How I read a contract

In: Entrepreneurship / 7 comments

15 Apr 2013

I’ve noticed, while talking to many young people, that reading and understanding a contract may be a challenge sometimes, especially when the contract is a very important one (investment, company sale contract or simply “the contract of a lifetime”).

It’s for these big contracts that I’ll try to tell you in the following paragraphs how I go about it:

Necessary steps:

  1. The business: You must know exactly what the deal you’re signing is, where you want to go with this contract (at the end, even if potentially there are more stages), what each of the parties gives and gets. In general, this is established in a one page Term-Sheet, without any details, just the essentials of the agreement. It’s not necessarily important to have a signed Term-Sheet, but it’s important for you to have the deal very clearly and completely defined in your mind;
  2. The mechanics of the deal: What the steps through which you get to the end are. Different terms, milestones, payments, structure etc.
  3. The architecture of the contract: Each contract has a way of phrasing the deal. This turn of the phrase must be understood very well, so that when you read an article, you know exactly when it applies.
  4. The terms of the contract: Here is where negotiations begin. Important terms – minority rights, options, control… – all of them must be understood and placed in the context of the points mentioned above;
  5. Little details: cross references, definitions, checking the math, grammar.

You must understand and treat your most important contract as a project: strategy, architecture, details. You must pay attention to all of its elements and slowly it must “take shape” in your head.

As you gain more experience, you can let your lawyers handle more of the above. However, you, the entrepreneur, must always be in full control and understand all that is happening. Speaking from the point of view of lawyers (please challenge me if I’m wrong), the more the client understands and the more he gets involved, the more the lawyers can help him.

Suggestions in terms of logistics:

  • It may be useful to read it in pairs: one should pay attention to the whole and the other should pay attention to the details;
  • Any contract must be read line for line and word for word, understanding every little thing, as if each situation described there is going to happen. Pay attention to all cross-links – there may be more than one and they may have potentially major implications;
  • The contract is read keeping in mind all the evils of the world. This is the only time you should think your partner will screw you (excuse my language), the earth will sink and so on. Suggestions from the “others” such as: “Come on, let’s sign it like this because this thing can never happen since we’re partners and we share the same interest” are unacceptable in the contract phase. After you sign it – yes;
  • According to the importance of a contract, I read it twice to 5 times over. Each time I read it differently, in another light, with another focus. And this goes for one round of contract circulation. After that, I send it with comments to the “others”, they send it back, and I enter another cycle;
  • I make notations on the side to know and return only to the important things after review: * = must re-read or take minor action, ! = must notify lawyers or major action, ? = must ask because I didn’t understand, NO = unacceptable (it comes together with “!” 🙂 ), grammar, bad link and others;
  • It’s good to know where yourinterests are aligned with your partners and where there’s a potential conflict, in order to know where to put more effort in protection;
  • I comment with someone close to me, even if he’s not a professional, in order to check the principles;
  • Don’t get bored when you read – after the first 120 pages you risk saying “this is clear, this is clear…”. Don’t get careless when it comes to your most important contract;
  • Lawyers may help a lot. Butthe deal is yours, so you must understand everything in the contract;
  • Read it all at once, otherwise you’ll forget the connections 🙂
  • Don’t be shy to ask your lawyers everything you don’t understand. You must understand ALL the contract – I think I’ve said this 4 times, but it’s very important;
  • When you get to a reference (link, definition) – check it. Someone malicious might sneak a lizard there;
  • I’ve seen many contracts in which the math was wrong. For example, an amount is set, then mistakes are made when calculating and nothing comes out right anymore. Basically, it’s up to the lawyers to do this, but then again…Check the math;
  • Read every paragraph keeping in mind that it can refer to what is obvious, but also to something without an apparent connection but that could radically change another paragraph;
  • Explain to your lawyers the best way you can what your business interest is. This is how they’ll know how to better help you;
  • Try to keep the same lawyers. They’ll start knowing the areas you’re sensitive to and the areas you’re willing to take risks in;
  • When you have comments, talk them through with your lawyers, then (you or your lawyers) draft the comments you’ll send to the other as clearly and non-confrontationally as possible.

