A Game Plan for Tackling Third-Party Paper, Part 1 of 2

Using your own contract template while negotiating a commercial agreement has been compared to playing a football game in your own stadium. You are familiar with the structure, provisions, and alternatives. You have already gone multiple rounds with counterparties on the most frequently negotiated clauses, and your arguments and counter-arguments are well-rehearsed.

While I prefer not to think of any negotiation, contractual or otherwise, as zero sum, I find this analogy apt.

Using a counterparty’s contract template (aka “third-party paper”), on the other hand, can be a bit like playing a football game on the road – if you don’t have a smart game plan to review the template and identify the differentiators, you’re going to be in trouble. A structured approach is critical to ensuring a successful outcome.

Third-Party Paper

Third-party paper is a familiar headache for corporate attorneys and contract experts. It stymies uniformity, complicates digitalization, and requires more time and resources to review. Each one is unique, rarely a clean fit, and can be a trap for the unwary.

There is often a fleeting temptation to throw the project over the fence for outside counsel to deal with, and I can hardly blame any contract expert who chooses to do so. But if the task falls to you for budgetary or other reasons, I think it is a challenge worth taking on and a skill worth refining, especially if you aspire to be a true contract nerd.

As the sole in-house counsel for a fast-growing healthcare technology company, I spend a fair amount of time drafting, reviewing, and negotiating various types of commercial contracts. By creating templates for our most common agreements, I have been able to streamline this workflow and standardize our terms to a great extent. While contract templates are an established best practice for promoting uniformity and digitization, and making it easier to manage risk, the problem is, everyone’s doing it! Having worked for early-stage, growth-stage, and mid-market companies for my entire in-house career, I have often found myself in the position of having to adapt   counterparty templates.

In this two-part series, I share a structured approach to reviewing and adapting third-party paper in the context of complex commercial transactions with multiple agreements and schedules. It is essential to follow a defined strategy rather than jumping right into redlining the documents. Many legal technology and Contract Lifecycle Management (CLM) solutions include functionality that can assist with various parts of the contract review process, and I point to some of those options below.[1]

Play 1: Start by Asking Why

If you are compelled to concede  on using your counterparty’s templates, I have found it worthwhile to ask for an explanation. The ensuing discussion will uncover helpful intel about your counterparty’s review team and processes, which will greatly increase the likelihood of a positive outcome.

For example, I applied this strategy while negotiating a complex commercial agreement with a prospective customer who was significantly larger in size and had more bargaining power than we did. The stakes were high, but their templates were a poor fit and would be very time-consuming to adapt. Yet, they predictably demanded we use their forms, citing “corporate policy.” We were pushing up against year-end and wanted to get the deal done before the holidays. I ignored the “corporate policy” explanation and politely asked my counterpart to expand on why he felt their templates needed to be used, considering that this transaction involved the implementation of our solution, for which our template was ideally suited and would ensure that the contract could be finalized much more quickly. I then spent what our nervous sales team felt was an inordinate amount of time quizzing him about their templates, key provisions, “non-negotiables,” approval structure, team members, holiday plans, lead counsel, etc. All of this was helpful intel in informing my negotiation strategy and approach.

Regardless of how you do so, gathering such intel up front in any complex contract negotiation is important. Insisting on an explanation rather than simply conceding also sends a subtle message that while you may be small, you are not a pushover. I have found that this tactic of subtly “owning” the process discussion tends to give you an upper hand in controlling the flow and “picking up the pen” at the end to push the process to conclusion.

Incidentally, they don’t need to know you are a masochist and enjoy dealing with third-party paper. Once you have determined that you need to concede on the forms, it can be beneficial to your overall negotiating strategy to make a bit of a deal out of the concession, as long as you don’t overdo it. The idea that conceding “the menu, the venue, [and] the seating” puts the other side in a subconscious obligatory space has its detractors, but I have found it to be effective on the margins. It definitely does not always work, and you risk being laughed out of the room if you do it inappropriately (“I drove all the way down here, the least you could do is agree to uncapped liability!”). But if used judiciously, it signals your good faith to the other side and conveys that you care more about results than winning empty process points.

Play 2: Perform a Gap Analysis

All of the above was just throat-clearing, now you have to actually get down to the work of adapting the templates. Where to begin?

