Why Most Commercial Contracts Fail Before Litigation Begins – Part 2

Part II: What Must Be Done Before Drafting Begins

Understanding the business transaction

The first and most essential step in drafting a commercial contract is a deep understanding of the underlying business transaction. Legal drafting must follow commercial clarity, not precede it.

A well-drafted commercial contract converts a business understanding into a clear legal structure. It should capture:

• Commercial objectives

• Operational realities

• Financial flows

• Dependencies and contingencies

Without this understanding, drafting becomes mechanical and disconnected from the actual transaction.

Understanding 'Power Dynamics' between parties

Commercial contracts are shaped not only by legal principles but also by bargaining power. The relative leverage of the parties determines the extent to which risk can be shifted, limited, or shared.

Understanding power dynamics requires assessing:

• Which party needs the deal more urgently

• Availability of alternative counterparties

• Market position and financial strength

• Long-term strategic value of the relationship

Courts examine contracts primarily for legality and enforceability. Businesses negotiate contracts within the constraints of leverage and commercial necessity. A legally balanced contract that ignores bargaining realities may never be executed. Conversely, a commercially realistic contract reflects what the parties can practically negotiate and accept.

A key drafting question is always:
What can the client realistically obtain given its commercial position?

Drafting with worst-case scenarios in mind

Commercial contracts exist to manage uncertainty. In most business relationships:

• Bargaining power is unequal

• Payments and performance occur over time

• External variables affect performance

• Disputes are foreseeable

A contract must therefore be drafted not only for cooperative performance but also for potential failure. Anticipating non-performance, delay, regulatory change, and commercial breakdown allow the contract to remain resilient when circumstances become strained.

A contract that only contemplates smooth performance ceases to function when difficulties arise.

Takeaway — Part II

Effective commercial drafting begins with understanding the transaction, recognising bargaining realities, and anticipating failure scenarios rather than assuming uninterrupted cooperation.

Disclaimer: This article is for informational purposes only and does not constitute legal advice or solicitation