Altogether, a contract of 70-80 pages takes me two to three two-hour sessions for a revision.

And one last suggestion: a meeting is worth 100 emails with comments.

Disclaimer: I haven’t tried to relate anything about the negotiation part here, but only about reading/understanding a contract. Otherwise, I would’ve had to write a book 🙂

(English version by Teodora Popescu)

Original Romanian version

Cum citesc eu un contract

Am constatat vorbind cu mai multi tineri ca citirea si intelegerea unui contract poate fi uneori o provocare, mai ales atunci cand contractul este unul important (investitie, vanzare de companie, sau pur si simplu “contractul vietii”). Tocmai pentru aceste contracte mari, am incercat mai jos sa povestesc cum fac eu:

Pasii necesari:

  1. Business-ul: Trebuie sa stii exact care anume este intelegerea pe care trebuie sa o semnezi. Unde vrei sa ajungi cu contractul asta (la final, chiar daca eventual sunt mai multi pasi), ce se da si ce se cere. In general asta se stabileste intr-un Term-Sheet de o pagina. Fara amanunte, doar esentialul intelegerii. Nu este neaparat important sa existe un Term-Sheet semnat, ci este important ca in mintea ta sa fie clar care este dealul;
  2. Mecanica Deal-ului: Care sunt pasii prin care se ajunge la final. Mai multe termene, milestones, plati, structura, etc.
  3. Arhitectura Contractului: Fiecare contract are un mod de a structura in cuvinte dealul. Acest mod trebuie inteles foarte bine, astfel incat cand citesti o clauza sa stii in ce context se aplica;
  4. Clauzele Contractului: De aici incolo incep negocierile. Clauze importante – minority rights, options, control… – toate trebuiesc intelese si puse in contextul punctelor anterioare;
  5. Mici Detalii: referinte incrucisate, definitii, verificarea aritmeticii, gramatica.

Trebuie sa intelegi si sa tratezi cel mai important contract al tau ca pe un proiect: strategie, arhitectura, detalii. Sa acorzi importanta fiecarui element si incet incet contractul sa se “rotunjeasca” in creier.

Pe masura ce ai mai multa experienta, poti lasa avocatii sa se ocupe de mai mult din cele de mai sus. Dar trebuie in tot cazul ca tu, antreprenorul, sa fii mereu in control si intelegere completa asupra celor ce ti se intampla. Vorbind din punctul de vedere al avocatilor (va rog sa ma contraziceti daca gresesc), ei pot ajuta clientul cu atat mai mult cu cat clientul intelege mai mult si este mai implicat.

Sugestii din partea logistica:

  • Poate fi util sa il cititi in doi: unul atent la partea de ansamblu si celalalt atent la detalii;
  • Orice contract se citeste rand cu rand si cuvant cu cuvant, intelegand fiecare lucru, ca si cand fiecare intamplare descrisa acolo se va intampla. Atentie la toate cross-links care pot fi multiple si cu implicatii potential majore;
  • Contractul se citeste avand in minte toate relele pamantului. El este singurul moment in care te gandesti ca partenerul ti-o va trage (scuzati vocabularul), ca pamantul se va scufunda, samd. Sugestii de la “ceilalti” de genul “Lasa, hai sa semnam asa, ca asta nu se va intampla niciodata, doar suntem parteneri si avem acelasi interes” nu sunt acceptabile in faza de contract. Dupa semnare – da;
  • In functie de importanta unui contract eu il citesc de 2 pana la 5 ori. De fiecare data citesc altceva, in alta lumina, cu alt focus. Si asta este la o circulare a contractului. Ca dupa asta il trimit cu comentarii la “ceilalti”, ei il trimit inapoi si intru in inca un ciclu;
  • Imi fac semne pe margine ca sa stiu sa revin doar la lucrurile importante dupa review: * = trebuie recitit sau luata o actiune minora, ! = trebuie anuntati avocatii sau actiune majora, ? = trebuie sa intreb caci nu am inteles, NO = inacceptabil (vine la pachet cu “!” 🙂 ), grammar, bad link, si altele;
  • E bine sa intelegi unde sunt locurile in care esti aliniat ca interese cu partenerul si unde esti in potential conflict, ca sa stii unde pui mai mult efort in protectie;
  • Comentez cu cineva apropiat, chiar daca nu se pricepe, pentru a verifica principiile;
  • Nu va plictisiti cand cititi – dupa primele 120 de pagini riscati sa ziceti “asta e clar, asta e clar….” . Nu dati rasol in cel mai important contract al vostru;
  • Avocatii pot ajuta mult. Dar dealul este al tau, asa ca trebuie sa intelegi totul in contract;
  • Citeste-l tot odata, altfel uiti legaturile 🙂
  • Nu te sfii sa intrebi avocatii acolo unde nu intelegi. Trebuie sa intelegi TOT contractul – cred ca am zis asta de 4 ori, dar chiar este important;
  • Cand ajungi la o referinta (link, definitie) – verifica. Cineva rau intentionat poate strecura acolo o soparla;
  • Am vazut in foarte multe cazuri contracte in care s-a gresit la aritmetica. Se stabileste o suma de exemplu, apoi se greseste la calcule si nu mai iese cum trebuie. In principiu asta e treaba avocatilor, dar din nou… Verifica aritmetica;
  • Citeste fiecare paragraf avand in minte faptul ca el se poate referi atat la ceea ce este evident, dar poate sa aiba si o referinta la ceva fara legatura aparenta care sa schimbe radical alt paragraf;
  • Explica avocatilor cat mai bine care este interesul tau de business. Asa vor sti sa te ajute mai bine;
  • Incearca sa pastrezi aceiasi avocati. Vor incepe sa cunoasca zonele la care esti sensibil si zonele in care esti dispus sa iti asumi riscuri;
  • Cand ai comentarii discuta-le pe larg cu avocatii proprii, apoi fa (sau fac avocatii) comentariile pe care le veti trimite celorlalti cat mai clare si cat mai “non-conflictuale”.

Una peste alta, mie un contract de 70-80 de pagini imi ia doua – trei calupuri de doua ore pentru o revizie.

Si o ultima sugestie: O intalnire face cat 100 de mailuri cu comentarii.

Disclaimer: Nu am incercat sa povestesc aici nimic din zona de negociere, ci doar din zona de citit/inteles contractul. Altminteri aveam de scris o carte 🙂

Comments

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Sorin Şarba

April 15th, 2013 at 12:18 pm

Excelente indrumari! Thx!

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Daniel Lynch

April 15th, 2013 at 4:27 pm

Very clear, useful advice. thank you for sharing.

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Eugen M.

April 15th, 2013 at 7:44 pm

Indeed, very clean and clear piece if information! 🙂

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catalin galatescu

April 16th, 2013 at 10:17 am

Foarte corect, avocatii, mai ales in timpul intalnirii trebuie sa fie pro semnare. Sunt multi care se pot numi dealbreaker.
Daca sunt pasi intermediari trebuie ca acele clauze ce definesc acesti pasi sa fie respectate ca acel contract sa -si urmeze cursul normal si sa nu fie necesar sa se renegocieze sau sa apara penalitati.

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Daniel

April 16th, 2013 at 10:25 am

Excelent articolul! Foarte interesanta perspectiva clientului asupra colaborarii avocat-client in revizuirea contractului.

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Aurora Georgescu

April 16th, 2013 at 3:51 pm

De luat aminte , chiar şi pentru un ” mini-contract “…

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Claudiu

April 16th, 2013 at 4:00 pm

Majoritatea contractelor semnate nu au fost negociabile, toate avantajele fiind ale celeilalte parti, eu avand nevoie doar de obiectul contractului cu speranta ca nu vor abuza de exceptii.

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