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Announcement: The Common Draft contract clauses and worksheets are posted (in draft); I plan eventually to turn the clauses and commentary into a book. If you’d like to be notified of significant developments, please subscribe to updates at right. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

Contract drafters* sometimes include provisions that require a party to minimize (or maximize) something. That could be bad news, however, because it might provide ammunition to an aggressive litigation counsel who argues that the term left no wiggle room, and therefore anything more than the absolute minimum (or less than the absolute maximum) constituted a breach.

* Including one student in the recent take-home final exam for my contract-drafting course

EXAMPLE: Suppose that in a confidentiality agreement, a drafter includes this language: The Receiving Party will minimize the number of people to whom it discloses Confidential Information. If the receiving party were to disclose Confidential Information to even one person who wasn’t absolutely necessary, the disclosing party might later try to make hay out of that fact.

Instead, consider different wording, such as (for example) The Receiving Party will endeavor to minimize the number of people to whom it discloses Confidential Information.

For more suggestions about “categorical” statements to avoid, see this piece.

I’m in the middle of grading final exams from my Contract Drafting course at the University of Houston Law Center. One of the main questions involved marking up clauses from a hypothetical contract on behalf of a hypothetical client, ABC Corporation, that is negotiating with a counterparty, XYZ, Inc. I’ve noticed that a  couple of students suggested something along the lines of, “Let’s put in a clause requiring XYZ to indemnify ABC.”

The problem was, it was very much not clear from the facts that XYZ would have the money needed to comply with such an indemnity obligation. It’s reminiscent of the old economist joke whose punchline is “no problem, we’ll just assume we have a can-opener.”

The students in question apparently didn’t remember my lecture comments: For important obligations, try to  make sure someone, somewhere, has a pot of money that can be used to comply with contractual commitments, or at least to pay the damages resulting from breach of those commitments. That might be an insurance company; a third-party guarantor; a letter of credit; or even taking a security interest in collateral that could be seized and sold to raise funds if necessary.

(It’s also useful to try to include contractual obligations that will help reduce the risk of breach or of other problems. By analogy, homeowners can get a break on their insurance-policy costs if they install burglar alarms, smoke detectors, etc.; likewise, young drivers get an insurance discount if they take driver-ed training.)

[Moved from the Ten Commandments of Contract Drafting post]

When I was a baby lawyer, the senior partner of my firm, the late and legendary IP litigator Tom Arnold, asked me to do a simple confidentiality agreement for a friend of his, “Bill,” who was going to be disclosing a business plan to Bill’s friend, “Jim.”

Tom told me NOT to draft a conventional contract. Instead, I was to draft just a short letter along approximately the following lines:

“Dear Jim: This confirms that I will be telling you about my plans to go into business raising tribbles so that you can evaluate whether you want to invest in the business.

“You agree that (1) you won’t disclose what I tell you about my plans to anyone else, and (2) you won’t use that information yourself, unless (A) the information has become public or (B) I say in writing that it’s OK.

“If this is agreeable, please countersign the enclosed copy of this letter and return it to me.

“I look forward to working with you.

“Sincerely, Bill.”

When I’d prepared a draft, I asked Tom, isn’t this pretty sparse?

Tom replied, yes it was sparse, but:

  • the signed letter would be a binding, enforceable contract, which Bill could take to court if he had to; and
  • Jim would almost certainly sign the letter immediately, without the delay that would result if he felt he had to have his lawyer review it.

That was an eye-opener; it taught me that contracts aren’t magic talismans; they’re just simple statements of simple things.

From the Recent-Developments Desk: When drafting a contract, it pays to be explicit about whether the contract is exclusive or non-exclusive. A drafter who leaves the issue unaddressed might see her client visited by an unpleasant surprise.

Silence might mean no exclusivity …

In Rhode Island’s JPL Livery Services, Inc., a company had a contract with the state of Rhode Island to pick up dead bodies and transport them to the medical examiner’s office. The contract said nothing about exclusivity.

