Whether you’re managing a high volume of agreements or advising a business that needs to move quickly, prioritization becomes part of the job. That’s where contract triage comes in.
In practice, triage raises two distinct questions: (1) which contracts to prioritize, and (2) within a contract, which issues matter most. This post focuses on the second.
In a perfect world, every issue in a contract would receive equal attention. But, in reality, factors such as time constraints, leverage, and deal size usually require prioritization of the issues in a deal. In smaller or low risk deals especially, it may not be efficient —or necessary—to negotiate every provision, depending on the nature of the deal.
So, how do you decide where to focus?
One practical approach, which I sometimes suggest in smaller deals, is to separate the “product quality” terms from the “liability” terms¹.
Product Quality Terms
These provisions address how well the product or service performs —and what happens if it doesn’t (e.g., remedies if the products or services are not as good as expected). Examples include:
- Acceptance criteria
- Specifications
- Service levels
- Termination rights
In a small deal (e.g., $5,000) where a quick, high level review of the biggest issues may be warranted, the downside risk tied to these provisions is generally limited to the value of the contract. For example:
- For a customer, you’ve likely paid for a subpar product.
- For a vendor, you may have difficulty collecting payment.
In either case, the financial exposure tied to product quality provisions may be more limited in scope.
Liability Terms
Liability-related issues address risks that can extend well beyond the value of the deal. These include:
- Intellectual property/infringement issues
- Confidentiality
- Data privacy
- Indemnities and/or liability caps
Even in a small deal, a mistake in these areas can create outsized exposure. For example:
- A vendor’s product may infringe on third party IP, resulting in the customer being named as a party to a costly lawsuit.
- A vendor’s data breach could trigger regulatory or consumer claims made against the customer.
- A customer may misuse your confidential information to build a competing product.
In each case, the financial and reputational consequences may far exceed the contract value.
A Practical Approach
In smaller deals, a practical approach can be to prioritize liability-related provisions before focusing on performance standards or payment terms.
Areas that may be worth reviewing with respect to the limitation of liability include:
- What’s included in the general cap?
- What is excluded?
- Are exclusions uncapped or subject to a higher cap? Common exclusions includes IP infringement, data rights, indemnity obligations, confidentiality, and misconduct-related claims (e.g., gross negligence, fraud, willful misconduct, breach of law, etc.)
Risk vs. Likelihood
No approach can be one-size-fits-all or 100% foolproof.
This logic assumes it’s a small deal. Protecting the value of the deal often becomes more important as the deal size increases.
Also, it is important to note that while liability risks can be significant, they may also be less likely to occur. By contrast, product quality or payment issues may arise more frequently.
Consider the below example of “expected value” calculations:
- A $10,000 deal with a 50% chance of a performance issue = $5,000 expected risk
- In the same deal, assuming there’s only a 0.1% chance of a $1M IP issue = $1,000 expected risk
Depending on the situation, that analysis could shift where you focus.
Takeaway
No two deals are alike, and there is no universal rule for contract triage. Distinguishing between bounded risks (quality/payment) and unbounded risks (liability/IP/data) and focusing on the issues with the greatest business impact can be a useful approach—particularly when time or leverage is limited.
Brian Heller is a Member of Outside GC’s Washington D.C.-based team and is an experienced technology and deal attorney, focusing on SaaS licensing, digital and social media, online advertising, mobile apps, cloud services, terms of use, data use and protection, content licensing and other technology deals. Brian has represented both vendors and customers and uses this experience to present reasonable positions on behalf of his clients. Brian can be reached at bheller@outsidegc.com.
1 It’s important to expressly note that no two deals are the same, and context matters.