-page letter of intent. Your lawyer gets to work. (Side note, if your lawyer is from Way Law, before getting to work, your lawyer spent time talking with you to understand how you see the deal, and your short and long-term goals, and get into the other side’s heads to see how they see the deal, but that’s neither here nor there). Your lawyer comes back to you with a document that is WAY longer than the “simple” arrangement you presented them with. What on earth is your lawyer doing? Surely, they are paid by the word!
Well, first of all, if you’ve seen any of our blog articles, I write long entries for free, so there’s that. But seriously, today I want to shed some light on what lawyers are doing and how the various parts of a contract work together to build your deal.
What Is a Contract Doing?
A great contract is a reflection of a relationship. It’s not something independent of the relationship. It is carefully tailored to the specific arrangement of the parties, or in the case of your standardized, master agreement intended for reuse with certain clients or vendors, it’s tailored to the specifics of your business model and how this other person fits into that.
For a relationship to flow well all sides need to understand their rights, obligations, and expectations of each other. The real magic of contract drafting is in the planning of these elements. The contract is then the expression of all of these pieces.
Your relationships shouldn’t be made to fit a contract, the contract should be made to fit your relationships.
A contract is the memorialization of an agreed-upon set of rules for how a relationship will flow, setting out rights, obligations, and expectations, providing for an exchange of benefits, and allocating the risk of loss through present or future exchanges of promises or performance. That’s not simple.
The Music of Contracts
The lack of simplicity doesn’t need to be off-putting. Let’s step out of contracts, and into something we all know and love. Music. Music is universally beloved. Singing along with your favorite song is incredibly simple, and fun. Humming your favorite tune is even easier. But have you ever looked at sheet music? It is complex and completely indecipherable to someone who doesn’t know what they’re looking at. But sheet music serves an important function. It expresses melodies and harmonies in a technical fashion. This technical writing style of music allows for relatively uniform interpretation so that all parties reading the music can read the same thing.
Contracts do the same thing! Contracts use a technical writing style to express a relationship in a clear fashion. The technical style, the wordiness, and the various types of clauses limit the opportunities for misinterpretation and dispute. It helps everyone reading the contract read the same thing. Let’s break down how we do this.
Introducing Clauses, Sections, and Terms
Contract parts frequently are described as terms or clauses, but what is a clause and what does a term mean?
Let’s start with the most basic building block, the clause. The concept of a “clause”, “term” or perhaps more modernly, a “section”, is incredibly flexible. There is no standard definition but perhaps the easiest way to think of a clause is as a series of sentences designed to accomplish a particular goal. The clause changes as the description of our goal becomes broader or narrower.
Context is key; depending on the goal a contract part may be a clause or term while also being a portion of a larger clause. For instance, a commercial lease will contain a section describing rent. This may be referred to in negotiations as the Rent Clause. Within the Rent Clause, however, may be other subsections describing the timing of rent payments, the rent amount, any additional rent, late fees, or the manner of payment. Each of these sub-clauses may be referred to as a clause depending on context.
So, a clause is defined by its purpose. If the goal discussed is rent, there may be a reference to the Rent Clause. If the goal discussed is whether there is a fee for paying with a credit card there may be reference to the Manner of Payment Clause.
“Term” can be a synonym for “clause”, but more properly refers to the length of time that the contract will provide the rules of the parties’ relationship (e.g. a one-year lease has a one-year term). Not every contract has a term in this sense. A contract may contemplate a one-off transaction instead of an extended relationship.
“Condition” should not be used interchangeably with the words described above. A Condition is an act or event that must occur before something else is required to happen, generally someone’s performance.
Contracts are built in a certain fashion upon sets of clauses grouped by purpose. This stylistic similarity makes them more easily understood. BUT though they may be similarly styled even contracts of the same type or purpose (a lease, an asset purchase agreement, an employment agreement) will seek to accomplish very different goals depending on the concerns of the parties. Similarly, purposed contracts can be very different for many reasons like a party’s bargaining power, their business models, and the risks they can afford to accept. A contract that worked for someone else is likely not the best fit for you. A contract should be unique to the risks, goals, and concerns of the parties to best manage those risks and provide for a profitable deal.
More to Come
With those preliminary concepts explained we can now discuss the differences between contract clauses and understand the contract’s parts. This is where we’ll really start to see what a great lawyer is actually doing, and why that “simple” agreement turns into so many pages of text. We’ll save this for part 2 next month!
In the meantime, as you consider how to build the deals that build your business, the team at Way Law is always here to help!