To save money, the medical examiner’s office started having its own people pick up some of the bodies. That cut into the company’s business. JPL Livery Services, Inc. v. Rhode Island Department of Administration, Nos. 2013-119 and 2013-120 (R.I. Apr. 17, 2014) (affirming trial-court judgment).

The company filed suit against the medical examiner’s office. It claimed that its body-hauling contract was exclusive, and thus the ME’s office breached the contract by having its own people pick up bodies.

The trial court rejected the claim, and the state supreme court affirmed:

… the contract provided … that JPL’s services were to be provided “as requested” by the state. The plain and ordinary meaning of this phrase indicates that JPL was obligated only to transport human remains when the state desired it to do so. This language is not ambiguous, and we find nothing else in the contract to suggest that the state was required to rely solely on JPL for its livery needs.

Id. at part III-A.

But silence also might leave room for exclusivity

On the other hand, in Alaska’s AAA Valley Gravel case, a gravel-mining lease agreement was likewise silent as to whether it was exclusive. In a first appeal, the state supreme court held (over a dissent by the chief justice) that the lease agreement was ambiguous whether the lease was exclusive: “[The lease agreement] does not mention exclusivity, but even though silent, some of its provisions may make sense only if the lease had been intended to be exclusive. Thus [the lease agreement] is ambiguous on its face as to exclusivity.” AAA Valley Gravel, Inc. v. Totaro, 219 P.3d 153, 160-61 (Alaska 2009) (vacating and remanding trial-court decision) (footnote omitted).

Subsequently, the trial court found that the lease agreement was indeed exclusive; the supreme court affirmed, again over a dissent by the chief justice. See AAA Valley Gravel, Inc. v. Totaro, No. S-14680 (Alaska Apr. 25, 2014) (affirming trial-court judgment).

Lesson for drafters: Spell it out

A drafter whose client is granting a right of some kind should seriously consider stating explicitly that the grant is non-exclusive, assuming that’s in fact the intent.

On the other hand, a drafter whose client is receiving a right of some kind should seriously consider stating explicitly that the grant is exclusive, again assuming that’s in fact the intent.

I just finished teaching my spring contract-drafting course for 3L students. This semester I’ve been trying to articulate some easy-to-remember rules for effective drafting. Here’s what I’ve come up with so far. Follow these rules and you’ll go a long way toward creating a serviceable contract.

I: Think of the contract as a trip plan

It’s helpful to think of contract drafting as planning for a trip. The planner — that’s you, and maybe others — should try to anticipate opportunities and threats that the client cound encounter along the way.

II: Write down all specific commitments, and prerequisites, and exceptions

Brainstorm everything that your client will want the other side to do. Be specific and succinct. Use as many of the 5Ws (who, when, why, where, what) as necessary.

Then list all the prerequisites, and all the exceptions, that you can think of.

Here’s a hypothetical example:

1 [Commitment:] Bob will sell Alice his 2012 MacBook Air computer, serial number 123456789, with all of its installed software, on the terms of this Agreement.

2. [Commitment:] Alice will buy Bob’s computer on the terms of this Agreement.

3. [Details:] The sale price is $800.

4. [Details:] The closing will take place at the parking lot of the Wal-Mart at 9555 South Post Oak Road in Houston, Texas at 10:00 a.m. on May 10, 2014.

5. [Details:] The parties may agree in writing (for example by an exchange of emails) to change the date and time of the closing.

6. [Commitments:] Between now and the closing of the sale, Bob will:

a) not use the computer without running up-to-date anti-virus software on it; and

b) remove the Grateful Dead decals that are currently glued to the lid, along with all glue residue.

7. [Exception:] Bob need not run anti-virus software on the computer when the computer is not connected to the Internet.

8. [Commitment:] At the closing, Alice will pay Bob the purchase price in the form of a cashier’s check drawn upon a U.S. bank.

9. [Exception:] Alice may cancel the sale if the Grateful Dead stickers are still on the computer at closing.

10. [Prerequisite:] When Alice pays Bob the purchase price, [Commitment:] Bob will give Alice the computer.