Resist the urge to dive straight into redlining; doing so makes adapting and merging your preferential language into their templates more inefficient and error-prone. I have loosely adapted my own approach from Sterling Miller’s excellent “three passes” strategy to reviewing contracts, which calls for first understanding the framework of the contract, then reviewing the defined terms, and finally, digging into the key provisions. The principle of successive, progressively more in-depth reviews is especially useful here.

Step 1:

Do a high-level scan of the various agreements and schedules to understand their interrelationships. Identify the master agreement, and what terms reside there as opposed to separate schedules or addenda and note how they relate to each other. Illustrate the interrelationships on paper, drawing boxes for each document and lines among them, and note which key provisions reside in which document(s).

There is an important judgment call to be made here. Is the counterparty’s framework suitable for this transaction? Conceding to their templates does not necessarily mean you have to force-fit your agreement into a framework that does not make sense. Larger counterparties are likely to have a core set of “master agreement” terms and move terms related to services, data use, or SaaS into separate addenda. This may be in part because there are different lines of review and approval. Changes to the data use and privacy provisions may need signoff from compliance, for example. Just make sure as you internalize their framework that you understand how the pieces fit together and fit your provisions into the right places. Make sure to understand the order of precedence among their documents so that provisions you insert into an addendum do not get trumped by their master agreement in the event of a conflict in interpretation.

Having drawn out the interrelationships among the various pieces of the contract and made some critical decisions about the appropriate framework for the agreement, it is time to move to Step 2.

Step 2:

Review the definitions. Are they in a dedicated section or scattered throughout the document? If they are in their own section, separate them so you can use them as a reference as you review the document. Pay close attention to any differences that jump out from your own key definitions.

LegalTech Tip: Some tools automatically “pull out” defined terms and make the full definition readily available to you as you are scrolling through the agreement. This helps in cases where definitions are scattered throughout the document. A real time-saver!

Step 3:

Do a quick page-by-page review, circling or highlighting key provisions and section references. If the templates are a bad cut-and-paste job (as many unfortunately are), you may find incorrect or even non-existent cross-references that you will need to sort out later. Also make sure you keep a sharp eye out for indemnities and covenants sitting in other sections. If the complexity demands, I am not above using colored highlighters (or the digital equivalent) to flag key provisions across their different documents, which I know I will need to match up and crosswalk later.

LegalTech Tip: Here again, many tools can help highlight section references, spot incorrect or non-existent cross-references, and generally serve as a second set of eyes to minimize human error.

Step 4:

Finally, do a more methodical page-by-page, sentence-by-sentence review of the document. Take your sweet, fully-caffeinated time with the most important provisions, such as ownership of intellectual property, data privacy, indemnification, limitation of liability, and termination. This is the step that inexperienced contract reviewers tend to jump right into, and generally get away with for simpler agreements, but when dealing with multiple, interconnected agreements, you can imagine how much easier it is to perform Step 4 after having developed an understanding of the framework, defined terms, frequent cross-references, and key provisions.

Two Important Caveats 

• Do not rely solely on headings or a table of contents to understand a contract’s true structure and contents. A table of contents is usually auto-generated from the section headings, and sections headings are famously “only for ease of reference.” It may turn out that the template has covenants and indemnities buried in other sections, substantive provisions stuck in recitals, and important obligations lurking in the miscellaneous provisions. That is what Step 3 is for.

LegalTech Tip: If you have imported the contract through a CLM tool, some of them can provide their own take on the structure of the document and help you spot that indemnity lurking in the “Taxes” section or the obligations hiding in the General/Miscellaneous Provisions section, which brings me to…

• Never overlook miscellaneous provisions. Glazing over boilerplate is one of those classic blunders every reviewer must resist falling victim to, right up there with never getting involved in a land war in Asia. A poorly worded waiver or severability provision can mean the difference between winning and losing a lawsuit down the line.

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Stay tuned for Part 2 of this series, in which I share additional tips on successfully dealing with third-party paper, including my suggested approach to cross-walking and redlining the counterparty’s template, and advice on negotiating the most contentious provisions.

[1] For the purposes of this topic, I have chosen to suggest a low-tech approach while making mention of LegalTech options that can assist with various parts of the process without calling out specific brands. In my experience, the functionality and mileage of the myriad of solutions that exist out there are quite varied, and I am making the assumption that for many small law departments, budget for LegalTech may be limited. I am also a big believer in refining the low-tech version of a workflow before relying too heavily on a tool to support it.[/vc_column_text][/vc_column][/vc_row]