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The In-House Advisor Published by Shepard Davidson & Renee Inomata

In-House Counsel Need to Think Like a Litigator When Drafting Contracts

Posted in Contracts

Memorializing an agreement in a written contract serves two primary purposes.  First and foremost, a written contract should clearly set out the deal terms so that there is little or no chance of a misunderstanding as to what the parties’ rights and obligations are.  Further, to be sure that they get the deal terms right, in-house counsel often turn to business people involved in the deal because they are the experts on the deal terms. 

The second reason to have a written contract is to set out the “Rules of Engagement” that will apply if a dispute arises between the parties.  Such Rules, on which I have written in other posts, include choice of law provisions, forum selection clauses, liquidated damages provisions, and arbitration clauses, just to name a few.  Surprisingly, however, and in contrast to in-house counsels’ willingness to consult with business people about the deal terms in a contract, in-house counsel often are reluctant to consult with experts on the Rules of Engagement, i.e., experienced litigators.  Whether the reason for this is a psychological aversion to placing too much emphasis on what might go wrong with a deal before it is fully in place, a concern for legal fees, or some other reason, the fact remains that even a slight variation in one or more dispute-related clauses in a contract could have an enormous impact should a dispute ever arise.

I suggest that the benefits of consulting with an experienced litigator in connection with almost any contract will far outweigh the cost.  Indeed, in many instances a litigator will not have to spend very much time issue-spotting and/or advising on any dispute-related provisions.  If in-house counsel really do not want to do this, however, they at least need to think like a litigator when negotiating and drafting such provisions.  This involves trying to imagine as many scenarios as you can involving the deal falling apart and/or how one party or the other could breach its obligations under the contract.  Among other things, doing this might reveal that: (i) it is advantageous for the law governing the contract to be that of the state where the other company resides; (ii) there is a big risk to your company if mediation is required before a lawsuit can be filed; or (iii) it is worth agreeing to the other party’s desire to have a liquidated damages provision because a court never would enforce what has been proposed.  

Thinking like a litigator does not mean: (i) stubbornly holding out for every little advantage possible; (ii) refusing to compromise; or (iii) building into the contract remedies for every conceivable type of breach, no matter how unlikely.  Negotiating favorable Rules of Engagement, just like negotiating favorable deal terms, always requires balancing the risk of not having your preferred wording with practical and business realities, as well as your company’s desire/need to ensure that a business deal is consummated in a formal contract.

Let’s face it, the percentage of contracts that ultimately end up with some sort of dispute that has to be resolved through litigation or some other formal process is far from de minimus.  Thus, while in-house counsel may not enjoy thinking like a litigator when drafting contracts, doing so can play a critical role in placing your company in a much stronger position if a dispute does arise.