This is a bare-bones contract. To me, it looks binding and enforceable.

III: Write down “Plan B” for various contingencies

Things can go wrong in contracts. Suppose the other side fails to perform. Sure, your client can file a lawsuit. But is that really the best way to handle the matter?

Whenever possible, come up with an agreed Plan B in case things go wrong. Write it down.

Here’s an example:

11. [Plan B:] If the computer becomes inoperable within five business days after the closing, then Bob will take the computer back and give Alice her money back.

IV: Write down all of the other side’s assertions on which your client is relying

If your client is relying on a particular factual assertion by the other side, then say so explicitly in the contract. That will help the client if the factual assertion turns out not to be true. See the Common Draft commentary for a more-detailed discussion.

You don’t necessarily have to use legalese such as “Bob represents and warrants ….” Consider using plain language instead, such as the following:

12. [Reliance:] Alice is relying on Bob’s statement that the computer has 8 GB of RAM and a 256_GB solid-state drive (SSD) and is in good operating condition. [Exception:] Alice may cancel the sale if Bob’s statement turns out to be incorrect.

(Keep in mind that there’s a difference between a representation and a warranty.)

V: Write down any necessary disclaimers

In some cases, the law requires particular disclaimers to be spelled out.

For example: Suppose that Bob isn’t sure whether he actually owns the computer. Under the Uniform Commercial Code’s article 2 for the sale of goods, he would have to specifically disclaim any warranty of title.

VI: Write short paragraphs

Notice how short the paragraphs are in the hypothetical examples above. This is a  good way to serve the reader.

Don’t inflict a document like this one on your readers:

  • You wouldn’t like it if someone did it to you.
  • It’ll take the other side longer to review the contract. That will delay getting the deal to signature. Clients don’t like that.

VII: One topic per paragraph

Contract reviewers like to be able to skim quickly over a draft. Help them out by addressing just one topic in a paragraph.

Want to make a contract reviewer crazy? Draft a long paragraph, and in the middle of it, suddenly veer off into a completely-different (and often-unexpected) topic, not uncommonly with the words “provided that ….”

VIII: Write short sentences

Help the reader out: Break up long sentences.

If you must write a long sentence, consider using parenthetical numbers like (1) this, and (2) this, to break it up.

IX: D.R.Y.: Don’t Repeat Yourself

If you want to say something in a contract, say it just once.

  • If you were to say it a second time elsewhere in the document, and then you had to revise it during the negotiation process, the chances are good that you’d forget to change one of the two.
  • Then if a dispute were to arise later, the parties would have to battle out which version represented the parties’ true intent.

True story: Last week, one of my clients and the other side of a deal agreed by phone to change a period of time from 120 days to 60 days. When the other side’s circulated a revised draft, it read, “one hundred twenty (60) days.” To quote Rick Perry: Ooops.

The same rule applies to monetary amounts, incidentally. Wrong: Ten dollars ($10.00). Right: $10.00.

X: Remember that contracts are about persuasion

As a contract drafter, your ultimate goal is to persuade a judge and/or jury to rule in favor of your client.

But your persuasion job doesn’t start there. You have to persuade the other side to sign the contract. You might even have to persuade your own client. In some cases these are easy sells; in others, not so much.

Persuasion might be necessary in performing the contract: It’s not uncommon for contracting parties to decide they’d really rather not do what they committed to do; not everyone behaves in the honorable way Reba McEntire sang about in [You Came Along] One Promise Too Late. Against that possibility, it can help for the contract to be very explicit about what the parties must do.

(Pro tip: You might be concerned that someday the other side’s lawyers could try to twist the contract’s wording. Try adding a statement prefaced by “for the avoidance of doubt,” to make it very clear what the intent is. Some drafters abhor doing this. It definitely can be overdone. In the right circumstances, though, a few extra words can be cheap insurance.)

Conclusion

It takes a little bit of practice to get comfortable drafting contracts in accordance with these rules. It’s well worth the effort. These rules will help you get your clients’ agreements to signature more quickly and in good shape. This will endear you to them.