In Commercial Transactions, Which Side Gets to Draft?

Posted on October 20, 2009 by Ken Adams

While lurking at the Business Integrity booth at the ACC annual meeting, I’ve had a chance to discuss with many people their company’s contract-drafting requirements. Some of those I’ve spoken with have been in the procurement department; others have been in sales. I haven’t spotted any particular pattern.

That raised in my mind the question of who gets to draft the contract in any given commercial transaction, the seller or the buyer. I invite your suggestions as to what factors come into play.

Posted in Uncategorized | 12 Comments

  • Vineet Sharma

    In my opinion, the draft should be drafted by seller’s commercial department and thereafter duly vetted by legal department. Procurement people, normally, are not conversant with the commercial and contract terminology and their implications.

  • http://www.ericgoldman.org Eric Goldman

    Ken, this is a really important Q, but I can’t recall seeing any good studies of the issue. I wonder if there are ways to study it empirically? Perhaps you could offer a survey to your readers. It wouldn’t be scientific, but it might be a start. From my perspective, two of the main factors include the relative size of the parties (the bigger the player, the more likely they demand drafting rights) and the nature of the transaction (some buyers, even when big, lack a good form for certain types of purchases). Eric.

  • Chris Lemens

    Ken:

    First you have to know whether the contract comes to you because of a request for proposal. If the RFP has a form of contract in it, the vendor pretty much has to start with the customer’s draft. The exception is when a company sends out an RFP for a piece of business that is too small to support the legal overhead associated with revising the draft. Then you send back your own form contract.

    For all other deals, the vendor usually proposes the agreement.

    This makes some sense. In the RFP situation, the vendor is trying to closely compare multiple different proposals to ensure that it is comparing comparable things. In the other situations, the customer makes the deal happen faster by adopting the knowledge embedded in the vendor’s form agreement (assuming that it is reasonably well-written).

    Chris

  • Rob Hyndman

    My startup clients are quite used to being told what the form of their contract is going to be ;)

    So it’s clear that in at least some cases, the entire issue is decided by comparative market power.

  • Rob Hyndman

    I should have also mentioned that I’ve seen many cases where the business people openly discuss with each other how long their respective legal teams will take to get a draft out, and how reasonable they can be expected to be. I’ve lost count of the number of times I’ve seen business people from both sides of the deal jointly scheming about how to fast-track the documentation.

    And I’ve always thought that in many cases it makes sense to offer the draft to the other side, essentially to inflict it with the legal costs. This works best when they’re represented by outside counsel, obviously. ;)

  • Bruce Eddy

    I think the legal cost of producing the document – even in a small transaction – is often outweighed by the “first cut” advantage. The lawyer preparing the first draft has the advantage of structuring the document in a way that is rarely available to the responding lawyer. Professional courtesy often discourages the responding lawyer from re-casting the document so that it suits the responding lawyer’s methodology. This is especially true if the structure of the first draft is tolerable, but not ideal, from the point of view of the responding lawyer.

  • Karlis

    The comments show that a variety of factors determine who produces the first draft. There might also be a “strategic” aspect: on certain occasion, you might elect to deliberately make an exception to your policy, if any, of preparing the first draft. In one instance (acquisition), the vendor’s external counsel (a major top ranking firm)was so aggressive and defensive that I knew that our draft would come back 99% redlined, so why bother. Not being convinced about the soundness of the deal, I let them prepare the draft which, as expected, was a masterpiece of devious and leonine drafting. This substantially helped convincing our business people that, perhaps, the target was not as rosy and promising as they initially thought and, eventually, the transaction aborted.

  • Michael

    That we have to ask the question tells us that our notion that the contract is merely a reflection of the deal that has been struck remains a pipe dream. If that were true, it wouldn’t make a damned bit of difference who wrote it. The form of the contract now becomes a factor in ultimately deciding the deal that is struck, which seems to be tail-wagging-dog.

    If this were an ideal Adams-world, we wouldn’t care who started, since each of them would produce more or less the same thing, and nobody would have any cause to create ‘masterpieces(s) of devious and leonine drafting.’ (I love that phrase by the way!)

  • Chris Lemens

    Karlis:

    I think “leonine drafting” is now my favorite phrase of the week. Thanks for this invention! Let’s all use it.

    Chris

  • Adam Levin

    I think that cost should play a large role, especially where negotiations have not been particularly contentious and there is a reasonable expectation that the other lawyer isn’t going to risk upsetting a good relationship between the parties by trying to be too smart for his/her client’s own good.

    Other factors that I believe should be considered are:
    1. The relative experience of the two lawyers in the type of transaction. The more experienced one is more likely to produce a draft quicker, in line with what the parties agreed and that addresses the nuances in the type of transaction.
    2. Tactics. It might be advantageous in a particular transaction to unsettle the other lawyer as well as his/her client’s belief in their lawyer by offering to receive a document that you know will be sub-standard with the intention of returning it with extensive red-lining.

  • johnfitz

    “If this were an ideal Adams-world, we wouldn’t care who started…” Oh, so true.

    “Professional courtesy often discourages the responding lawyer from re-casting the document so that it suits the responding lawyer’s methodology.” Oh, so not.

    If my opposite number is an institution (academic, hospital, etc.) I offer to let them provide their template, point them to MSCD, and explain that if they are OK I may wish to make extensive revisions. I always precede the first-round revision volley with a phone call to explain where we’re going. Works 99 out of 100 times.

    For LVTs (low-value transactions), I always prefer to drive, no matter who the opposite party may be. Time value of drafting. Other than this case, I really don’t see an advantage to the first-cut. If it is a negotiation/drafting exercise and not a take-it-or-leave-it dictation who has the first run at the paper may not matter.

    When my counterpart is the 800 lb. gorilla I prefer a level playing field – it’s a coin-flip, but the gorilla usually wins, or he embeds the coin in my forehead. In most cases the big guy’s paper carries the day. The few times that I have done the first cut the drafting phase has ended up being unnecessarily prolonged as the gorilla tries to mash up the document I have created into his own form.

    “leonine drafting” is awesome! Plan to use it.

  • Andre Kerkovius

    A successful used car salesman once taught me to never set an opening price. In the absence of good reasons do to otherwise (several of which are found in earlier posts), let the other side take the first crack at drafting. If their opening salvo is better than your idea of a reasonable deal, let them continue to hold the pen. If they are truly not realistic, just say no and take over the drafting.