My background is in drafting for deals rather drafting commercial agreements. (By “commercial agreement” I mean, vaguely enough, a form agreement relating to the supply of goods, services, or technology to customers.) But in my consulting activities, I’ve recently been dealing exclusively with commercial agreements.
Because any given commercial agreement will likely be entered into dozens if not hundreds of times, from the company’s perspective only select information is of interest in any given contract.
Consequently, it’s commonplace for commercial agreements to pull out of the body of the contract and place at the top of the contract those bits of information that are unique to that contract, such as the customer’s name and contact information, the signature blocks, the effective date of the contract, the termination date, and any identification numbers assigned to the customer or the contract. Often enough this information is presented within borders, with various bits of information assigned their own compartment. I refer to this sort of presentation as the “box.”
Presumably the idea is that if a company is entering into a particular contract many times, it simplifies matters for the company’s contract-management personnel to be able to find on the first page of each contract all information that is unique to that contract.
Here’s what I think of this practice:
Tradition and narrative logic (for instance, the idea that more important provisions should come before less important provisions) help determine the sequence of provisions in a contract. Departing from such standard arrangements can make it harder to read a contract. For instance, I find it a little awkward to have the termination date stated apart from the termination provisions, or the party contact information stated apart from the notices provisions. You should only take information out of its traditional context and put it on the first page if the administrative benefits clearly outweigh any adverse effects on readability.
I’m skeptical that the administrative benefits are significant. Presumably any company that has to handle commercial agreements with many different customers would maintain an electronic database containing relevant information from each contract. Only if company personnel were routinely required to consult copies of the contracts—surely not a desirable situation—would it matter where in a contract that information is placed.
And note that administrative convenience isn’t relevant to the customer, for whom the agreement is a one-off experience.
Another concern is that putting the signature blocks and other out-of-context information on the first page conveys the message that the company is intimately familiar with, and so doesn’t have much interest in, that which follows. I’m a little uneasy with anything that suggests to a customer that it is dealing with “boilerplate,” as that raises the possibility of the customer claiming that it didn’t know what it was getting into. This would seem to be particularly the case when you’re dealing with a contract that contains negotiated provisions. So in this context, too, you have to weight the pros and cons of putting information on the first page versus keeping it in its traditional place.
The net effect is that whenever I’ve redrafted a commercial agreement that contains a box or something comparable, I’ve dispensed with it—with the client’s assent—in favor of a more traditional arrangement.
8 thoughts on “Issues in Drafting Commercial Agreements—The “Box””
I don’t agree with you on this one. Segregating regularly negotiated provisions from the others has several benefits, including:
* as you note, the ability to quickly spot the changes to the form. This also makes it much easier to review the contract in the future for people new to the transaction.
* ease in training salespeople how to use the form. This includes making it easier to demarcate what salespeople are authorized to negotiate. Given that your client’s internal sales force is often difficult to control, it would be a mistake to dismiss the benefits of tools that conform their behavior.
* the signal (that you think is a negative, but many would regard as a positive) to the customer that negotiating the remainder of the contract is going to be harder/more time-consuming, necessitating the involvement of the legal department and possibly multiple rounds of negotiations. Thus, the form (and its implicit threat) “raises the bar” on the incentives for the customer to suggest changes to the form.
Given that so many contracts are signed without serious negotiation/modification, it makes sense to focus the businesspeople’s attention only on the issues that they are most interested in. Thus, I suspect using “the box” significantly speeds up negotiations in most cases.
Eric: Good points. I’m might still be a little too deal-centric, and I’ll need to keep an open mind on this issue. But I think that ultimately you need to balance administrative convenience and structural integrity. I was previously more amenable to the idea of the box, but after discussing the issue with clients, we ended up gradually whittling down to nothing what would have been in the box. But those were complex agreements; it may be that with simpler agreements the box has more to offer. Ken
Ken admits that his background isn’t in commercial transactions, and I think that’s clear from this post. (Sorry, Ken!) For one thing, he might have an unduly optimistic notion of the database capabilities of most companies. I’ve worked in two large law firms and had clients from small start-ups to Fortune 100 companies. I can’t think of any company that has an electronic database “containing relevant information from each contract.” In the real world, paper copies remain all too relevant–company company personnel are always checking contracts–business relationship managers want to know when the contract expires, what the payment provisions are. In that regard, presenting select information in the manner Ken describes is very helpful.
