How to Draft a Contract from a Term Sheet

1.1The first draft in one paragraph

A deal starts as a short list of business points. A first draft is the first full version of the contract, written by one side’s lawyers. It turns those points into words that bind. This workbook follows one contract from that list to the day it is signed.

You are a first-seat trainee at Hennacott LLP, in its commercial team. You act for a bakery that is hiring a garage to look after its vans. You hold the pen, so you write each version of the contract.

1.2Why a bakery pays a garage

A bakery that delivers its own bread needs vans that run every day. A van off the road means bread that does not reach its customers. The bakery could keep its own mechanics. Many bakeries pay a garage to look after the whole fleet instead, because:

• the bakery has no workshop to keep
• it pays one price a van each month, which it can plan around
• the garage keeps parts and spare vans, so repairs go faster

The garage gains too. A contract for a whole fleet keeps its workshop busy for years. It also brings in money every month, whether or not a van breaks down.

1.3The case: a bakery hires a garage

Polgarrow Bakery Limited is a family bakery. It delivers bread across Devon and Cornwall, six days a week, in 60 vans. It has agreed to hire Kestrow Fleet Services Limited to service and repair them.

Kestrow looks after business fleets. It is open six days a week and keeps vans for hire. It will charge £100 a van each month for servicing, and more for repairs.

The bakery expects to pay about £120,000 a year in all. The contract will run for three years, and the bakery may add a fourth.

The bakery’s finance director instructs your firm. He is a director of the company, so he can sign for it. On the other side, the garage’s director decides, and the garage’s solicitors act for it. These are the people in the case:

The deal starts on a term sheet: a short table of the points agreed so far. Another name for it is heads of terms. Leonie built this one from Martyn’s notes and Kestrow’s written quote. It is marked subject to contract, so nobody is bound until the contract is signed.

Its first row names the two sides:

The customer pays for the work, and the supplier does it. Chapter 2 shows why the customer’s name in this row needs a check before it goes into a contract.

1.4What each side wants, and who holds the pen

Each side wants the contract to protect its own business. The bakery wants:

• its vans back on the road fast
• a van to use when one is not back in time
• fixed prices it can plan around
• a way out if the service keeps failing

The garage wants:

• three years of steady work
• prices that rise when its own costs rise
• a limit on what it must pay if something goes wrong

The side with the work to offer usually takes the pen. Here that is the bakery, because Kestrow wants the work. So Kestrow lets the bakery’s lawyers write the first draft. That means you choose the defaults. A point your draft settles stays settled, unless Kestrow spots it and argues it out.

You do not start from a blank page. You start from the firm’s precedent: a contract for a similar deal that the firm keeps to build on. Then you fit every clause to this deal.

The road to signing runs through six versions. When the garage answers, its solicitors send a mark-up: your draft with their changes shown.

Once signed, the contract is called the Agreement. The papers from each stage sit in the Drafting File.

1.5Your job

The term sheet says nothing about some points the contract must settle. So your first task is a list of questions for Martyn. Send it with version 1, so that his answers can shape version 2. Ask him:

• Who collects a van that breaks down, and who brings it back?
• Do Saturdays count when the contract counts days?
• On what day does Kestrow date its invoices, and when does it send them?
• Where should notices to the bakery go, and could that address change?

Each answer becomes words in the draft. A question you never ask leaves a default you never chose.