To their detriment, too often clients as well as lawyers skim or skip the first and second stage of proposed transactions. When they do this they enter a forest with no clear path to follow.
When they follow the three stage transaction or contracting process they move from casual dating, to going steady, to getting married. It’s that simple.
There are three stages for most intellectual property and business law transactions. The first stage is needs assessment. The second, deal points definition. Only after the first and second stage are at least properly considered should anyone go to the third stage – formal contract drafting.
In both business and personal relations, problems and costs are likely to be much higher when the first two stages are ignored. The problems can include aggravation in negotiations and litigation. They can cause loss of reputation and morale, and even bankruptcy and business insolvency.
Parties to a proposed business transaction should do the following in the first and second stages:
- Work out what they want to achieve in commercial, technological and other non-legal terms – for example write the functional specification and technical specification
- Define with precision the intellectual property they want to have dealings about – this may require the assistance of professional advisers and consultants
- Clearly set out the respective rights and obligations of each party; and additionally, any prohibitions or security to be applied or given by the parties or one of them.
After doing this, our recommendation is that the parties test the thoroughness of work done in the first two stages.
If there is still comfort, try an intermediate drafting step, rather than rushing to contract drafting.
This may involve preparing a heads of agreement, memorandum of understanding, letter of intent or other similar document. They can clarify the intention of the parties subject to preparation of a formal detailed contract. They can do this by documenting what is assumed, known, understood or agreed so far. This provides another opportunity to test the work done in the first and second stages.
For the first and second stages it is useful to ask business process questions. Walk through the proposed end to end arrangements, visualise them in graphics, ask whether the rights, obligations and consequences are clear for each of the parties and other stakeholders. If there are gaps in logic, fill them before going to the formal contract drafting third stage! The penalty for not filling gaps will be greater complexity, higher risk, higher legal costs, stressed parties in negotiations, and less predictable results.
If you need to, use a lawyer in first or second stage definitional work. But do not give instructions to commence drafting of a formal contract until the needs assessment and deal points definition stages are finalised.
Why process comes before legal advice
To finalise let’s illustrate the benefit of the above business process before legal process approach in process terms.
The Flash animation below is designed to illustrate the distinction and overlap between business process and legal advice. Items circled in red are directly relevant to a legal process, the rest is indirectly relevant business process.
The Flash animation is part of our Needs Assessment Guide. We often supply the Guide to clients for them to assess their legal documentation processes and needs before they ask us to do contract drafting. The Guide is one of our proactive ways of helping clients save money, reduce stress and risk and improve return on investment in legal services.
Study the Flash animation and then read the final short notes after it below.
|Points to note about the above sample business process:|
Our Needs Assessment Guide explains how the following items (if created during the first and second stages of a proposed transaction) help put business process before detailed legal work:
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