Measuring the effectiveness of the contracting process

January 6, 2016

4541The primary measure of performance in the contracting process is whether or not the final contract clearly and completely memorializes the intent of the parties with respect to the particular transaction. It is not sufficient for the parties to have good ideas about the goals and purposes of the relationship if the contract does not provide a clear and unambiguous road map for the parties to follow in order to achieve their objectives.

In order to prepare an effective contract, counsel must fully understand the key details of the transaction and have access to all of the important background information relating to the negotiations, and prior relations, between the parties. In addition, counsel must have sufficient information and experience to make sure the contract fulfills the following roles and purposes:

  • The contract must cover all of the essential elements necessary for formation, interpretation and performance of a legally binding agreement under applicable laws. In order to meet this requirement, counsel must fully understand the client’s intent with regard to all material terms, such as goods covered by a sale-of-goods contract and the pricing and delivery terms.
  • In cases where the contract is intended to govern a continuing relationship between the parties, it should include all necessary policies and procedures for managing the exchange of performances between the parties. Parties are often able to achieve this goal in a simple, shorthand fashion, such as by incorporating INCOTERMS to identify delivery terms in an international contract. See Sales of Goods (§ 120:72). In other situations, however, the parties may rely on detailed operations manuals that are more extensive than the original contract and cover a variety of issues in detail.
  • The contract should clearly state all of the rights of the parties necessary in order for them to achieve their underlying business objectives. This can be as simple as defining the right of the seller to receive payment within a specified period of time; however, counsel must carefully consider all relevant and reasonable rights when preparing the contract.
  • While the parties obviously anticipate, and hope, that the exchange of performance between the parties will flow smoothly, counsel does a disservice by not anticipating potential problems and crafting remedies in the contract before it is signed. For example, a default in payment obligations will certainly trigger collection rights in favor of the party expecting payment; however, consideration should also be given to charging interest and allocating collection costs to the defaulting party.
  • Counsel should be able to provide reasonable assurances to the client that the contract will be enforced and interpreted in the manner described by counsel before the contract is signed. In order to provide effective counsel in this area, it may be necessary to engage experts to review particular provisions and provide an opinion regarding the enforceability of a particular right or remedy included in the contract.

Gutterman WLEC bannerBusiness counselors should set aside time early in the client relationship for assessing certain issues relating to the client’s processes for formation and performance of contracts.  Counsel may use a contract formation and performance questionnaire and diagnosis form similar to the one appearing at §100:126 in Business Transactions Solution to get a better sense of how the client approaches the contract process and how much time and effort is invested in negotiating and documenting business relationships.

Counsel should also build upon the communications during the questionnaire and diagnostic period by providing clients with tools they can use to develop and improve their contract management process.

Examples include an executive summary for clients regarding contract management (see Business Transactions Solution § 100:127) and an overview of recommended procedures for contract review and approval (see Business Transactions Solution § 100:128). In addition, counsel should use the results of the diagnostic process as a guide for developing new templates for contracts that the client will likely be negotiating as the attorney-client relationship moves forward (see Business Transactions Solution § 100:131).

You can learn more about building an effective contracting process for your clients by attending next week’s Business Counselor Institute program on Tuesday, January 12 at 1:00 PM EST.  Here’s a link for more information.

Titles by Alan Gutterman