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All content by Kyle E. Mitchell, who is not your attorney.

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Contract Componentsfine-grained means of abstraction in legal drafting

I’ve drafted a bit of contract text, a generic, orthodox, permissive software copyright license:

  1. Licensor grants Licensee a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Program and such Derivative Works.

  2. Derivative Works” means any work that is based on (or derived from) the Program and for which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work of authorship. Derivative Works do not include works that remain separable from, or merely link (or bind by name) to the interfaces of, the Program and Derivative Works of the Program.

I’d like to reuse these terms in a variety of agreements. I’d like to share the terms with others, to reuse in their agreements. I’d like sharing and reusing the terms to be easy. I’d like sending and using future revisions to be easy.

The snippet defines Derivative Works for itself. It uses, but does not define, Licensor, Licensee, and Program. So we can reuse the snippet in an agreement by providing the missing definitions:

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Definitions.

    1. Licensor” means Vendor.

    2. Licensee” means Customer.

    3. Program” means Licensor’s Super Calculator software.

  2. Permissive Software Copyright License.

    1. Licensor grants Licensee a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Program and such Derivative Works.

    2. Derivative Works” means any work that is based on (or derived from) the Program and for which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work of authorship. Derivative Works do not include works that remain separable from, or merely link (or bind by name) to the interfaces of, the Program and Derivative Works of the Program.

Here’s another snippet, a product warranty disclaimer:

Unless required by applicable law, Seller provides the Goods on an “as is” basis, without warranties or conditions of any kind, either express or implied, including, without limitation, any warranties or conditions of title, non-infringement, merchantability, or fitness for a particular purpose.

This snippet uses, but does not define, Seller and Goods.

The two snippets use different terms. But we can combine them in a single agreement, by the same method:

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Software” means Vendor’s Super Calculator software.

  2. License.

    1. Definitions.

      1. Licensor” means Vendor.

      2. Licensee” means Customer.

      3. Program” means the Software.

    2. Permissive Software Copyright License.

      1. Licensor grants Licensee a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Program and such Derivative Works.

      2. Derivative Works” means any work that is based on (or derived from) the Program and for which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work of authorship. Derivative Works do not include works that remain separable from, or merely link (or bind by name) to the interfaces of, the Program and Derivative Works of the Program.

  3. Disclaimer.

    1. Definitions.

      1. Seller” means Vendor.

      2. Goods” means the Software.

    2. As Is. Unless required by applicable law, Seller provides the Goods on an “as is” basis, without warranties or conditions of any kind, either express or implied, including, without limitation, any warranties or conditions of title, non-infringement, merchantability, or fitness for a particular purpose.

Using definitions in this way allows us to reuse the snippets without changing their text. That means we could include them by reference, instead of copying:

Agreement

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Software” means Vendor’s Super Calculator software.

  2. License.

    1. Definitions.

      1. Licensor” means Vendor.

      2. Licensee” means Customer.

      3. Program” means the Software.

    2. Permissive Software Copyright License. The parties include the terms attached as Schedule A here.

  3. Disclaimer.

    1. Definitions.

      1. Seller” means Vendor.

      2. Goods” means the Software.

    2. As Is. The parties include the terms attached as Schedule B here.

Schedule A — License Terms

  1. Licensor grants Licensee a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Program and such Derivative Works.

  2. Derivative Works” means any work that is based on (or derived from) the Program and for which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work of authorship. Derivative Works do not include works that remain separable from, or merely link (or bind by name) to the interfaces of, the Program and Derivative Works of the Program.

Schedule B — Warranty Terms

Unless required by applicable law, Seller provides the Goods on an “as is” basis, without warranties or conditions of any kind, either express or implied, including, without limitation, any warranties or conditions of title, non-infringement, merchantability, or fitness for a particular purpose.

Drafters often break up the terms of a complex agreement into schedules in just this way. Different drafters can then handle each schedule, in parallel. Drafters can crib schedules for and from other projects. Terms can change, growing longer or shorter, changing in structure and specifics, over time.

Since we’re still not changing the terms of either snippet, we can go even further. If we publish the snippets, via Common Form or otherwise, we can replace references to schedules with references to the publications:

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Software” means Vendor’s Super Calculator software.

