The Deal Room, No. 2: How to Argue With a Contract

This series is written for non-lawyers. It is general education, not legal advice, and it does not replace a lawyer. If you have a question about a specific transaction, get a legal opinion.

Reading a contract cynically sounds like bad manners. But from another perspective (mine included) it’s the best way to respect the spirit of the deal.

Pass one was structure, and it left you with a map of the document. This is pass two, the line by line read, and it runs on an assumption you may find uncomfortable. You cannot presume the person on the other side thinks the way you do. You cannot presume they share your intentions, or that they mean by a word what you would mean by it. Assume they do not, and you will read what is on the page. Assume they do, and you will read what you expected to find, which is a different document and a more flattering one.

This is not pessimism about people. It is the posture that lets you see the agreement you were actually sent. Charity, on a second pass, is a form of not paying attention.

Active reading, and the failure it replaces

The failure has a name and you have almost certainly done it. Numb reading. You get through all forty pages, every sentence made sense as it went past, and you have retained nothing and challenged nothing. It takes time and mental effort, so it feels like work.

Contracts are dense, and some of them are deliberately hard to follow. That is exactly why the parts that read as convoluted or circular deserve more of your attention rather than less.

So what should you actually do while you read? One section at a time, and then you stop. Do not try to digest the whole agreement in one sitting. You have the map from pass one, so when a section sends you somewhere else, go there. Read the section it points at, then come back and ask whether that was really the section it should have pointed at. Re-read the definition when it comes up. Gut check whether it’s being used properly.

When the drafting resists you

Two problems, and they are the same problem wearing different clothes.

The first is a cross-reference that lands somewhere odd. Section 8.2 sends you to Section 11.3, and 11.3 does not do what 8.2 says it does. Sometimes that is a stale reference nobody cleaned up after a renumber. Sometimes it is not.

The second is circularity. A defined term defined by reference to a second defined term, which is defined by reference to the first. If you read Part 1, you already know why that fails: a definition that loops cannot tell you what is inside it and what is outside it, which is the only job a definition has.

Here is the rule worth carrying out of this section. Confusion is a signal, not a personal failing. If you have read a provision three times and still cannot say what it does, that is the information you take away. It may be sloppiness and it may be design, and for your purposes it does not matter which, because the response is the same either way. It becomes a note.

The seven questions

Ask these of every substantive provision:

1.  Why is it there?

2.  What is its function?

3.  Who bears the risk of loss?

4.  Who gets the most benefit?

5.  Is this normal, for the industry and for this relationship?

6.  Does it pass the sniff test?

7.  What does it call for?

Seven is a lot to hold, so start by knowing which two do the heaviest lifting. Question five is how you find out what kind of deal the other side thinks you are in. Question seven is how you find the provisions that are missing. The rest of this piece is mostly those two.

One clause, run through all seven

Take a work made for hire clause, which turns up in most publishing agreements and reads something like this:

All Deliverables and all materials created in connection with this Agreement shall be considered works made for hire, and to the extent any such material does not qualify as a work made for hire, Developer hereby assigns to Publisher all right, title and interest therein.

Why is it there? The publisher wants to own what it paid for. That is a reasonable thing to want, which is exactly why this clause survives so many reviews unchallenged.

What is its function? It moves ownership of everything you make under the agreement. Possibly more than that, depending on the words the drafter chose, and we will come back to those words.

Who bears the risk of loss? You do, and the loss may not be this project. It is your next one, if the clause quietly carries off tools and technology you intended to reuse.

Who benefits? The publisher, completely. There is no grant back unless somebody negotiates one, and there is no reason for them to volunteer it.

Is this normal? Here is where it bites. For a commissioned work made for hire deal, this clause is entirely standard and nobody should be surprised by it. For a co-development deal, or a funded-developer deal where you are supposed to keep your IP, it is not standard at all. The clause is telling you which of those deals the other side thinks you are in. That may not be the deal you think you are in, and finding that out on page eleven is much better than finding it out in year three.

Does it pass the sniff test? Look at the difference between “the Deliverables” and “all materials created in connection with this Agreement.” The first is the thing you agreed to build. The second is enormous, and it does not look enormous. It can reach your engine, your tooling, your pipeline, and the thing you sketched on a Sunday because the project got you thinking.

