On Reviewing a Contract

Recently I received the following email:

I have been following your blog for a long time and your insights are really helpful for young lawyers. I am a young lawyer from India who has recently started working with a law firm. Though there are senior lawyers to guide me, I would like to have your views on contract review. Here are some of the questions that I have:

  1. What are the best practices for reviewing contract?
  2. Do I need to point out issues which may be one-sided but pretty standard in that particular kind of contracts?
  3. Do you suggest in-line comments or use the comments feature in MS Word?
  4. Should I make all the changes or just point out the major issues while reviewing leaving it to the opposite party’s lawyer to make the changes?

I don’t do deals, so my perspective might not be that relevant; I hope readers will chime in. But here are some thoughts, addressed to the sender:

The first part of reviewing is reading the other guy’s draft; see this 2014 post about that. The key point is that you should have a basic understanding of the substantive issues covered in the draft, so you have a frame of reference to compare it to. So study! Unfortunately, the resources available are of, ahem, mixed quality.

If you have comparable contracts prepared by your law firm, compare them to the other side’s draft.

Regarding what issues to point out, I guess the question is, To whom? Someone at your law firm? The client? Your client might need to have everything explained.

You can mark comments by hand, make changes using Word’s “track changes” feature, or use Word comments. I don’t know the extent to which people still mark comments by hand.

As between using track changes and comments, I guess that relates to your fourth point. I would have thought it’s always best to propose your own language, because that gives you the momentum. But if that would be time-consuming and you have to limit your billable time, you might find it preferable to let the other side do the work.

Generally, you should limit your comments to matters that could cause confusion, could add risk, or don’t reflect your understanding of the deal. Don’t make changes to make the language conform to what you think contract language should look like. Traditionalists are prone to doing that when reviewing drafts prepared by people who consult A Manual of Style for Contract Drafting. It’s annoying.

But I would be willing to ask the other side to get rid of what is usually simple clutter if I can show that it has the potential to cause problems. See for example this post on an instance of what I call “throat clearing” that confused a court.

Anything else, readers?

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

8 thoughts on “On Reviewing a Contract”

  1. (1) What are the best practices for reviewing contract? If you do mark-up the draft with changes, make sure ALL of the changes are accurately shown. It creates mistrust if only some are shown. Sometimes this happens because several people in the organisation make changes. It is a good discipline for the lawyer to control the draft and insert all the changes.

    (2) Do I need to point out issues which may be one-sided but pretty standard in that particular kind of contracts? There is no requirement to comment on the changes. However, it may help smooth the negotiations to add some comments. There is no need to comment on every change.

    (3) Do you suggest in-line comments or use the comments feature in MS Word? I assume you are referring to comments rather than revisions. I prefer to use the comments function for comments, as it makes them easier to delete once reviewed.

    (4) Should I make all the changes or just point out the major issues
    while reviewing leaving it to the opposite party’s lawyer to make the
    changes? It depends on many factors, including whether the client wants you to make the changes, to ensure that they fully reflect his instructions, or wants to save money by just providing comments.

    Reply
  2. Before you read so much as one section of the other guy’s draft, decide what you expect to see in an effective document, knowing what you know about the deal. The same skill that’s needed for drafting your own documents. That way, you avoid the first trap of being lulled into reviewing what’s in the draft, and forgetting about what’s missing, and you will recognise a document that isn’t even a good starting point. The other guy might have picked the wrong precedent and then you need to have a conversation before getting out your red pen – if only to set expectations about what’s coming in your amendments.
    On one-sided provisions, its annoying to see someone amend them just because they are one-sided. Market norms and role differences might justify for some asymmetric mechanisms. Pick your battles.
    The comments feature in Word is more elegant than in-line comments except that 1) you might need to adjust the Track Changes settings so that there’s enough screen real estate to see the comments and 2) be aware that it’s easier for the other guy to delete comments without the deletion being apparent.
    I’m wary of clients or counterparties who say “just focus on the big issues”. There’s a time for that, but you need to know the client pretty well to assess what is a big issue and it’s funny how often a minor issue looks like a big issue when it’s being debated in the court room. After you’ve had a few contracts litigated in the appeal courts, your coffee intake and sleep patterns get a lot easier if your first review of a contract identifies all the issues even if your client or negotiations filter some of them out.

    Reply
    • Interesting question and discussion … I’m not a lawyer but a Contract Manager…

      For me the 1st step is having a clear understanding of the business considered and the contract purpose (your client view)

      The second step is understanding the “risk appetite” of your client…after some discussions with your customer you will detect what is really critical for him, what he/she is willing to accept and to reject…Never forget your customer key “expectations” …and key “fears”

      And then have a “process view” when reading/reviewing the contract (= how all this will work? …very concretely).

