Contract Checklists-does sequence matter?

Many professionals use checklists to ensure high quality, consistent performance and to avoid errors of omission. We are all grateful, for example, pilots run through their checklists every time they take-off; even if it is their fifth departure that day.

Checklists received acclaim with Atul Gawande's book, Checklist Manifesto, which became a New York Times best seller in 2009. In his book, Gawande distinguishes between errors of ignorance (mistakes made because we did not know enough), and errors of ineptitude (mistakes made because we did not make proper use of what we know). Failure in the modern, complex world, Gawande asserts, is primarily due to the second reason.

It is not that the pilot, doctor or lawyer does not know how to perform a task. Moreover, it is unlikely that a checklist would teach them anything they did not already know. The main purpose of a checklist is to prevent trained professionals from a missing a step. Sometimes when we perform familiar tasks, we "see" what we expect: not necessarily what is, in fact, the case. We can, for example, mentally insert words that are absent from the text we are reading.

In this context, the challenge of reviewing long, complex legal documents is especially daunting. We can proof-read what is on the page; it is much harder to proof what might be missing, potentially located in another section of the section, or duplicated elsewhere.

Unfortunately, few lawyers have ready access to formal document checklists. For some complex deals firms will prepare deal checklists to orchestrate the preparation and filing of documents and coordinate work among the lawyers involved in the transaction. But, these checklists rarely capture the detail needed to review each agreement. Lawyers must rely on a mental checklists honed over years of experience. But, in the face of unrelenting pressures to be ever more efficient—and do things faster—more opportunities for errors will undoubtedly arise.

There are, however, surrogates for formal checklists. As in many situations, knowledge management can, as pointed out by Chris Boyd of Wilson Sonsini, "capitalize on existing law firm information flows and business processes." In this case, the existing information resource is the table of contents of existing—hopefully exemplar—agreements.

Contract analysis can shed additional light on how to make best use of existing resources. It aggregates multiple documents into a single combined outline. Viewed as an outline, it is in many ways a comprehensive checklist of all deal terms. How it is organized and order presents some interesting choices. The clauses in the outline—both the top level and the sub-clauses in each section—can be ordered in:

(a) a traditional sequence
(b) an alphabetical order, or
(c) a logical and categorized sequence.

Question: what is the best approach?

Consider a simple example based on a partial list of clauses found in the Miscellaneous or General Provisions section, in which the more frequently occurring terms are highlighted in bold text.

Traditional	Alphabetical	Logical
Notices Interpretation Assignment Successors and Assigns Binding Effect (Parties in Interest) Severability Schedules and Exhibits Remedies Cumulative Specific Performance Governing Law Arbitration Headings Mutual Drafting Amendment Waiver Counterparts Entire Agreement Jurisdiction Waiver of Jury Trial Attorneys' Fees	Amendment Arbitration Assignment Attorneys' Fees Binding Effect (Parties in Interest) Counterparts Entire Agreement Governing Law Headings Interpretation Jurisdiction Mutual Drafting Notices Remedies Cumulative Schedules and Exhibits Severability Specific Performance Successors and Assigns Waiver Waiver of Jury Trial	(a) Scope of Agreement Entire Agreement Counterparts Schedules and Exhibits Amendment Waiver (b) Parties Binding Effect (Parties in Interest) Assignment Successors and Assigns Notices (c) Enforcement Arbitration Governing Law Jurisdiction Waiver of Jury Trial Attorneys' Fees (d) Interpretation Remedies Cumulative Specific Performance Severability Interpretation Headings Mutual Drafting

In choosing between the three alternatives, the programmer in me will normally select the logical alternative. However, each alternative carries advantages and disadvantages.

First, the principal advantage of the traditional sequence is familiarity. Lawyers expect to find provisions in predictable locations.

Second, the alphabetical order serves as an index of the clauses in the same manner as the lexicon at the back of reference books. It can serve as a useful tool to check for duplicate terms. For example, if you create an alphabetical list of the all the terms found in a merger agreement, you will likely find a clause typically called "Further Assurances" occurs in the Merger section, the Covenants and Additional Agreements sections, as well as the Miscellaneous section; all containing similar, but slightly divergent terms.

Third, the logical sequence serves a role similar to the outline or table of contents at the front of a reference book. It helps determine whether all the appropriate terms exist and that they are combined the appropriate sequence.

The sequence of terms, like any taxonomy, can be categorized by reference to its goals or purpose. Applying this approach, the Miscellaneous section can be organized by defining the "law of the agreement" and grouping the clauses by: (a) scope of the agreement, (b) parties, (c) enforcement, and (d) interpretation. While this may not be that significant for the humble "boiler-plate," terms, it can be extremely useful when applied to more complex sections, such as the Representations and Warranties of a merger agreement. In this case, the sequence and order can follow the due diligence process and organize the clauses in something like the following:

• Company Status
• Authority and Permissions to Conduct Business
• Financial Condition and Reports
• Assets
• Liabilities
• Contracts and Other Obligations
• Compliance with Laws and Internal Controls
• Environmental Matters
• Employee and Labor Matters
• Information Supplied and Full Disclosure
• Other Representations and Warranties

Now, it is much easier to evaluate whether something is missing or perhaps inappropriate to the context of the transaction.

While the logical approach appears helpful, I am mindful of the adverse impacts of change, especially for those who expect provisions in a particular place in the document.

In general, I have concluded that when building document templates and checklists based on documents from a single firm, or perhaps those of an industry or regional group, the best approach is to follow the existing form. However, when building templates based on publicly available documents, it is frequently true that no clear sequence emerges and in this case, it seems preferable to establish a new logical sequence.