1. 2 One of my favorite books is Working With Contracts – What Law School Doesnt Teach You, by Charles M. Fox, a partner in the New York City law firm

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DRAFTING DRAFTING CONTRACTSCONTRACTS

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One of my favorite books is Working With Contracts – What Law School Doesn’t Teach You, by Charles M. Fox, a partner in the New York City law firm of Skadden, Arps, Slate, Meaghest & Flom. Most of the quotes in the slides come from this book – the others come from Understanding Contracts, by Jeffrey Ferriell and Michael Nevin. (This latter book is a general text on contracts law – not a primer on contract drafting). Also, in California, we have a number of form books, which are of great help – one of the best is the multi-volume California Transactions Forms – it contains five huge volumes of different types of contracts for business transactions. I often refer to this source. (In fact, our class on Thursday, March 16, 2006, will be based on Chapter 6 of this 34 chapter series – something to look forward to!).

Resources for Drafting

Contracts

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Resources for Drafting

ContractsEvery contract needs plain English. Three of the very best books on the subject are:

The Elements of Legal Style, by Bryan A. Garner (considered the preeminent authority on legal language and writing);

The Elements of Legal Writing, by Martha Faulk and Irving Mehler;

Plain English for Lawyers, by Richard C. Wydick.

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“Everything is negotiable

EVERYTHING!

Even things the other party tells you are not negotiable

ARE NEGOTIABLE.

Even pre-printed forms and boilerplate terms are negotiable.”

Everything is Negotiable

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Question:

Will you be tasked with negotiating?

Answer:

Only after you prove your competence and reliability.

Everything is Negotiable

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A. Be comfortable with your duties – if not, do not sign the contract.

B. Be clear about your desires, requirements and expectations at the beginning of the negotiations – this makes for easier and faster negotiations.

C. Be insistent about including a remedy within the contract if there is a breach by either party – if the other side balks, maybe you should not do business with him/her/it.

D. Unless it is truly an emergency, don’t be in a hurry – always be prepared to walk away.

Four Cardinal Rules for Negotiating Contracts

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These are contracts “with the language/terms already set.”

Since parties usually do not negotiate when using form contracts, review the language/terms

carefully.

Remember slide #6

(don’t be in a hurry – don’t do what I once did – to be explained in class).

Form Contracts

F I N I S H

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“In contracts drafting, plagiarism is a virtue. A lawyer drafting a contract should always try to start with a form designed for the kind of transaction involved, or from a contract previously used in a similar transaction. There are several reasons for not wanting to

‘reinvent the wheel’:

Form Contracts

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1. Starting a contract from scratch is more time-consuming than marking up a good form;

2. Precedents contain provisions that address issues in ways that are generally accepted in the legal and business communities;

3. Boilerplate provisions that have been used and accepted in previous transactions are less likely to require careful review and negotiation.”

Form Contracts

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Use model form contracts when drafting – much better than starting from scratch.

Do not use the language/terms of the model/form contract unless it makes sense for your situation.

Be careful to eliminate legalese – most model/form contracts are filled with it.

Form Contracts

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The Freys (p.127) are correct -

Draft From an Outline

“An outline helps the drafter present the terms of the contract in a logical, orderly fashion. An outline prevents the omission or duplication of essential terms.”

See example 6-1 on p. 127

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Good legal writing (including contract drafting):

1. Does not include legalese (aka “lawyerisms”);

2. Is written in “plain English.”

Eliminate Legalese

Plain English for Lawyers by Prof. Richard Wydick

First published in 1978 and created a real change in the legal profession.

“Good legal writing does not sound as though it had been written by a lawyer.”

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• Lawyerisms:

Eliminate Legalese

“Lawyerisms are words like aforementioned, whereas, res gestae, and hereinafter. They give writing a legal smell, but they carry little or no legal substance…They baffle and annoy, and give a false sense of precision and sometimes obscure a dangerous gap in analysis. A lawyer’s words should not differ without reason from the words used in ordinary English.”

