Strategic Contracting

Let me begin by stating the obvious, namely, that these are my personal views, and not those of any employer, past or present.  

First, some background, for those not familiar with me or this personal blog.  I have practiced law in various in-house and law firm settings for the past 20+ years and have worked on thousands of transactions.  As a result, it is impossible not to form views on contracting (and various other topics) or to fully avoid a dispassionate approach to issues raised by law practice generally. 

This is the last article in this series.  Modern Contracting (https://johnpavolotsky.com/2021/07/19/modern-contracting/) and The Path to Efficient Contracting (https://johnpavolotsky.com/2021/07/19/modern-contracting/) are the others. 

To begin, strategic contracting presumes some contracting is not strategic.  If not strategic, then what?  Tactical?   Ad hoc?  Opportunistic?  Rudderless?  Technically, strategic transactions usually encompass mergers and acquisitions (M&A) and critical intellectual property transactions.  Purchasing office supplies is generally not strategic; licensing a patent portfolio or entering into a collaboration agreement capable of critically improving a company’s products could be. 

There is no shortage of books on various aspects of strategy.  The Attacker’s Advantage (Charan) and Intellectual Property Overview and Strategies for Entrepreneurs (O’Regan) are but two examples.  Per the American Heritage Dictionary, Second College Edition (1203), “strategy” is “the art or skill of using stratagems in endeavors such as politics and business.”  In turn, “stratagem” is “a military endeavor designed to deceive or surprise an enemy.”  Needless to say, none of this is very helpful. 

At the highest level, strategic contracting involves creating a contracting framework and executing against that framework.  However, strategic contracting is more than just creating and executing a negotiation plan (your opens, counterparty’s known positions, and your accepts and walks) for a given transaction (or sets of related transactions).  Let me explain (and illustrate). 

• What is the purpose of the transaction, and how does it fit into the overall goals of the business?  These questions need to be asked and comprehended before reviewing a given contract. 
• Do you even need a separate contract? A short-term (e.g., 30-90 day) evaluation of the binary code of a vendor could be performed under an existing non-disclosure agreement (NDA). Put otherwise, a separate agreement is not necessary.  For other licensing or other transactions, is there a framework agreement to which the software package in question could be added as an exhibit?  Every legal department is resource-constrained.  Knowing when you do not need a separate agreement (or any agreement) is critical to managing workload and being strategic. 
• Decide which agreements and provisions you will not negotiate. If you a have a nice, balanced mutual NDA, it should work for 95%+ of situations where confidential information of low to medium sensitivity will be disclosed. 
• Many parties prefer framework agreements.  Some, for reasons stated below, do not. Yes, more time is needed up front to negotiate framework agreements, especially if they have longer (5+ year) terms, but once they are agreed, you simply add exhibits to them for products and services.  However, some parties do not prefer these, instead preferring to negotiate individual license or other agreements to get another bite at the apple and to keep improving terms. Be mindful of both paradigms.  While not efficient, if you have the bandwidth (and negotiating power), negotiating one-offs may work out for you.  I am not a proponent of this approach as the improvements, if any, are typically incremental, but, as intimated above, opinions differ. 
• If you want to understand strategic contracting, work for a global procurement or sales organization.  So doing will, at the least, give you a bird’s eye of the contracting process and considerations among a broad range of deals.  It will also help you identify and propose solutions for systemic issues.  For example, if IP contamination is an issue, strengthening IP handling requirements, including audit rights, and mandating training could be helpful.  If you are on the sales side, most favored customer (MFC) terms, for example, can be challenging to manage across a broad of customers.  Supporting a procurement or sales organization will also give you the deal volume you need to hone your strategic contracting skills and practices. 
• Understand what issues are important to the business for a given transaction (or sets of transactions).  These could be cost, quantity, technical support (including extended support), continuity of supply, specific expertise, flexibility, IP indemnity, and so on.  What do you really want and why?  If you had to choose, which of these would matter the most? Given challenges in the global supply chain, continuity of supply might be at the top of your list. You may be willing to pay more, and to compromise more on other components of the deal, to help ensure this. Packaging (deal terms) is key. 
• Consider creating a one-pager for your business clients on key legal terms in contracts typical for the business. This can inform the conversation (e.g., does an IP indemnity even make sense here?) and accelerate time to closure. 
• Time is of the essence. Naturally, some deals, especially complex IP transactions or framework purchase agreements with key suppliers require more time to negotiate and close.  That said, to the extent possible, the focus should be on managed speed, by knowing where to spend your time on a given deal.  The perfect agreement delivered twelve months too late is useless.  Implementing the tenets of strategic contracting can help accelerate time to closure and to lead to more consistent results. 

Comments welcomed.