Using Visuals To Capture Important Contract Details


Let's face it, one of the more daunting tasks when trying to digest a new deal is discerning the relevant business/operational details and then capturing that information in a way that allows you easy access without going back to the contract itself.

In our Deal World Rule #4 (Use Maps to See the Deal Landscape) we discuss the utility of "deal maps" to help you better see the deal landscape. This is one of our favorite tools and we feel strongly that it is a great way to capture relevant information in an easy to digest format. There is an example of a deal map in the Deal World Rule link above to help spark some ideas.

Turning more directly to a contract, you can use a deal map to help capture the important deal terms so that a quick glance at your visual can replace hunting around in a contract. This can be extremely helpful when attempting to implement some contract management procedures. Generally, you'll want to capture several important terms:
  1. Contract Length:
    • If you know the end date well in advance, you have time to form a more intelligent plan for renewing or shopping around for a new deal.
    • Renewal can often be tricky! Many contracts have an "evergreen" clause which allows the contract to renew automatically unless notice is given by a specific date. Knowing this date in advance can save a lot of headaches!
  2. Payment Terms:
    • When can you expect payment after you've submitted an invoice? or How long after you receive an invoice do you have until you must remit payment?
    • What happens if there is a late payment?
    • What are your options if you are not paid?
  3. Ownership:
    • Who owns the Work Product? Is it licensed out to a party or owned outright without restrictions?
    • Who can use the Work Product and how can they use it?
  4. Confidentiality:
    • What information should be considered confidential and how should that information be handled?
    • What happens to information shared between the parties after the contract concludes or is terminated?
  5. Other:
    • There are many times you may want to include other important deal terms in your deal map. These could include Warranties, Non-Compete clauses, "Most-Favored Nation" clauses, assignment (i.e., can you pass on your responsibilities under the contract to a third party?), publicity (i.e., what restrictions exist with regards to disclosing your relationship with the other party and/or the fact that you are partnering with them in some way?) among others.
Having all this information in an easily accessible and easy to understand format can be a great way to keep on top of your deals and help you get the most out of your future deals! 

Contracts & Behavioral Economics


I'm always interested in the way in which compromises are reached, especially in terms of doing deals and putting that language into the contract. If we could do whatever we wanted without consequences,  we'd all write contracts that pushed all burdens, obligations and risks to the other party while handing ourselves all the upside. Since that's not the way things work, we end up making compromises that end up shaping our behaviors with respect to the other party.

In the post, Contract Terms as a Driver of Behavior, Tim Cummins marvels over how little attention is paid by the legal community to the field of behavioral economics. This is primarily due to the way in which contract principles are presented in most law schools: You do something wrong, the contract has a way of punishing that behavior. The question posed by Tim is whether that's really all that helpful in terms of a real-world business contract. Do you want to punish failure or encourage full disclosure in order to attempt to mitigate the consequences of failure. Not an easy line to draw on the page.

It's fairly obvious that negative consequences do not always deter bad behavior. According to the prevalent work in economic theories most parties will breach a contract when it's possible to pay the appropriate damages and still make a profit. So, the question in my mind is how to reward or at least encourage "good" behavior between two contracting parties. For some interesting reading on the subject, check out this interview with Harvard Business School associate professor Nava Ashraf. One of the issues raised in the interview discusses the issue:
"... we trust managers to carry out the interests of shareholders: We can build contracts to align manager incentives with those of shareholders, but we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalized the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests."
Without getting into the nitty gritty of Behavioral Economic Theory (which I am woefully unqualified to do), what many researchers are looking at now is what a breach of contract costs outside of the four corners of the contract. That is, what is your reputation, brand, trust, etc., worth in economic terms.