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Words & Phrases to Avoid

1. acknowledge and confess2. act and deed3. afford an opportunity4. aforementioned5. aforesaid6. alter or change7. and/or8. annul and set aside9. as to whether10. attached hereto11. at that point in time12. authorize and empower13. because of the fact that14. by means of15. by reason of

16. by virtue of17. cease and desist18. comes now19. confessed and acknowledged20. conjecture and surmise21. convey, transfer and set over22. covenant and agree23. cover, embrace and include24. deem and consider25. due and payable26. due to the fact that27. during the course of28. during the period when29. during the time that30. each and all

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46. free and clear47. free and unfettered48. from and after49. from the point of view50. full and complete51. give and grant52. give, devise and bequeath53. good and sufficient54. good consideration55. goods and chattels56. have and hold57. have an effect on58. have an impact on59. have a tendency to60. heed and cause

31. each and every32. entirely and completely33. file an action against34. final and conclusive35. fit and proper36. fit and suitable37. for and during38. for and during the period39. force and effect40. forswear 41. for the period of42. for the purpose of43. for the reason that44. forthwith45. fraud and deceit


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61. hereafter62. hereby 63. herein 64. hereinabove 65. hereinafter66. hereof 67. heretofore68. herewith 69. hitherto 70. hold and keep71. hold, perform, observe, fulfill,

and keep72. in accordance with73. in as much as74. in connection with75. in favor of

76. in instances in which77. in lieu, in place, instead and in

substitution of78. in lieu thereof79. in my stead and place80. in order to81. in reference to82. in regard to83. insofar as…is concerned84. in spite of the fact that85. in terms of86. in truth and in fact87. in view of88. just and reasonable89. keep and maintain90. kindred character

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91. last will and testament92. let or hindrance93. lot, tract, or parcel of land94. made and entered into95. made and provided96. made, ordained, constituted,

and appointed97. maintenance and upkeep98. mind and memory99. modified and changed100. next and just101. null and void102. of and concerning103. on the basis of104. on the part of105. order and direct

106. ordered, adjudged, and declared107. over, above, and in addition to108. pardon and forgive109. part and parcel110. peace and quiet111. perform and discharge112. point in time113. prior to114. remise, release, and quit to claim115. rest, residue, and remainder116. revoked, annulled and held for

nought117. said (i.e. “the said document”)118. saith 119. save and except120. seized and possessed


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121. shun and avoid122. situate, lying, and being in123. stand, remain, and be124. subsequent to125. suffer and permit126. suffer or permit127. thence128. thenceforth 129. therefrom 130. therein 131. there is no doubt that132. thereof 133. thereout 134. thereover 135. therethrough

136. thereto 137. thereunder138. this is a topic that139. total and complete 140. true and correct141. truth and veracity142. undertake and agree143. unless and until144. until such time as145. void and of no effect146. whensoever 147. whereby148. wherefore149. wherein150. whereof

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151. whereas 152. whereat 153. whereon 154. whilst 155. with the exception of156. with reference to157. with regard to158. with respect to159. witnesseth 160. written document161. written instrument


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• The Active Voice not the Passive Voice.

• Short sentences.

• Everyday language where possible – do not make readers (who will be mostly non-lawyers) scramble for a dictionary.

• Concrete words – be specific – contracts should not be vague.

Use…

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The next 12 slides are taken verbatim fromChapter 6 of California Transactions Forms, Bancroft-Whitney (1997),

written by attorney Michael Overly of Newport Beach (you will receive a handout of Mr. Overly’s “checklist of common contract clauses” in class on Thursday, November 3, 2005):

Common Contract Provisions

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I. Provisions Concerning Contract Formation

A. Offer

1. Bilateral

2. Unilateral

3. Irrevocable Option

4. Revocation of Offer


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B. Acceptance/Rejection of Offer

1. Unconditional acceptance

2. Conditional acceptance

3. Exercise of option

4. Rejection of offer

5. Rejection and counteroffer


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II. Introductory Provisions

A. Identification of the Parties

B. Effective Date of Agreement

C. Recitals

D. Consideration


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III. Conditional Provisions

A. Conditions Precedent

B. Performance to Promisor’s Satisfaction

C. Conditions Concurrent

D. Conditions Subsequent

E. Force Majeure


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IV. Modification and Termination Clauses

A. Modification

B. Termination on Specified Date

C. Termination on Specified Event

D. Conditions Permitting Termination

E. Termination on Notice

F. Termination on Default

G. Termination for Cause

H. Attorney Fees upon Termination


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V. Assignment

A. Assignability

B. Assignable on Prior Written Consent

C. Binding on Successor and Assigns


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VI. Penalty and Liquidated Damages Clauses

