3.1 Setting up an agreement

This activity implies a few types of actions:

  • Identification of subject matters. Identifying and grouping the transaction or the main elements of the contract which need to be addressed. To a very large extent, the identification of the main elements of the contract is driven by the nature of the agreement at hand and common practice. (In other words, a contract drafter typically starts with a model contract.)
  • Splitting up. Subdividing the main elements of the contract into articles and contract sections. This requires a classification or determination of where any given provision should be placed.
  • Use of definitions. Identifying concepts for use as definitions (and substitution of defined terms in the contract clauses). In complex or large transactions, this also entails an evaluation as to whether a hierarchical structuring of defined terms and definitions is desirable.
  • Classification. Recitals, definitions, warranties and conditions each have their own place in the contract.
  • Prioritisation and logical ordering. Once the contract articles are defined, they should be placed in the right order.

Identification of subject matters. For the identification of subject matters, a drafter should consider whether all elements need to be addressed in one and the same contract or instead be divided over two or more documents. For example, a sales agreement may well contain a relatively insignificant licence provision, but if intellectual property licensing is more than ‘relatively insignificant’, a division into two contracts would be desirable. Similarly, a joint development agreement often entails the establishment of a steering group; but if such body would also be regulated as regards its power and authority to act and modify the scope of R&D, it is desirable to split the JVA into a joint venture (partnership-like) agreement on the one hand and a mutual services agreement with IP clauses on the other hand. Contract elements are grouped together in different transaction document if the relative importance of those elements would otherwise result in an overly mixed document. To a large extent, custom dictates what clauses are included in the standard kinds of contract.

Splitting up. Subdividing the contract elements into articles and contract sections requires a classification or determination of where any given provision should be placed. Whether articles should be split up or contract clauses subdivided, may well depend on the length of the contract. In U.S. style contracts, the tendency is to reduce the number of articles (in a share purchase agreement sometimes to no more than four or five articles). Whether a contract clause should be divided into subclauses mainly depends on how long the section is, the topics it addresses and whether the subdivision enhances clarity.

Classification. Recitals, definitions, warranties and conditions each have their own place in the contract. Background considerations and explanations (e.g. “…in order to enable Seller…”) should be split off from obligations or other contract provisions and be concentrated in the preamble. Definitions are typically placed in a separate article (or sometimes a schedule). Warranties should never be mixed up with obligations or other contractual provisions. Conditions that affect the entire agreement or a contract’s main dynamics should be brought together in one article.

Prioritisation and logical ordering. In determining the sequence of the articles and contract clauses, a few forces come into play. Because a contract is not typically drafted from scratch but based on a model or precedent, the sequence of articles and contract clauses is often similar from contract to contract. A share purchase agreement, for example, is often structured as follows: conditions precedent; general sale and transfer provisions; purchase price provisions; covenants in relation to the sale and transfer; covenants covering the period to closing; the closing agenda; non-compete; warranties; limitations of liability; specific indemnities and miscellaneous provisions.

As also discussed in section 2.1 (think analytically and draft MECE), efficiency suggests that the following considerations should be applied:

  • General provisions (e.g. defining scope, desired results and principles) should precede specific provisions (e.g. limiting provisions, procedures, exceptions and carve-outs).
  • Important provisions should precede less important provisions.
  • Clauses identifying causes of action or triggering events should precede their consequences.
  • Substance should be distinguished from form.
  • Content should be distinguished from procedure.
  • Chronological order (if applicable).
  • Provisions with a certain permanency should precede temporary or ad hoc provisions.
  • Miscellaneous provisions (boilerplates) come at the end.

Custom not only has an economy of effort in its favor; it also makes it easier for experienced practitioners to find their way around a contract and determine how the contract addresses a certain topic. Ultimately, it is up to the individual drafter to strike a balance between logic and customization when determining sequence.