Wednesday, June 21, 2006

First Draft Agreements

As a reformed lawyer, I may be more sensitive to how contracts are drafted than some other deal guys. However, a conversation with a former colleague reminded me of a particularly annoying tactic some folks use when sending the initial draft of a definitive agreement - the one-sided, overreaching first draft. It's not something you see every day, but still far too often.

I'm not talking about terms that need to be unilateral or lopsided because of the parties' differing roles, or even terms that are being aggressively negotiated. No, these agreements are laced with terms that favor the drafting party beyond any measure of reason.

Some claim that it makes sense to send over a lopsided contract because (a) the terms may stick and (b) it gives you terms to negotiate back from. I don't find the first point compelling, and the second represents a rather juvenile outlook on negotiating. Sure, lopsided contracts will occasionally work with unsophisticated parties or those you have loads of leverage over. However, in the vast majority of cases they will:

- Piss off your counterparty, harming any useful rapport you may have established
- Make your counterparty dig deeper into the agreement to look for all the other ways you're trying to screw them
- Waste a lot of time as the agreement gets negotiated back to where it should have been in the initial draft

End result: You're back in the same place you would have been had you sent a fairly-written contract, at substantial net expense in time, fees and credibility. You may even lose the deal because of the added delay or trust issues created by your draft.


Anonymous said...

Would 'Chump Insurance' fall under this category?? ;)

Anonymous said...

The logic of sending an unreasonable first draft is a bit more subtle. Any hard-ass provision that isn't in the first draft is effectively waived in most cases. The risk is that the adversary will respond with an unreasonable markup (hoping to gain advantage or simply to convince his/her client or supervising partner that he/she is tough) and I will end up negotiating my adversary's unreasonable terms. (Rebutting with my unreasonable terms is weak -- they weren't important enough to start the negotiation with.)

If I know that my adversary tends to be reasonable, I take the chance and start with a reasonable draft. If I suspect the adversary will respond with wholly unreasonable terms (classic example, the adversary is a mega-law firm and I am in a small, unknown one), I warn the client and get out the outrageous boilerplate. I can and do junk it if the adversary turns out to be reasonable.