Contracting Triage

by Brian Rogers on February 2, 2012

in Contract Law Basics and Tips

Legal triage is an everyday part of business. It’s rarely anything so dramatic as the action you see on TV hospital dramas, but businesses constantly have to decide which legal issues are critical, which are important, and which can be put off for a while — or even ignored altogether.

I’ve often advised people to give important contracts special attention. That might mean a full-blown negotiation with rooms full of lawyers and business negotiators, bland pastries, and tubs of Red Bull. But sometimes it’s sufficient to have an executive higher on the corporate org chart read the contract closely and consider the pros and cons of its terms.

So some contracts deserve more attention than others, but how does a business determine which contracts need extra care and how much special attention is enough? Contracts with a high dollar amount are clearly important, as are contracts with critical suppliers and customers. If a contract would expose a business to outsized risks, those risks should be analyzed carefully and the contract terms negotiated appropriately.

Another framework for determining how much attention — including legal review — to give to a contract is based on the contract’s purpose.

What is the main purpose of the contract?

Written contracts serve multiple purposes. Sure, they memorialize the parties’ rights and obligations and contain promises that courts will enforce. But they also help business people think through the details of the business deal, and they help guide the parties in their interactions with each other once the contract has been signed.

Providing a considered framework for the business relationship

The negotiating process itself often helps the parties understand each other and think through the details of the business deal. People often approach a contract with a general idea of the deal, but they haven’t really thought through how it will work. For example, you might want to engage my company to sell your widgets in Missouri as your exclusive reseller, but does “exclusive” mean that you can’t sell widgets directly to consumers yourself? And what about Internet sales? Should those all go through me also? As we talk about these issues, the contracting process itself helps us gain clarity on the details of the deal.

If the main purpose of a particular contract is to help the parties figure out the details of the business deal, you probably don’t want to spend too much time and money on having lawyers make sure every legal i is dotted and every t crossed.

Guiding the parties along the way

Another purpose of a written contract is to provide guidance to the business partners throughout their relationship. When are payments due? What are my reporting obligations? Who has to pay for inspections of delivered product? What is the return policy for defective products? Having answers to these questions in a written contract can keep things running smoothly and prevent disagreements from turning into an all-out legal battle.

Contracts that continue to serve their main purpose throughout the parties’ performance should probably receive more attention than those whose main purpose is fulfilled once the contract is signed because the parties will refer to it from time to time and use it to guide their business relationship.

Creating airtight legal rights

You know from the start of some business relationships that you would fight for your rights tooth and nail if things were to go south. Maybe it’s because the business deal is valuable to your company or because your business’s most valuable intellectual property asset is at stake. If, for whatever reason, you would go to court to enforce the contract, you should make sure the contract terms are sufficient to give you a good chance of winning. Those contracts are important and should get special attention.

What do you think?

Thinking about contracts in this way glosses over a few things, such as the fact that many contracts have multiple purposes and that the parties might not know a contract’s principal purpose from the beginning. Plus, things change along the way. But businesses need to have a basis for determining priority in their legal triage decisions. What do you think? Can this approach can provide helpful guidance?

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