  2. License.

    1. Definitions.

      1. Licensor” means Vendor.

      2. Licensee” means Customer.

      3. Program” means the Software.

    2. Permissive Software Copyright License. The parties include the terms published at https://commonform.org/forms/3279…

  3. Disclaimer.

    1. Definitions.

      1. Seller” means Vendor.

      2. Goods” means the Software.

    2. As Is. The parties include the terms published at https://commonform.org/forms/a7a8…

As drafters, combining snippets of terms this way doesn’t stop us needing to read the snippets, even if we’re familiar with them, have read them before, and know their legal effect. The ways they’re drafted may cause structural issues:

  1. Two snippets might define the same term, like Person or Material Adverse Change, in different ways, creating ambiguity. And the combining agreement itself might define a term in a different way than a snippet does, also creating ambiguity.

  2. The agreement and its snippets might set other kinds of interpretation rules that conflict or combine in unfortunate ways.

These potential problems reflect contract drafting conventions:

  1. Unless they say otherwise, definitions apply throughout an agreement.

  2. Unless they say otherwise, other interpretation rules apply throughout an agreement, too.

Exceptions occur, but infrequently. Drafters sometimes limit a definition or other interpretation rule to a specific organizational part of their agreement, such as the containing paragraph or a specific section. For example, control is often defined solely for purposes of a section about assignment.

Sometimes these conventions make organizing a long set of terms difficult. Rather than litter agreements with “exclusively for the purposes of this section” and the like, drafters avoid the unhelpful organizational effects of these rules by attaching terms as separate agreements under one master agreement:

Master Agreement

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Software” means Vendor’s Super Calculator software.

  2. License. Customer and Vendor will enter concurrently into the License Agreement attached as Exhibit A, with Vendor as the “Licensor”, Customer as the “Licensee”, and the Software as the “Program” under that agreement.

  3. Disclaimer. Customer and Vendor will concurrently enter into the Warranty Disclaimer Agreement attached as Exhibit B, with Vendor as “Seller”, Customer as “Buyer”, and the Software as the “Goods” under that agreement.

[Signature pages follow.]

Exhibit A — License Agreement

Customer, Inc. (“Licensee”) and Vendor, LLC (“Licensor”) agree as follows. In this agreement, “Program” has the same meaning as “Software” in the Master Agreement.

  1. Licensor grants Licensee a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Program and such Derivative Works.

  2. Derivative Works” means any work that is based on (or derived from) the Program and for which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work of authorship. Derivative Works do not include works that remain separable from, or merely link (or bind by name) to the interfaces of, the Program and Derivative Works of the Program.

[Signature pages follow.]

Exhibit B — Warranty Disclaimer Agreement

Customer, Inc. (“Buyer”) and Vendor, LLC (“Seller”) agree as follows. In this agreement, “Goods” has the same meaning as “Software” in this Master Agreement.

Unless required by applicable law, Seller provides the Goods on an “as is” basis, without warranties or conditions of any kind, either express or implied, including, without limitation, any warranties or conditions of title, non-infringement, merchantability, or fitness for a particular purpose.

[Signature pages follow.]

Each agreement develops a vocabulary of defined terms, a set of interpretation rules, and a numbering scheme all its own. It can borrow from other agreements and documents from there, if it does so explicitly.

Drafters separate many kinds of complex transactions into multiple agreements. Changing the rule from sharing all definitions and interpretation rules across all terms of the deal to sharing only within special-purpose exhibit-agreements helps lawyers prepare, review, and negotiate many kinds of complex transactions more reliably and efficiently, in more manageable pieces.

A change to any particular agreement requires less work reviewing other terms to see if they require conforming changes. Counsel more readily find needed terms to review or revise, by searching in the specific exhibit-agreement dedicated to that subject matter. Drafters more readily reuse common utility agreements, such as purchase agreements, voting agreements, intellectual property agreements, and nondisclosure agreements, across deals. Deal teams more readily delegate large parts of the overall drafting burden, as exhibit-agreements or schedules, to specialists, associates, paralegals, and client personnel. As they collaborate, they can think of team members’ contributions in terms of what they achieve, without concern for what specific language or document structure they use to do so.

These benefits offset the costs of distributing a deal’s terms across multiple documents. Separate documents often duplicate language, from preambles to definitions, interpretation rules, and general contract terms. That makes a fatter closing volume overall. It takes some additional work to ensure that the master agreement correctly incorporates all exhibit agreements. Clients end up signing many agreements, at one time, to do one deal.