      This “process view” will allow you to detect “hidden” issues or “unmanageable duties” or “exaggerated commitments” or “missing clauses” or “inconsistencies” or “unclear responsibilities” or “scope misunderstood…” etc.

      After that or at the same time …deepen the language used…deepen again….after a while you will get it done more quickly and accurately (more specifically, spend time on the “Definitions” section, this is the 1st risk area)

      I agree with Charles Drayson …do not underestimate small issues…”be afraid of words”…a few words can kill the benefits of your customer. For example if you detect the
      words “at all time” in a framework agreement, your customer could be automatically
      obliged to deliver certain duties in all successive Task Orders or SOWs that will be ordered by the other Party under this framework agreement…and if the termination
      clauses of this framework agreement do not allow an easy exit in favor of your customer, then…

      You can then categorize your findings like this for your reporting to your customer

      1) Crown-jewels duties (e.g., Intellectual property of your customer is OK)

      2) Relevant information notably when impacting certain duties (“Definitions », etc.)

      3) Apply-duties (“applying safety rules”, onboarding, …)

      4) Active duties (the “to dos”, the “project plan” …)

      5) Sensitive duties requiring specific follow up in the course of …(“delivery without undue delay”, “liabilities”, “warranty”,…)

      6) Express-Request duties (« encryption may be required by …. for…. »)

      7) Event-driven duties ( “in case of …”, “force majeure”, … )

      8) Passive duties (confidentiality, law, jurisdiction, etc.)

      Then make propositions to your customer or – to save time – explain him/her
      the “added value services” you performed …about several tens ….but to be commensurate to the contemplated contract

      A few services and examples:

      mitigating your customer risk exposure ( “out of scope” is now included, “order of precedence” has been defined)

      hardening your customer posture (now prices can be increased after X months…etc. )

      providing controlled flexibility to the Parties (“unless otherwise mutually agreed”, “amicable settlement”, “waiver” clause, etc.)

      anticipating deviation or inability risks of the other Party (“step-in” clause is now
      included )

      mitigating business relationship threats (“non-compete” , “non-solicitation” , “no
      exclusivity”, …)

      etc.

      Just my 2-cts, Patrick SURY

      Reply
  3. All sympathy to young lawyers! A few thoughts:

    1/ The other side did the draft, so the first thing is to make sure it accurately embodies the deal. Does it add points, omit points, or misstate points?

    2/ Second, are the provisions clear/certain/accessible? Do they reasonably notify the people who have to act on it what they must, can, and may do?

    3/ Third, is it concise? Bloat risks confusion. Follow Einstein: ‘Keep everything as simple as possible, but not simpler’.

    4/ Finally, is it ‘coherent’? Coherence is technical perfection: spelling, numeration, fonts, consistency of every kind.

    5/ How many changes you ask for after such a four-point review depends on etiquette. As Mark says, don’t be a control freak, but don’t leave important client interests blowing in the wind.

    6/ Another approach is to use the categories of contract language for a sentence-by-sentence analysis. What is this sentence here for? Does it oblige a party? Grant something to a party? Forbid a party from doing something? There’s a lovely cheat sheet around here somewhere.

    7/ Once you have identified the functions of a sentence, you can evaluate whether it does those jobs adequately, all things considered. If so, leave it alone; if not, propose a fix.

    8/ What a ‘fix’ is depends on whether you are trying [a] to make the contract better match a negotiated deal term, or [b] to fill in ‘usual stuff’ or ‘boilerplate’ that isn’t in the term sheet from which you’re working. In the latter case, you are acting not only as a drafter but as a ‘sub-negotiator’.

    9/ Sub-negotiators need to be instructed by their principals. Are you to seek every advantage, to concede every difference, to aim for middle-of-the-road provisions, or to do something else? Be sure to get approval for what you do, so blame doesn’t settle on you if disputes arise, unless fall guy is the role for which you auditioned.

    Reply
  4. I won’t add any more framework because the other commenters have made great suggestions. However, three minor things I wanted to add:

    1) check the governing law first to make sure you can give legal advice for the applicable jurisdiction. It’s frustrating when you spend hours on an agreement, get to the end, and realize you have to tell your client that your advice is not legal advice, but simply the advice you would give if the laws of the jurisdiction in which you practice applied. Sometimes a client would rather not pay for your non-legal advice.

