Thursday, March 1, 2012

Comparative Analysis

A study of Employment, Contractor and Severance Agreements

Visual Complexity -  Protein Homology Graph

One of the main objectives of contract analysis is to identify the similarities—and differences—between different agreements, both in terms of their clause elements and clause language. This analysis is helpful not only to understanding contracts, but is also the means to significantly reduce contract drafting and contract management costs.

This approach goes against convention. Driven by many factors (such as training, tradition, and billing systems) lawyers, when approaching a drafting task, often see the differences—or as some may say, nuances—between one agreement and another.

By contrast, an analyst sees the similarities, but does not overlook the details. The analyst applies the science of complexity, as first articulated by Herbert Simon in the Architecture of Complexity. Two quotes capture Simon’s thesis:

Complex Systems are those that are made up of a large number of parts that interact in a non-simple way.
The fact…that many complex systems have a…hierarchic structure is a major facilitating factor enabling us to understand, to describe, and even to ‘see’ such systems and their parts.
Applying approach, I created a comparative framework for an employment agreement, an independent contractor agreement, and a severance agreement. (You can view the online version here).

1.       Structural Similarities

By applying the Unified Contract Structure to the three types of agreements, all the individual terms can be aligned. For the most part, the provisions line up. But, compared to convention, one major change is necessary to align the employment agreement with the others. The change is in the case of the termination benefits. Typically, severance benefits are included with the termination provisions or immediately following the termination events. However, to align the severance package with the Unified Contract Structure, these clauses are included as part of the consideration section.

2.       Similarities

The principal similarities are found in bulk of the document following the terms of the bargain, particularly in the representations, covenants and general provisions.

3.       Differences

Of course, there are major differences, principally in the terms of the bargain, namely, in the exchange and consideration provisions.

a.       Deal-Specific

There are interesting contrasts in the indemnification and insurance terms. In case of the indemnity terms, the employment agreement typically requires the employer to indemnify the employee; whereas the contractor agreement requires the contractor to indemnify the company. In case of the insurance, the employment agreement typically states that the employer provides Director and Officer Insurance in favor of the employee; whereas the contractor agreement will typically require the contractor to carry insurance in favor of the company.

b.      Convention Driven--Comparative Gaps

By comparing and contrasting one set of agreements to the others, it is also possible to see terms that are included in one set, but may be missing in another. For example, the expense provision in employment agreements typically contains two elements (what can be expensed, and how the expense must be documented). By contrast, the same term in independent contractor agreement often adds a third element, namely, when and how the expense must be paid by the employer.

This circumstance can also be seen when comparing acquisition agreements to finance agreements. In the case of finance agreements, they will almost always contain a representation detailing indebtedness, whereas a minority of acquisition agreements contains a similar provision. Do we then presume that lenders care about other lines of credit that might impair the value of their loans, but buyers of a business do not care about outstanding debt? No, of course, not.

As the analysis grows, it will interesting to determine to what extent it will be possible to develop a single master contract from which any particular agreement can be constructed: of course, acknowledging that many contracts will require deal-specific terms.