A. Statutory Maximum

B. Liquidated Damages, Subject to Reasonableness Standard

C. Remedies Cumulative


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VII. Dispute Resolution

A. Arbitration

B. Attorney Fees


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VIII. Construction of Contract

A. Governing Law

B. Forum Selection

C. Integration Clause

D. Severability Clause

E. Joint Drafting and Neutral Construction

F. Undefined Terms


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IX. Warranties

A. Warranty Regarding Litigation

B. Warranty of Title

C. Warranty Regarding Tax Liabilities

D. Warranty of Authority to Execute

E. Warranty Regarding Community Property


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X. Miscellaneous Clauses


A. DefinitionsB. TaxesC. ConfidentialityD. Compliance with Laws and OrdinancesE. Further AssurancesF. Contract Entered Into Freely and in Consultation with CounselG. Incorporation of Schedules and

Other Attachments

H. Place of Performance I. Effect of Titles and HeadingsJ. NoticesK. No WaiverL. Calendar datesM. Time of the EssenceN. Joint and Several Liability

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XI. Execution of Contract

A. Counterparts

B. Spousal Consent


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Date:


“A contract must have a date. The agreement may provide that it becomes effective or that performance is required on a later date – but the date of the contract is the date that it is first executed and delivered. The date of a contract is usually recited in the first paragraph. Sometimes the date is at the end of the contract with the signature lines.”

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Recitals:

These provisions must be drafted especially carefully. They “are the paragraphs at the beginning of a contact that recite the factual background of the contract.”


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Consideration:

Provision setting forth what each party is providing and receiving for their respective promises.


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Condition precedent:


“The provisions specifying the requirements that must be satisfied before a party is obligated to perform under a contract or before the contract is enforceable are known as conditions precedent…Conditions are often colloquially referred to as ‘outs,’ because a failure by one party to satisfy its conditions allows the other party to get out of the contract or to terminate certain of its obligations.”

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Condition concurrent:

Conditions concurrent mean that both parties’ performances must occur simultaneously.

Example:

In a contract between Helen and Bob in which Helen promises to sell her car to Bob for $1000, Helen’s duty to tender delivery of the car is subject to the condition that Bob perform his promise to pay the $1000.

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Condition subsequent:

A condition subsequent is an event which, if it occurs, excuses a duty which has already matured.

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Force majeure:

“Frequently a part of construction contracts to relieve a party of performance obligations or liability for damages upon the occurrence of an unforeseeable event that could not be avoided through the exercise of reasonable care.”

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Performance to promisor’s satisfaction:

This provision is subject to a “good faith” requirement - otherwise the promise would be deemed illusory.

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Modification:

IV. Modification & Termination

“Describes the requirements for entering into amendments, consents, and waivers. This section should always require amendments, consents, and waivers to be in writing…It is preferable to require all of the parties to sign each amendment, waiver, and consent.”

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Assignment:

V. Assignment

“In many cases, the provision governing whether and under what conditions the parties may assign their rights under the agreement is found in the miscellaneous section. The primary exception to this is agreements where assignability is one of the key substantive issues, such as partnership agreements and shareholder agreements.”

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Remedies:

VI. Remedies

“A bare bones contract could omit any discussion of what happens if the parties fail to perform in accordance with the terms of the contract. As every lawyer learned in law school, the aggrieved party could ask a court to fashion a remedy for breach based on statutory and case law. However, sophisticated commercial parties are generally reluctant to rely on a judge or a jury to do this, and for this reason many contracts have remedial provisions. Remedial provisions have two elements: a description of the events that give rise to the right to a remedy, and the remedies themselves.”

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VI. RemediesTermination:

“Termination of the contract is one of the most common remedies, and results in neither party’s being required to continue performance under the contract (although in some cases the right of termination may be exercised together with other rights, such as the right to receive indemnification payments or liquidated damages).”

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“The remedy of acceleration is found primarily in debt financing agreements. The exercise by a lender of this right results in the indebtedness under the agreement being accelerated, i.e. becoming immediately due and payable by the borrower despite a later stated maturity date…”

VI. RemediesAcceleration:

Acceleration often has catastrophic consequences. Usually, the mere threat of acceleration is sufficient to cause the defaulting party to make significant concessions in exchange for the lender agreeing not to accelerate.