I agree with Eric on all of his points and I say that after practicing for almost a decade (1/2 of that in Silicon Valley area) and with a lot of experience in-house.
I understand your point, and I’ll bear it in mind when I’m next faced with redrafting a contract that has a box. I’m not inherently opposed to the idea of the box, it’s just that hasn’t proved helpful in the commercial agreements that I’ve recently redrafted. Ultimately, it’s a question of what arrangement the company finds most helpful.
One area where “box” style contracts are neccessary and important is in government contracts, which almost always have a “box” page on the front, but which many times create an ongoing relationship, with the associated contract memorialization that goes along with that, modifications, extensions, follow on contracts, etc. The box contract in that world is extremely helpful for getting the operational staff (program managers, etc.) the specific information about budgets and period of performance that they need quickly, and for allowing a contract who may perform work of many different types for many different agencies to know that the same type of information will always be in the same place, regardless of the identity of the particular client, or the nature of the services or the goods.
Presumably any company that has to handle commercial agreements with many different customers would maintain an electronic database containing relevant information from each contract.
Based on my experience as an in-house lawyer, I think you presume wrongly.
However, another advantage of the “box” is that it makes it much easier and faster to create an electronic database (with a lower error rate to boot).
As a business lawyer whose clients generally have no contracts administration staff, I agree with everything that the above writers have added to Ken’s post. Eric hit the nail on the head, particularly with his third point.
I have redrafted contracts which were otherwise perfectly acceptable, simply to include either “the box” or, in the case of more complicated commercial agreements, an attached schedule. My client’s primary purpose for the change was to send a message to the recipient that the “boilerplate” was not subject to negotiation. You would be surprised how often people even in large organizations will sign a “form” but will send a “contract” to their legal department for review!
The change in format doesn’t knock out all attempts to negotiate terms which are outside “the box,” but I have seen a marked decrease in comments after revising the format.
I pretty much agree with what the other commenters have said. But I have seen an awful lot of poor uses of the box. Over time, the terms in the box migrate away from the terms of the rest of the agreement as business people change the stuff in the box. The worst case comes when there is enough in the box that someone sends just the front page of the contract and it comes back signed.
Here is how I approach the front page. I want it to include all the variables for the contract, but I want it laid out so that it is a good summary of the business terms of the agreement for the customer. Basically, I want the front page to include enough information that the business person on the other side can find 80% of what they could reasonably want to know on the front page.
I have done a lot of software and service deals this way. Typically, the front page ends up including:
a. identify of parties;
b. identify and quantity of products, with cross references to any relevant provision defining them in the agreement;
c. term, with cross reference to termination and extension provisions in the agreement;
d. fees, with cross reference to payment terms in the agreement;
e. billing and notice addresses;
f. cross reference to any provisions that must be conspicuous;
g. signature block.
On the front page, you should avoid defining thing where your definition is pretty common-sense. Instead, push it to the back. So, for example, if a lease starts on the date of installation, just say “The term of this agreement starts on the Date of Installation (as defined in Section X.Y) and continues . . . . ” Then, back in Section X.Y, you define the Date of Installation to mean the earlier of when it is actually installed or 30 days after delivery (or whatever your case may be). This appeals to business people.
The sections on the second page should be heavily weighted towards the things that you cross reference on the front page and that the customer would care about. For example, if warranty coverage is important in your sales process, the warranty section gets bumped up. If there is a description of the service being bought, it usually gets bumped up. If there is bargaining power disparaity through the term of the agreement, the termination provisions might get bumped up. In any case, definitions, disclaimers, and legalese fall to the end.
It takes a lot of experimentation to get this right, but I have seen a lot of six-digit contracts come back signed the same day because of it.