Principled 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. 

I had planned to write a three-part series on contracting: Strategic Contracting (https://johnpavolotsky.com/2021/08/01/strategic-contracting/), Modern Contracting (https://johnpavolotsky.com/2021/07/19/modern-contracting/) and The Path to Efficient Contracting (https://johnpavolotsky.com/2021/07/19/modern-contracting/).  Here is part four.  Perhaps there is a book here, albeit one on a rather niche and esoteric topic. 

Habit 2 (Begin with the End in Mind) of The 7 Habits of Highly Effective People (Covey) consists of identifying and living by correct principles.  Thus, these (first) principles, once elucidated, are applied to and help guide each decision.  The same concept, of first principles, applies equally to complex transactions, where a broad range of options are available to the parties, and a foundation, a functional guidepost, is needed to drive meaningful discussions.  The concept of first principles answers the “what” and the “why” and once those are agreed, the parties can proceed to the “how.” Transaction first principles might include increasing the competitiveness of the parties’ respective products and services, developing new knowledge and skills, providing a proper return on investment (in a non-recurring engineering (NRE) arrangement), and so on.  Alignment on first principles can be express or implicit.  An express approach is preferred, inasmuch as it, in effect, a deal constitution, can be revisited to ensure that the parties are adhering to it when negotiating the deal.  Like the constitution, first principles are not immutable; changes in known facts or circumstances should cause the parties to re-examine and if and as necessary revise first principles.  Transaction first principles can be encapsulated in an email; a formal document is unnecessary. Once first principles are agreed, a term sheet and definitive agreement can follow, with deal points guided by these principles, rather than maximizing a party’s position or imposing, without thought, market terms.  Once the deal is closed, its success can be judged against the transaction first principles, which, as mentioned, can be updated to reflect new information.  

Comments welcomed.