Contracts Cognition

contracts-cognition

When to use

• A draft MSA / DPA / SOW / vendor contract / partner agreement lands and a non-lawyer needs to read it for what it actually constrains, which clauses carry real risk, and what to redline first.
• An existing contract is being renegotiated; the question is which clauses are now misshapen given current scale, regulatory regime, or customer mix.
• A new customer contract triggers obligations (SLA, indemnity, audit, data-handling) that need to be sized against operational capacity before signing.

Do NOT use as a substitute for actual legal counsel (this skill produces the non-lawyer cognition that prepares the conversation with counsel, not the legal opinion), for privacy-specific review (route to privacy-review (P6); this skill composes P6 for data clauses), or for contract management software / e-signature operations.

Cognition cluster

• Mental model 28 — Inversion. "What would force us to invoke this clause? What would force the counterparty to invoke it?" Inversion surfaces which clauses are dormant boilerplate vs which are loaded triggers. See mental-models.md § 28.
• Mental model 21 — Second-order thinking. Each clause has a second-order shape: indemnity caps interact with insurance coverage; SLAs interact with operating-cost; auto-renewal interacts with switching cost. Reading clauses in isolation misses the load-bearing combinations. See mental-models.md § 21.
• Mental model 26 — Optionality. Each clause either preserves or forecloses future choices (terminate-for-convenience preserves; auto-renewal forecloses; exclusivity forecloses; MFN forecloses). The cost of a clause is the optionality it removes. See mental-models.md § 26.
• Context-spine — regulatory-regime + customer-segment + org-stage. Read regulatory-regime (J1) for floor-bound clauses (GDPR DPA terms, HIPAA BAA, SOC 2 audit). Read customer-segment for risk sizing (enterprise SLA terms ≠ SMB SLA terms). Read org-stage for what's affordable (early-stage = avoid uncapped indemnities; growth = can absorb tighter SLAs).

Procedure

Step 0: Frame the contract by intent

Two questions before reading clauses:

1. What outcome are we trying to enable? (sell to enterprise, integrate vendor, partner co-sell, license IP).
2. What outcomes are we trying to prevent? (unbounded liability, lock-in, IP leakage, audit ambush, payment risk).

Without intent, every clause looks equally important. With intent, 80 % of clauses are background and 20 % are load-bearing.

Step 1: Identify the load-bearing clause families

Five families carry most real risk for non-lawyers:

1. Liability & indemnity — caps, carve-outs, IP indemnity, mutual vs one-way. Uncapped indemnity is the canonical trap.
2. Term, renewal, termination — auto-renewal, notice windows, termination-for-convenience vs for-cause, data-return obligations.
3. Data & privacy — DPA, sub-processors, data location, breach notification, retention, deletion. Compose privacy-review (P6) for the deep read.
4. IP & confidentiality — work-product ownership, license grants, confidentiality term, residual-knowledge clauses.
5. Commercial mechanics — payment terms, MFN, exclusivity, change-of-control, audit rights.

Other clauses (governing law, force majeure, severability, notices) are usually boilerplate; flag deviations but don't lead with them.

Step 2: Inspect each load-bearing family

For each family, read three things:

1. The clause as written — what does it literally say.
2. The clause invoked — "under what scenario does this clause fire?"
3. The clause's tail risk — "what's the worst-case if it fires?"

A clause whose tail risk is bounded and small = accept. Bounded and large = redline to reduce. Unbounded = redline to cap or refuse.

Step 3: Run the inversion check

For each load-bearing clause, ask:

1. "Would we sign this if the counterparty had 10× our leverage?" Reveals which clauses we tolerate because of relationship, not because they're fair.
2. "What would we want if we were the counterparty?" Reveals which clauses are mutual vs one-way unfairly.
3. "What scenario makes this clause matter in 18 months?" If no scenario, the clause is dormant; if a plausible scenario exists, prioritize the redline.

Step 4: Build the redline priority list

Rank redlines by:

1. Tail-risk size — uncapped > capped-large > capped-small.
2. Probability of invocation — high-likelihood clauses (auto-renewal, payment terms) outrank low-likelihood (force majeure).
3. Asymmetry — one-way clauses where the counterparty bears no symmetric risk.
4. Optionality cost — clauses that foreclose future moves (exclusivity, MFN, change-of-control restrictions).

Top 3–5 redlines = the negotiation; everything else is acceptable or backlog.

