Consideration
February 27, 2008
No binding legal agreement can be formed without the presence of at least one drop of consideration.
If a person makes a gratuitous promise it will not be binding unless something is exchanged or “buys” that promise. That extra element given to acquire an undertaking - either to do something or not to do something - is consideration.
Consideration is a bit tricky to grasp at first because it can be so intangible. It is an important legal concept however as although the forms consideration can take are almost infinitely varied, the absence of consideration is fatal to the existence of an agreement.
Hundreds of years of law have built up numerous rules concerning consideration, but a few simple rules will give you the general idea:
- while the consideration must be of some value (at least from a legal viewpoint) that does not mean that it needs to be valuable;
- consideration needs to flow from the one receiving the promise, but the benefit of that promise can be directed to anyone nominated to receive the promise; and
- the consideration must relate to some future undertaking to either do or not do something as it can’t relate to ‘past’ consideration which has already been given.
Importantly, an absence of consideration can be overcome by documenting the agreement as a deed rather than as an agreement. Deeds do not require the presence of consideration to be legally binding and enforceable.
The other primary difference between a deed and an agreement is the way the deed is signed (or ‘executed’ in legal speak). There are certain legal formalities that a lawyer can guide you thorough in the execution process to ensure the deed is validly signed. In most other respects a deed and an agreement are very similar documents.
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Always Take a Macro View
February 19, 2008
Whether you’re selling your business, signing-up for a project, or finalising any other deal, the first step is to get a good overview of the deal in your own mind. Always remember basic concepts and keep reverting to a macro view of your overall strategy so you can maintain your bearings.
There is considerable flexibility in how a deal is documented and progressed. The main aim in any deal, and any well-drafted legal document, is clarity of the key terms: What is to be done? When? How much is to be paid? Who is liable if things go wrong? Of course, many other issues must eventually be recorded and there’s no shortage of distracting issues.
A deal should be built to suit the particular transaction, its timetable and each party’s concerns. Interim documents can sometimes be bypassed or selectively used – just like selecting a particular item from a legal tool kit. The only really mandatory document is the final detailed Agreement.
Keep the transaction simple and don’t let the other party bamboozle you with unnecessary complexity or with jargon and terminology.
Let’s work through what deal building tools you can use if they are seeking a Deed of Confidentiality, Deed of Non-Disclosure, Deal Memo, Term Sheet, Heads of Agreement, Memorandum of Understanding or Letter of Intent.
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Deal Building Tools
February 2, 2008
The documents discussed below are the basic tools required to build any deal. They are used to establish the parameters of any confidentiality undertakings, to set down the proposed deal’s terms and to clarify any undertakings given in relation to performing or refraining from doing certain tasks.
Sometimes documents with the same effect or purpose are given different names due to individual habit.
Don’t let the jargon throw you and always remember that the contents are far more relevant than the title.
Deed of Non-Disclosure or a Deed of Confidentiality
Discussions are usually protected by a Deed of Non-Disclosure or a Deed of Confidentiality - same animal, different names. Such a document identifies and protects confidential information (ideas, concepts and proposals) from disclosure - except when disclosure is required by law or by stock exchange rules.
Deal Memo or Term Sheet
Headline terms are often recorded in a Deal Memo or Term Sheet. The idea is to record the basic commercial terms and let the lawyers subsequently fill in the more intricate detail in the final Agreement.
This can be a useful process as there is a human element to any transaction and it’s important to strengthen the perception you’re moving the deal along. Working through the issues when compiling a Term Sheet may also help you evaluate the merits of the deal while there is still time to withdraw if the deal doesn’t stack up.
Memorandum of Understanding or Heads of Agreement
A Memorandum of Understanding or Heads of Agreement is a more developed Term Sheet with some legal clauses added to ensure each party is ‘locked into’ the deal while more detailed terms are negotiated. This type of document may also be used to establish a due diligence process or set up a working party who will work through the finer details.
Letter of Intent
A Letter of Intent is essentially the same document that may have an added emphasis on one party undertaking to do a certain task or to enter into the transaction before a certain date. Legally, nothing particularly turns on the title, but the mention of ‘intention’ may yield some benefit – again, the human element.
Also, nothing turns on the terminology of whether the document is called a contract or an agreement. If it is called a Deed though, there is a legal difference in how the document should be executed.
The final document should, of course, contain all the precise details. For example: not only how much will be paid, but by what date each month, whether there will be an annual CPI increase or whether interest will apply to late payments. In short, the myriad details crucial to full protection of your rights.
Get a lawyer involved as soon as possible if you don’t intend to fly solo in negotiating and documenting the entire deal. It’s very difficult to change a hastily agreed Term Sheet without damaging the trust and goodwill that must be cultivated to ensure a deal eventuates. So, get advice before the foundations are laid.
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Terminology Made Simple
January 16, 2008
Here are a few tips that may help to demystify legal jargon and enable you to use business terminology more accurately.
Joint Venture / Partnership / Alliance
The terms joint venture and partnership have very serious legal implications. Unless you mean to use them in their true context, avoid the use of these
terms. They will cause confusion in the other camp if they are used indiscriminately. A more general term that is less likely to provoke concern is “alliance”.
A joint venture is a legal arrangement that normally requires significant commitment from the participants. It generally connotes the incorporation of an entity in which the venturers are joint shareholders. Often the new entity is initially supported by shareholder contributions before it launches its own business. The subsequent profits are divided according to the equity held by each party.
Partnership is also a precise legal concept that means two or more persons working together with a view to making profits. The danger of entering into a partnership is that each partner has the power to bind the other partners. If one partner incurs a debt, the creditor can recover it from the borrowing individual or from any other partner.
In short, unless it is completely accurate, avoid the use of the word “partner” or any related terminology. A better term to use is “working together”.
Agreement or Contract
There is often confusion about whether a document is a contract or agreement. It is really the same thing and the terms are interchangeable.
Deed or Agreement
There is a legal difference between a deed and an agreement although there is not a great deal of practical difference, other than the name and the way the document should be executed.
A crucial reason to execute a document as a deed rather than an agreement is if there was concern over the existence of valid consideration. This is a fairly legal issue, so don’t worry too much. The key point is this: Don’t be overly perplexed by a document being a deed and not an agreement.
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