The Term Sheet – Avoiding the Battle of the Redlines

Contracts and Negotiations Series

“What we’ve got here is a failure to communicate.”

- Captain, Cool Hand Luke

In my career, I have seen the same problem crop up repeatedly when negotiating agreements. It may start innocently enough, but eventually it ends up in the same place—a battle of the redlines. In almost all cases like this, the lawyers didn’t make effective use of a term sheet.

Here’s what happens: a lawyer drafts an agreement and sends it to the other side for review. The initial draft is often taken from a template or uses text from a different agreement. The other side marks up the draft and sends it back; then this is repeated, back-and-forth. Each side digs in. The lawyers may make comments in the margins, but they rarely communicate effectively that way. This becomes an expensive and counterproductive battle of wills between the attorneys. And it is almost always unnecessary. This post is the third in a series of posts about agreements. In it, I will provide some suggestions for avoiding a battle of redlines.

The term sheet – an “extra step” that saves time and trouble.

If the two sides have not already found substantial common ground on the deal they are considering, it is premature to proffer a full agreement. Dozens of pages of words can cloud the key points of the deal. It is almost always much better to start with a simple term sheet.

What should go into a term sheet? I usually ask my clients to list all their goals and key asks in the deal, and to identify any big risks or concerns they want to address. From this, we create our terms. I ask opposing counsel to do the same. Then we put the listed terms into a single document and identify any points to be negotiated or resolved. The term sheet works as a checklist of items that need to be agreed upon before taking the time to prepare a full agreement.

When lawyers skip this step, it is often because they believe the present facts fit with an existing agreement that has already been carefully crafted. They modify the existing document to adapt it to the present facts, hoping to save time by not bothering with a term sheet. But a term sheet is where the most important parts of the deal can be identified, prioritized, and negotiated, before those terms get buried in dozens of pages and thousands of words in a full agreement.

What if things need to happen fast?

In some cases, it’s important to move quickly to a signed deal, even if it’s preliminary or short-term, to permit the parties to begin the related/pending work. In such cases, a basic term sheet can be adapted into a non-binding Letter of Intent or a Memorandum of Understanding (MOU). The MOU can be non-binding, fully binding, or only binding as to some of its provisions, leaving the others more flexible or subject to further negotiation.

In any case, it is (in my opinion) pointless to try to write an agreement before the parties even know they have something meaningful on which they can fully agree. That may seem obvious, but I have seen many situations in which the sides had little common ground, and yet lawyers for both sides fighting over wording. This is like trying to put a roof on a house before laying the foundation.

I’m already stuck in a Battle of Redlines – what should I do now?

So, if you want to avoid a battle of redlines, first be sure both sides agree on the basics. If you don’t have clarity on this issue, that contributes to the endless back and forth that doesn’t produce results. If this sounds like a situation you are in right now, back up, extract the key provisions from redline morass, and create a clean term sheet. Be sure the clients agree on all key terms. Then, you can be confident that any remaining sticking points are less important and should be easier to resolve.

The next post in this series will discuss how to resolve those remaining issues. If you would like some advice about your own situation, you can email the author here.