Step 5: Validate the read before emitting

Before producing the artifact, verify three things:

1. Family coverage — confirm each of the five load-bearing families was inspected (Step 2); silent skips mean the contract was not read, only skimmed.
2. Tail-risk sizing — assert every top-5 redline has a named worst-case scenario and a named cap / carve-out / refusal-shape ask; un-sized redlines fail.
3. Counsel handoff — check that the contract-cognition note explicitly flags which clauses need legal counsel review vs which are commercial / operational decisions; this skill does not replace counsel.

All three must pass. If any fails, return to the failing step.

Step 6: Emit the contract-cognition note

Produce the contract-cognition artifact for the negotiation lead (founder, sales lead, ops lead) and for counsel. The artifact is the non-lawyer cognition that prepares the conversation with counsel, not the legal opinion.

Related Skills

WHEN to use this

• Reading a draft MSA / DPA / SOW / vendor / partner contract for risk and constraint.
• Renegotiating an existing contract at a new scale or under a new regulatory regime.
• Sizing customer-contract obligations against operational capacity.

WHEN NOT to use this

• Privacy-specific deep read — route to privacy-review (P6); this skill composes P6 for data clauses.
• Data-classification / retention judgment — route to data-handling-judgment (P7).
• Build-vs-buy / partner-vs-vendor decision shape — route to build-buy-partner (P1); P1 outputs the whether, this skill outputs the what to redline.
• Actual legal opinion — route to qualified counsel; this skill prepares the cognition for the counsel conversation, not replaces it.

When the agent should load this

• "Review this MSA."
• "What does this DPA actually bind us to?"
• "Which clauses do we redline first?"
• "Is this contract safe to sign?"
• "Lies mir den Vertrag durch."

Output

1. contract-frame.md — intent (what to enable / prevent), counterparty leverage read, regulatory-regime context.
2. load-bearing-clauses.md — five families × clause-as-written + invocation scenario + tail risk per clause.
3. redline-priority.md — top 3–5 redlines ranked by tail-risk × probability × asymmetry × optionality cost; named asks per redline.
4. counsel-handoff.md — explicit list of clauses that need legal counsel review vs commercial / operational decisions.

Gotcha

• Uncapped indemnity is the silent killer. If the cap is missing or excludes major risk categories (IP, data breach), it's the first redline.
• Auto-renewal with short notice windows compounds across years — calendar the notice window the day the contract is signed.
• "Industry-standard" is a marketing word, not a legal one. Push for the specific cap / term / carve-out.
• Mutual NDAs that look symmetric often aren't — confidentiality term, residual-knowledge, and remedy clauses skew one-way silently.

Do NOT

• Do NOT issue legal opinions; this skill prepares cognition for counsel, not replaces counsel.
• Do NOT collapse all clauses into one list; the five families carry the real risk, treat them differently.
• Do NOT skip the inversion check — clauses that look fine in our shoes often look terrible in the counterparty's.

Runnable example

Growth-stage SaaS, customer is Fortune-500 enterprise, MSA draft from customer's legal.

• Step 0 — Intent: enable enterprise deal, prevent uncapped liability + audit ambush + data-handling overreach.
• Step 1 — Identify families: liability (mutual indemnity, uncapped on IP); term (3-year auto-renew, 90-day notice); data (DPA references but no DPA attached); IP (work-product ownership unclear for integration scripts); commercial (MFN clause buried in pricing schedule).
• Step 2 — Inspect: uncapped IP indemnity → tail risk = bet-the-company (uncapped patent claim). Auto-renewal 3-year → tail risk = $1.2M locked in if missed notice. MFN → tail risk = forecloses bundle pricing across portfolio.
• Step 3 — Inversion: would we sign this with 10× leverage? No. Symmetric? Indemnity is one-way; MFN is one-way.
• Step 4 — Redline priority: (1) cap IP indemnity at 2× annual contract value with reasonable carve-outs; (2) reduce auto-renewal to 1 year, expand notice to 180 days; (3) strike MFN or limit to identical-SKU; (4) attach DPA before signing; (5) clarify integration-script IP ownership.
• Step 5 — Validate: five families inspected; top-5 redlines sized with cap / refusal asks; counsel-handoff names IP indemnity + MFN as counsel-led, auto-renewal as commercial-led. Pass.
• Step 6 — Emit contract-cognition note for negotiation lead; route IP indemnity + MFN to counsel; sales lead negotiates auto-renewal and DPA attachment.