In our previous blog, we discussed the importance of analyzing contract from a legal perspective. Now let’s discuss what are the major types of clauses an analyst comes across while analyzing a contract:
Standard clauses – As discussed in the previous blog, it is the boilerplate provision that occurs frequently. They are generally consistent clauses. But, though the commonality exists, the analyst has to remember that boilerplate clauses may be easy to find and convenient to use, but there are many legal issues that may come hand in hand with them. Thus, it’s important to understand why those provisions appear in the agreement.
Negotiated clauses — In any contract, negotiated clauses are commonly occurring, divergent clauses. Such language variation may occur due to negotiation between the parties or it can be attributable to different drafting customs or personal preferences. For example, the purchase price clause in an Acquisition Agreement might exhibit wide variation across a set of documents. However, similar degrees of variation can also be found in a severability clause. Years of research and analysis has identified the following as top negotiated clauses: –
- Limitation of Liability
- Price / Charge / Price Changes
- Intellectual Property
- Liquidated Damages
- Performance / Guarantees / Undertakings
- Delivery / Acceptance
- Applicable law / Jurisdiction
- Confidential Information / Non-disclosure
(Adapted from Paul Mallory’s presentation to the IACCM Europe Forum June 2014 of the Top Terms in Negotiation report in www.iaccm.com).
Transaction-specific clauses — These are clauses which change based on the type of transaction executed between the parties. Every type of contract has some form of transaction specific clauses. Good examples of transaction specific clauses are “Grant of license” in the case of a Master License Agreement or Master Service Agreement and “Offer” in Merger Agreements. Transaction-specific clauses do not occur frequently, but when found, the language of this clause has language consistency.
Deal-specific clauses – These are the clauses which are tailor-made with respect to the particular deal (read: intent of the parties) and usually display wide language variation. Generally, no similarities are found in terms of languages. These are the clauses an analyst is required to spend most of his or her time to understand the clear purpose and intent of the parties. Let’s take the example of an Indemnification clause in an Employment Agreement or a Master Service Agreement. In the Employment Agreement, the employee’s company provides indemnification to its employee, whereas in case of Master Service agreement, the service provider provides indemnity to its client company.
Needless to say, these four types of clauses can be further divided into sub-elements to conduct an even more in-depth analysis of the clauses.