Contracts are the grease on the skids of most businesses, i.e., it is how they make money.  Consequently, unless you work in a very unusual legal department, one of the most important tasks you deal with as an in-house lawyer is the drafting and negotiation of contracts.  Most of us sat through a contracts class the first semester of our first year of law school, where concepts like “consideration,” “statute of frauds,” “offer and acceptance,” and “direct vs. consequential damages” were drilled into our heads.  And I am glad this was the case because the bit of law school I use the most day-to-day as an in-house lawyer is contract drafting (followed closely by “meeting avoidance”).  Most legal departments use contract templates for their important contracts, as it speeds up the process.  Yet, less than 25% of in-house legal departments use contract playbooks as part of the process.  This is surprising because everyone in the legal department, executive team, and the sales organization should understand which contracts are acceptable to the company and which contracts the company will walk away from.  Contract playbooks do just that.  Given their importance and the lack of adoption, this edition of “Ten Things” will walk through the process of creating a contract playbook:

1.  What is a contract playbook?  A contract playbook is a document that, in some fashion, breaks down the company’s standard contract terms, sets out an explanation of each clause along with fallback clauses (i.e., variations of the standard clauses that the company would accept if the customer wants to negotiate a standard clause), and notes when the company will “walk away” from a contract.  The last part means the customer is insisting on changes to the standard contract that the company cannot accept based on risk-management, economic reasons, or some other criteria.  While companies want to sell their products or services to as many customers as possible, they will only do so to the extent the contract makes financial and other sense to the company (e.g., acceptable limitations of liability).  A properly prepared contract playbook allows the legal and business teams to stay aligned and close contracts faster (or know when it’s time to walk).

2.  What are the benefits?  The benefits of a contract playbook are numerous.  Here are just a few to consider:

• A playbook aligns key groups up front (e.g., legal, sales, finance) and makes it more likely they will stick together and not snipe at each other throughout the contracting process.  If you have worked on enough contract negotiations, you know there is little more frustrating than when the sales team becomes an advocate for the customer’s contract positions vs. the company’s.  A playbook can help solve this.
• A playbook is a lifesaver to new attorneys joining the department as they can get quickly up to speed on the parameters of the company’s contract negotiation positions. It also captures years of legal department “tribal knowledge” about the contracting process.  Similarly, a playbook helps reduce renegades, i.e., those lawyers or business people who want to do things “their way” which may not be the “best way.”
• The same is true for outside counsel, where a playbook can make them far more effective in helping you.  A good playbook means you can probably hire most any outside commercial lawyer and have them be helpful almost immediately.
• A playbook helps your business colleagues understand the contract and the issues at play.  This makes them better negotiators and partners on deals.  Moreover, it takes away, to a large extent, the easy path of blaming the legal department for contracts being delayed or for not being able to reach agreement at all.  A playbook that tracks what the company finds acceptable, means that contracts fail or are delayed because of the company’s positions and not because the legal team is killing deals.
• We have all been asked to do “more with less.”  A well-prepared contract playbook allows you to do that as you and the team will spend less time in contract negotiation and drafting when the company’s negotiation positions are already set out in writing.  Just follow the playbook!

3.  What does it look like?  A contract playbook can take many forms.  One version is simply a document setting out general contract negotiating principles that the company follows, e.g., no unlimited liability, company employees will negotiate in good faith, signature/approval process, and so forth.  It may also contain checklists and link to form agreements or a contract clause library.  Likewise, it may link to different company policies and procedures related to contract negotiation and approval, including a “deal review” process and/or some type of grading criteria.  The more common type of contract playbook may include some or all of the above but typically takes the company’s standard contract template and for each clause explains why the clause is important, any acceptable changes to that clause (i.e., fallbacks), and when the company will walk away.  The contract playbook may be different based on geography and you can have different playbooks for different lines of business/contracts.  Here is the first page of a sample contract playbook I created based on past experience with SaaS contract.  The columns across the top are: “Section and Issue,” “Standard Agreement Language,” “Purpose/Meaning of Language,” “Potential Customer Objections and Response,” and “Alternatives.”