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VI. Remedies

Indemnification:

Terms “caps,” “baskets,” and “indemnification termination” to be discussed in class.

“An agreement may provide that a party breaching its representation or covenants will be required to indemnify the other party for all costs, damages, and losses incurred as a result of the breach.”

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These clauses “provide for one party to make a specified payment to the other party upon the occurrence of certain events.”

VI. Remedies

May not be penalties:

1. The actual amount of damages in the event of a breach must be difficult to compute and

2. The amount of liquidated damages must represent a good faith attempt to estimate the actual damages that may be suffered.

Liquidated Damages:

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Alternative Dispute Resolution:


“Rather than agree to a specific remedy for breach of contract, the parties sometimes agree to a particular method for resolving their disputes, such as arbitration or mediation. Many agreements include a provision requiring the parties to submit any dispute that arises to a panel of arbitrators, whose decision, including any remedy they impose, will be binding. Arbitration provisions are typically enforceable – courts usually dismiss action brought in violation of such a clause.”

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Attorneys fees:

Attorney’s fees and litigation costs are not, generally, recoverable as damages for breach of contract. Therefore, parties often make them recoverable by contract.


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Choice of law:

“This provision states that the contract is to be interpreted and enforced under the law of a particular jurisdiction…. This is the most important of the miscellaneous provisions and should never be omitted from any contract, no matter how short or informal. It specifies that all substantive legal issues arising in connection with the enforcement or interpretation of the contract are to be resolved by looking to the law of the chosen jurisdiction. Without this provision, any dispute regarding a contract will most likely also involve a dispute over the law governing the contract. Anyone who has taken a conflict of laws class knows the complexity of the issues that can be involved in a judicial determination of this issue.”

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Forum selection:

“This provision is designed to ensure that a dispute regarding the contract will be heard in a particular court or the courts of a particular state. This is achieved by having the parties agree that they are subject to the personal jurisdiction of such courts. Sometimes this provision is drafted to provide that the jurisdiction to which the parties consent is the exclusive jurisdiction to litigate issues arising under the contract.”

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Integration:

“This clause provides that the agreement is the entire and exclusive agreement between the parties with respect to its subject matter. This clause prevents the parties from arguing that there are side agreements or understandings that are not set forth within the four corners of the agreement. This may be extremely important in the event of a dispute.”


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“This provision states that if a clause in the agreement is found to be legally prohibited or unenforceable, the offending provision is ‘severed’ from the rest of the agreement which otherwise continues to operate as originally written. Otherwise, there is a risk that a court may throw out the baby with the bathwater and refuse to enforce the entire contract.”

Severability:

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IX. Representations Aka “Warranties”:

“Representations and warranties are statements of fact made in the contract by one party to the other party as of a particular point in time. Their purpose is to create a ‘snapshot’ of facts that are important to the recipient’s business decision to enter into the transaction. The failure of a party’s representation to be true will result in the other party having rights and remedies under the contract.”

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Execution clauses:

“Every written contract must be signed, or “executed” by each party to the contract. This is an absolute requirement: failure to have the parties execute the written contract means that the contract has not been entered into and may not be enforced by the parties.”

Yes –

unless barred by the Statute of Frauds, oral agreements ARE enforceable, but, as discussed in class, because of evidentiary problems, “it is always preferable to have every agreement embodied in a signed writing.”

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“An oral contract is not worth the paper it is written on.”


Samuel Goldwyn, great legal scholar

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“A short agreement will often be in the form of a letter, addressed to one party from the other, and signed by the sender with a separate signature line for the receiving party. Agreements in this form are usually shorter and less formal than contracts not in letter form…Some letter agreements refer to the parties as ‘you’ and ‘we.’ This makes it very difficult for the reader to remember who is who, and should be avoided…Define the parties in the normal fashion, as Seller, Borrower, Lessee, or by reference to the party’s name: “ABC” for Alpha Binding Co., for example.”

XI. Letter Agreements

Documents

1. 2 One of my favorite books is Working With Contracts – What Law School Doesnt Teach You, by Charles M. Fox, a partner in the New York City law firm