The trade-off makes sense when the benefits of breaking terms up outweigh the costs of duplication and more pieces to handle. The benefits are always welcome. Can we drive the costs down, to make the benefits available, no matter how complex the deal?

We can. If separate agreements and schedules benefit drafters thanks to implicit conventions for reading them independently, we start by making those conventions explicit:

These interpretation rules apply to each “Agreement” of this transaction:

  1. Definitions in the Agreement apply only in the Agreement.

  2. Definitions outside the Agreement apply in the Agreement only if explicitly stated.

  3. Interpretation rules in the Agreement apply only in the Agreement.

  4. Interpretation rules outside the Agreement apply in the Agreement only if explicitly stated.

Then we make them generic:

These interpretation rules apply to each “Component” of this agreement:

  1. Definitions in the Component apply only in the Component.

  2. Definitions outside the Component apply in the Component only if explicitly stated.

  3. Interpretation rules in the Component apply only in the Component.

  4. Interpretation rules outside the Component apply in the Component only if explicitly stated.

That frees us to apply the rules not just to agreements, with all their handling and signing burdens, but to subdivisions of a single agreement, as well:

Customer, Inc. (“Customer”) and Vendor, LLC (“Vendor”) agree:

  1. Software” means Vendor’s Super Calculator software.

  2. Components. These interpretation rules apply to each “Component”:

    1. Definitions in the Component apply only in the Component.

    2. Definitions outside the Component apply in the Component only if explicitly stated.

    3. Interpretation rules in the Component apply only in the Component.

    4. Interpretation rules outside the Component apply in the Component only if explicitly stated.

  3. License. The parties include the terms published at https://commonform.org/forms/3279… as a Component of this agreement. In that Component:

    1. Licensor” means Vendor.

    2. Licensee” means Customer.

    3. Program” means the Software.

  4. Disclaimer. The parties include the terms published at https://commonform.org/forms/a7a8… as a Component of this agreement. In that Component:

    1. Seller” means Vendor.

    2. Goods” means the Software.

Armed with these Component rules:

  1. Components can define whatever terms they like for their own purposes. If they happen to define the same term in different ways, no ambiguity results. Each Component gets its own definition.

  2. Components can set whatever interpretation rules they like for their own purposes. If they happen to set conflicting rules, or rules that combine in an unfortunate way, no problem results. Each Component gets its own interpretation rules.

  3. As a contract drafter, I can mix and match Components that achieve aspects of the deal I have in mind. If I remember what a Component achieves, I can ignore the specific language, terms, and structure it uses to do so as I combine it with other Components to achieve more complex, composite goals.

  4. As a contract drafter, I can easily write Components that others can reuse, drafting just the terms I need to achieve the purpose of the Component, leaving terms for parties, amounts, and other details undefined for containing agreements to provide. I can use Components to build more Components, just as I can use Components to build agreements.

In the coming weeks, I’ll be writing more tools and services, under the Common Form umbrella, to make writing, sharing, and combining Components easier. This will bring to the Common Form arsenal the tool I now see was missing. Common Form has good tools for expressing the elemental language and structure of contracts, and for combining those elements in useful ways. But it lacks what computer scientists call means of abstraction.

Contract drafters already understand means of abstraction. Putting terms in separate agreements, attached as exhibits, is a means of abstraction. Separating exhibit-agreements, and Components under the rules above, allow reuse of terms as functional units, or black boxes, without concern for the specifics of exactly how they were drafted. Suppressing those details allows drafters to focus on the more complex terms created by combining existing Components. Making those details irrelevant to users allows Component authors freedom to refine and improve Components without creating undue headaches for users. Means of abstraction afford those benefits.

The beneficial trade-off of means of abstraction is well known across trades and professions. Computer programmers build programs out of reusable subroutines. Engineers develop new devices out of jelly bean components. Architects design projects for modular construction. Contractors build with standardized, interchangeable, prefabricated parts and standardized materials.

Controlling complexity allows simple creatures, like mortal contract drafters, to meet complex needs. It’s high time to bring the state of the art in complexity control to the draftsman’s art.

Your thoughts and feedback are always welcome by e-mail.

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