4.  How do I create it?  It takes some effort to create a contract playbook, depending on the sophistication of your business and the number of standard contracts utilized.  If your department has not created a playbook before, you should start with something relatively easy, like your standard NDA agreement which is typically just a couple of pages long with roughly 12 or so sections.  Cut and paste each section of the NDA into a spreadsheet and for each section prepare a summary of the purpose of the language, i.e., why is it there?  Then discuss common objections from customers.  Finally, propose alternative language for the clause that is otherwise acceptable to the company.  For example, your standard choice of governing law may be New York and you may have customers object to that choice, especially those located outside the United States.  So, for fall back you can note that you will except Delaware, Florida, and Colorado law in the United States, and the laws of England or Singapore outside the U.S.  And any situation where the customer objects to these options must go the General Counsel or a deal review committee to accept something different. Once you have created a playbook for one of your simpler contracts, you can start to tackle your more complicated ones.  For any contact playbook, you must do the following:

• Review your existing contracts to determine what positions the company has agreed to in the past.  Not material differences between geographies and line of business, i.e., you may need multiple versions.
• Understand where the company has deviated from the template and how so.  But do not rely solely on the fact that the company may have accepted a different clause once or twice – it may have been in a position where it had no choice but otherwise would not want to accept the clause again.
• Find your company’s bottom line, i.e., where the company has walked away.
• For each clause, create the acceptable fallbacks (if there are any).
• Do not create a contract playbook in a legal department vacuum. Loop in the other key players in the contract process to get their input, i.e., finance, sales, IT security, sales operations, risk management, etc.  This way you can reach a consensus on business priorities and tolerance for risk.  A collaborative approach means everyone is invested in the playbook and the agreed upon limits.
• Determine the escalation process, i.e., what happens when the customer will not agree to the standard terms or agreed on fallbacks.  This is where the company (not the legal department) decides what it will or will not accept, balancing the risk and reward with all affected parties having the opportunity to weigh in.
• If you have a big enough team, let the more junior members own the playbook project.  It will give them a substantive responsibility which is good for retention, and it will allow the more experienced team members to review and edit vs. taking the leading oar in the drafting.

5.  Automation.  An extra benefit of a contract playbook is that it makes automation of your contract process much easier to implement.  Most contract assembly tools require that you break your contracts down into sections.  A contract playbook already does that work.  Likewise, the tool will require that you set up acceptable alternatives to your standard clauses usually in the form of a clause library.  Then, as the contract is assembled, the user (lawyer or business person) can pick and choose from approved clauses.  A robust contract playbook makes this task easy as well.  Likewise, there is growing use of artificial intelligence within in-house legal departments.  One hotspot is using AI to review contract drafts and tell you what sections of the contract are acceptable and where negotiation is needed.  A contract playbook is an important part of setting up such a tool.  The tool’s AI uses your playbook to learn your standard clauses and positions and then can “review” contracts, e.g., redlines to your standard contracts or the customer’s standard paper, and give you a redline of proposed edits you should make. While a contract playbook will save you valuable hours during the contract negotiation process, using artificial intelligence to do the first pass of contract review is, in my opinion, a game changer for legal departments.

6.  Who is the playbook for?  On first blush, you might think this is a silly question.  The contract playbook is obviously for the lawyers (in-house and outside).  While that’s probably true, you might be better served considering your audience to be the business, in particular, the sales team.    If your sales team understands the contract and the company’s positions on various material clauses, you can save yourself a lot of headaches because you can start to turn them into advocates for the contract vs. advocates for what the customer wants.  When the latter occurs, it drives bad behavior on the part of the sales team and forces the in-house legal team to have two negotiations, with the customer and internally with sales.  A well-written contract playbook can bring sales over to the right side.  But, to do this means you must keep the playbook relatively short and written in a way non-lawyers can understand.  If you give the sales team a hyper-detailed, 100-page playbook to use, it will sit on the shelf gathering dust.  That said, you don’t want to dumb it down so much that it’s not helpful to your lawyers.  One solution – though extra work – is to create two playbooks – one for the lawyers and one for sales (i.e., an edited version of the lawyer playbook).