What does it call for? A carve-out for your pre-existing IP and your general tools. A license back for anything you need to keep using. And a trip back to how “Deliverables” and “Developer IP” were defined, which you already flagged in pass one.

That last answer is not really about this clause. It is about the shape of the whole agreement, which is the subject of the next section.

Provisions call for other provisions

This is the most useful idea in this piece, and it is the one that separates reading a contract from auditing one.

Provisions are load-bearing for other provisions. Reading well means knowing which ones require which, and then going to look for whether the required one is actually in the document. Absence is the finding.

•       A representation or a warranty calls for indemnification. A promise with no remedy attached is decoration.

•       Indemnification calls for a limitation of liability, or the exposure has no ceiling.

•       Indemnification also calls for insurance, because an indemnity is only worth what the indemnifying party can actually pay.

•       Confidentiality calls for a term. Without one it is either perpetual or it is nothing, and which of those it is will not be obvious from reading it.

•       Termination calls for a survival clause. Otherwise the provisions you most needed to outlive the relationship will not.

While you are in the indemnification clause, read who is covered rather than only what is covered. Does it reach the company alone, or does it reach directors, officers, employees and contractors? If you are a founder who is also a director of your own studio, a clause that protects “the Company” and stops there has left you personally standing outside the shelter. The question runs the other way too. There are people you should not be agreeing to indemnify, and someone else’s officer acting badly is high on that list.

The move to practice is this. When you finish a provision, ask what it structurally requires, and go and look for that thing. If it is not there, you have found something better than a badly worded clause, because a missing provision never announces itself and no amount of careful reading will surface it. You have to go looking on purpose.

If that feels familiar, it should. Pass one taught you to read scope for what it excludes. This is the same move, applied to the whole document.

Promises that do not promise

Question six deserves its own treatment, because this is the category you can find in your own contracts in about ten minutes.

The test, and you only need one: if the other side did nothing at all, would they have breached? If the answer is no, you are not looking at a promise.

Watch for these:

•       Best efforts, reasonable efforts, commercially reasonable efforts, good faith efforts. These sound like a ladder. They are usually undefined, and the case law is genuinely unsettled about what separates them. One federal judge applying New York law wrote that the case law on efforts clauses is anything but a model of clarity, which is an unusually candid thing for a judge to commit to writing. New York courts have declined to enforce a best efforts clause where the agreement supplied no guidelines for measuring the efforts. So the question is never which phrase is stronger. The question is whether anyone wrote down what would count.

•       “May” doing the work of “shall.”

•       “Subject to mutual agreement” and “to be agreed.” This is an agreement to have a second negotiation, which you have promised to conduct from a weaker position than the one you are in now.

•       “In Publisher’s sole discretion,” “as Publisher deems appropriate,” “as Publisher may determine.”

•       Consultation rights wearing the costume of approval rights. The right to be asked about a decision is not the right to change it.

None of these is automatically a defect. Some of them are the only way to write a workable clause about a future nobody can specify. The point is to notice that you are holding one, and to decide on purpose whether that is acceptable here.

What a useful note looks like

Take notes as you go, because pass three is where you revise, and you cannot revise from a feeling.

The unhelpful note is “this seems bad.” It records that something happened to you while reading and nothing about what to do next. A useful note answers three things: which of the seven questions the provision failed, what specifically triggered it, and what you would want instead.

Keep two piles, and keep them separate. Things you do not understand, and things you object to. While you are reading they feel identical, and in pass three they get handled completely differently. One becomes a question for the other side or for your lawyer. The other becomes a redline.

Try it on something with no stakes

Pick a EULA, or the terms of service for a tool you already use. Run the seven questions on three provisions. Watch how quickly it comes apart.

The reason this is a good exercise is that you cannot negotiate a EULA. There is nobody to annoy and nothing to lose, which makes it the safest place there is to practice being adversarial with a document. Do it on somebody else’s paper before you do it on your own deal.

Pass three is where you stop reading and start revising, testing the agreement against your best case and your worst case. That is the next piece.

By then you should have a marked-up document, two piles of notes, and a short list of provisions that should be in there and are not. Bring all of it.