Contract Analysis: Standard and Negotiated Terms Measured by Commonality and Consistency

The last post reviewed the top negotiated and disputed terms determined by a survey conducted by the IACCM. The survey revealed a surprising difference in viewpoint between negotiators and business managers.

The survey prompted further thought on whether statistical analysis can identify key contract clauses.

The statistical tools used in contract analysis identify the most commonly occurring clauses and the most similar clauses. Plotting these two measures in a matrix creates the quadrants shown the diagram.

·         The upper-right quadrant—standard clauses—contains frequently occurring, consistent clauses. Examples of such clauses should include so-called “boilerplate” provisions.  However, as the analysis can also show, such boilerplate provisions may, in fact, exhibit wide variation in language.

·         The upper-left quadrant—negotiated clauses—contains commonly occurring, divergent clauses. These are clauses that appear in most agreements, but contain different language. Such language variation may occur due to negotiation between the parties creating different terms, or it can be attributable to different drafting customs and personal preferences.  For example, the purchase price clause in an acquisition agreement will likely exhibit wide variation across a set of documents. However, similar degrees of variation can also be found in a severability clause.

·         The lower-right quadrant—transaction-specific clauses—contains clauses that do not occur frequently, but when they are found contain consistent language. A good example of a transaction-specific clause is “The Offer” term found in a set of merger agreements. This term may appear in about 20% of the agreements—indicating that such transactions are structured as a tender offer. In these cases, the language will likely be very consistent.

·         Finally, the lower-left quadrant—deal-specific clauses—contains infrequently occurring clauses that display wide language variation. These are clauses that are custom-tailored to a particular transaction.

However, not all clauses fit neatly into this schema. Clauses that should contain consistent language are often, in practice, highly variable. In large part, this background divergence can be attributed to custom and personal drafting preferences. Indeed, this is very evident when analyzing documents from a large number of different organizations, compared to a set from a single law firm or corporate legal department. The more varied the source of the documents, the more diverse the clauses and the language. Of course, the fact that divergence increases with the diversity of the source set should not be surprising because they will contain a wider range of drafting customs and personal preferences. They key point is that as divergence increases above a certain threshold, the usefulness of the statistics is reduced.

Using a set of documents from a single law firm, the analysis can identify the top 10 most frequently occurring, divergent clauses. Once again the study reveals a number of surprises.

Top 10 Negotiated or Variable Clauses from a Set of Merger Agreements

1.         The Merger / Effects of the Merger

2.         The Merger / Directors

3.         General / Severability

4.         General / Counterparts

5.         General / Non-Survival of Representations and Warranties

6.         General / Waiver of Jury Trial

7.         Representations and Warranties of the Company / Information Supplied

8.         General Provisions / Interpretation

9.         Representations and Warranties of Parent and Sub / Information Supplied

10.       Termination / Effect of Termination

It is frequently the case that the most divergent clauses are found in the first few representations and warranties and in the general provisions. As further posts will examine, these differences are largely due to personal preferences and the use of compound and overlapping clauses (See, post Contract Readability -- Part 2 for definitions of compound and overlapping clauses).

The wide differences in language also indicates that these are the clauses where attorneys are spending significant time in contract drafting. However, few would assert that all these provisions are the most significant terms in the agreement. In fact, with rare exceptions, few of the top 10 negotiated or highly variable clauses will appear on the IACCM’s most disputed clauses list.