7.  Training.  You cannot dump a playbook on someone’s desk, say “here you go,” and walk away.  For a contract playbook to be effective, you need to spend time annually training people on how to use it and the different provisions, fallbacks, and other items contained in the book.  For new lawyers joining your in-house team or outside counsel you use for contract work, this means a longer and more “legal” focused training. The level of training you conduct for lawyers will be different than that you provide to the business.  For the former, you can set aside several hours and drill into the details of the wording and the law.  You cannot do that with the business.  Consider setting up several one hour (or less) sessions on the playbook.  These can be live or webinar (or a mix).  Record them so others can view them when they have the time or when joining the company.  The purpose of the business training is to get them familiar with basic legal concepts and the “what” and the “why” of the company’s positions on different clauses in the contract.  If the business understands the difference between a limitation of liability clause and an indemnity clause, they are much more likely to be helpful during a negotiation.  That said, don’t expect miracles.  Most of the sales team won’t care – and it will show.  That’s normal.  But, a solid minority will care and they will be your champions within the organization for the value of the playbook and how it can lead to faster (and better) deals.  If you can convince the head of sales of the value of the playbook, that can drive converts in their organization as well.  Usually, the one phrase that gets their attention and buy-in is “faster deals,” which always appeals to a head of sales who is running behind revenue targets.

8.  Key clauses to focus on.  While most contract playbooks deal with the entire contract, that is not always feasible, especially if you are pressed for time or you are preparing something for the business vs. your lawyers.  If so, focus on the most important clauses for your business in your playbook.  For example, while commonly called “boilerplate” these are some clauses that can substantially reduce the risk your company faces in entering into any contract:

• Legal parties.  Getting the legal parties down correctly can be very important for multiple reasons, the least of which is tax treatment and the ability to hold the correct party responsible.
• Indemnities.  Indemnity provisions place the risk of something going wrong on one party or other.  These are usually among the most heavily negotiated part of a contract.  For example, if you are providing software, you typically will indemnify the other side against third-party claims alleging IP infringement.
• Limitation of Liability.  These are clauses that typically put a cap on the overall liability of one or both parties in the event something goes wrong.
• Warranties.  Usually, the party providing the good or service will give a warranty that the product will work vs. some set of specifications.  Additionally, many contracts specifically exclude any implied warranties.
• Dispute resolution/arbitration.  While everyone is happy when the contract gets signed, the smart lawyers are already planning for the divorce.  Meaning, you should spend lots of time on choice of law, choice of forum, etc.

9.  Update it regularly.  Creating a playbook takes a lot of work, but the creation is not the end of the process.  Plan on reviewing the playbook annually so you can keep it current and fresh.  Add it to your department’s official goals each year.  While you’ll focus on updating the playbook for changes in your contract, updated contracting processes, customer feedback about clauses, or changes in the law, it’s also an opportunity to make your playbook more user-friendly.  Consider adding flowcharts and graphs – visuals are always helpful for creating understanding.  Checklists are helpful too.  Consider adding a discussion about the contracting process generally, including signature authority and the approval process.  Consider setting out how company contracts are stored and managed after signing.  Finally, be sure everyone gets a copy of the updated playbook.  The best idea is to store the master playbook online so that employees can access it easily and you can keep it updated (but remember to focus on keeping it confidential as well).  Many (especially the lawyers) will want a hard copy to keep at their desk.  So, just be sure to give notice when it’s time to get the latest version.

10.  Resources.  If you would like more information about contract playbooks, here are some additional sources you can check out:

• How to Design Contract Playbooks and Standards – Doc Juris.
• Legal IO – a repository of playbooks and other documents (registration required).
• Play by Play Guide to Creating a Contracts Playbook – ACC (2012).
• Value of Contract Playbooks – LawGeex Blog (2018).
• The Playbook Methodology – European Financial Review (2015).Contract Playbook Template
• Contract Playbook Template – free download at Doc Juris.

*****

All in-house legal departments should develop contract playbooks.  While there is a good amount of work required, the payoff is more than worth the trouble.  The key things to keep in mind are: 1) make it as simple to read as possible, 2) get a wide variety of inputs – not just lawyers, 3) the importance of training users, and 4) annual updating of the playbook.  Once you launch your contracts playbook, you and the legal team will find that getting contracts done becomes a faster and less stressful process.  That should be of interest to all in-house lawyers.

Sterling Miller

July 17, 2018

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