    2) If I’ve been asked to provide comments to a client (not directly to the drafting lawyer), or if I ask a junior lawyer to provide me with comments, then assuming the agreement being reviewed isn’t rife with confused language, errors, and other poor drafting, my preferred method of delivering comments is as follows (otherwise, tracked changes and Word’s comment feature makes more sense):

    – For a couple reasons, I will deliver my comments in a memo format, with a 2-column table. Left column has the section numbers and right column has the comment and recommmended language. I feel this gives clients a better perception of the value in my work, leaves more room for me to comment rather than cramming the document’s margins with comments, and is less invasive to a drafting lawyer who might eventually see parts of that document. Beyond that, it let’s me include some overall CYA comments in the same document as my clause-specific comments, so that it’s all in one place (e.g. “This agreement is legally enforceable against all parties and creates a registrable charge in favour of the lender. A registrable charge means…”).

    Note however that this method is less efficient when dealing directly with the drafting lawyer, so I don’t usually use it in that circumstance.

    3) Comment in third person when delivering your comments to the client or a senior lawyer (e.g. “This clause requires the Seller to terminate its existing employees the day before the closing date”). Sometimes clients will forward your comments to others so if they’re written in second person (“you have / he has to terminate…”), it looks less elegant and can become confusing. Also, if I want to use a junior lawyer’s comments, it would allow me to keep them as written, whereas I would have to spend time modifying them if written in second person.

    Reply
  5. I’m not a lawyer, but a Contract Manager…and indeed this question is very interesting.
    Our challenges are numerous: our customer wants to be sure …we want to detect all issues…we want to avoid killing the business relationship with the other Party… we want to keep control of the contract language… we want to save time for several reasons… we want to demonstrate added value, …we want to be efficient…we want to be able to correctly assess the contract
    risks and explain them in an ethical manner (= being sure that my customer is now
    perfectly aware of… before signing)

    A) For me the 1st step is having a clear understanding of the business considered and the contract purpose (my client view)

    B) The second step is understanding the “risk appetite” of your client…after some discussions with your customer you will detect what is really critical for him, what he is willing to accept and
    to reject…So, never forget your customer key “expectations” …and key “fears”

    C) And then have a “process” view when reading/reviewing the contract, i.e., = how all this will work very CONCRETELY.

    This “process view” will allow you to detect “hidden” issues or “unmanageable duties” or “exaggerated commitments” or “missing clauses” or “inconsistencies” or “unclear responsibilities” or “scope misunderstood…”, “inappropriate language”, “legal issues” etc.

    D) After that, or at the same time, deepen the “language” used in key clauses. After a while you will get it done more quickly and accurately (more specifically, spend time on the “Definitions”
    section, this is a 1st risk area. Spend also time to identify/check the references/numbers of clauses used all over the contract…you could encounter surprises)

    I agree with C. Drayson …do not underestimate small issues…”be afraid of words” as my father
    said (he was lawyer). A few words can kill the benefits of your customer. For example if you detect the words “at all time” in a framework agreement, your customer could be automatically obliged to deliver certain duties in all successive Task Orders or SOWs that will be ordered by the other Party under this framework agreement…and if the termination clauses of this Framework agreement do not allow an easy exit door in favor of your customer, then…

    E) To save time because time is sticking, you can then “categorize” your findings for your reporting to your customer, giving him/her a rapid idea about his/her current posture and the
    items that should be negotiated with the other Party ….Category examples:

    1) Crown-jewels rights/duties (e.g., Intellectual property of your customer is OK ?)

    2) Active duties (are the real “to dos”, the “project plan”, SoW, etc …)

    3) Relevant information, notably when impacting key duties (“Definitions », etc.)

    4) Apply-duties (“applying safety rules of…”, onboarding policies, …)

    5) Sensitive duties requiring specific follow up in the course of …(“delivery without undue
    delay”, “liabilities”, “warranty”, …)

    6) Express-Request duties (« encryption may be required by …. for…. »)

    7) Event-driven duties ( “in case of …” , “force majeure”, … )

    8) Passive but important duties (confidentiality, law, jurisdiction, etc.)

    F) Your added value will also consist in the “services” you perform (about several tens
    probably but to be commensurate to the contemplated contract). So, explain your
    “services” to your customer …..A few services + examples:

    I mitigated your risk exposure ( “out of scope” clause is now included, “order of precedence” has been defined)

    I hardened your pricing posture (now prices can be increased after X months…etc. )

    I provided “controlled” flexibility to the Parties (“unless otherwise mutually agreed”, “amicable
    settlement”, “waiver” clause, etc.)

    I anticipated deviation or inability risks of the other Party (“step-in” clause is now
    included )

    I mitigated business relationship threats (“non-compete” , “non-solicitation” , “no
    exclusivity”, …)

    I mitigated legal issues (e.g. forbidden clauses in Shareholders Agreement, forum shopping
    risk, etc.)

    Just my 2-cts.

    Patrick

    Reply

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