Drafting Points

Critical Thoughts on Contract Drafting

Upcoming Contract-Drafting CLEs: June 2013 – August 2013

By Vincent R. Martorana on Posted in Miscellaneous

For those of you who need CLE credit (or who are otherwise just interested in contract drafting), below is a list of some upcoming CLEs that I’ll be giving during June, July, and August 2013. Check back to this list from time to time for updates (or you can click here for a complete list of my speaking engagements), and feel free to contact me should you have any questions. If it’s been made available, you can click on the applicable link to be directed to the venue’s web site for a description of the course and to register.

Also, my M&A CLE course, The Role of Written Representations in M&A Contracts, is available at The National Academy of Continuing Legal Education.

 

June 10, 2013, 9 a.m. EDT – 4:30 p.m. EDT New York State Bar Association (Long Island, NY – Live at the Melville Marriott) Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

 

June 12, 2013, 6 p.m. EDT – 9 p.m. EDT New York City Bar Association (NYC – Live at the NYC Bar Association) Intermediate Concepts in Drafting Contracts

 

June 14, 2013, 9 a.m. EDT – 4:30 p.m. EDT New York State Bar Association (NYC – Live at the New Yorker Hotel) Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

 

July 19, 2013, 10:50 a.m. EDT – 12:30 p.m. EDT New York County Lawyers’ Association (NYC – Live at NYCLA) Basic Concepts in Drafting Contracts

 

August 1, 2013, 1 p.m. EDT – 2:30 p.m. EDT Commercial Law Web Advisor (Webinar) Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

August 9, 2013, 10:50 a.m. EDT – 12:30 p.m. EDT New York County Lawyers’ Association (NYC – Live at NYCLA) Intermediate Concepts in Drafting Contracts

 

August 15, 2013, 1 p.m. EDT – 4:10 p.m. EDT Practising Law Institute (NYC – Live at PLI) Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

Thoughts on Ken Adams’s Irreparable Harm Provision

By Vincent R. Martorana on Posted in Specific Words and Phrases, Substantive Provisions

It’s been quite a while since my last post. Things have been busy. But Ken Adams’s (now not-so) recent post, Redraft This Sentence, MSCD Style: My Version of an “Irreparable Harm” Provision, on his contract-drafting blog gave me great pause. In the post, Ken puts forth a draft an irreparable harm provision and asks readers for their comments. There are several interesting comments, and I highly recommend reading not only the blog post, but also the comments.

After reading the post and the comments, I wanted to respond, and, given the length of this response, figured that the best way to offer my thoughts is through a blog post of my own.

 

Ken Adams’s Irreparable Harm Provision

 

Here’s Ken’s draft of the provision:

The Sellers acknowledge that breach by the Sellers of one or more of their obligations under section X could cause the Purchaser to suffer irreparable harm, namely harm for which damages would be an inadequate remedy. The Sellers further acknowledge that requiring, as a condition to obtaining an injunction, a restraining order, or any other equitable remedy with respect to such a breach, that the Purchaser demonstrate that it would suffer irreparable harm could cause delay that results in the Purchaser’s suffering irreparable harm before any equitable remedy is granted. That being the case, the parties intend that if the Sellers breach one or more of their obligations under section X, for purposes of granting an equitable remedy any court will assume that that breach would cause the Purchaser irreparable harm.

Given the number of hours that I’ve spent reading and thinking about A Manual of Style for Contract Drafting (MSCD) on the Long Island Railroad and otherwise, I’d like to consider myself fairly familiar with Ken’s contract-drafting guidelines. So his draft of the provision prompted me to think about ways in which it might be improved upon by using those guidelines and with a couple of Vinny-isms thrown in for good measure.

 

My Suggested Changes to Ken’s Draft

 

So I’ve come up with a list of suggestions specific to the irreparable harm provision at issue and, in doing so, also delve into the more philosophical question of the extent to which you can tell a court what it must do.

1) The Sellers acknowledge that breach by the Sellers

In contracts that I draft I prefer, when possible, to use apostrophes to convey possession, rather than the passive voice. Thus, I would ordinarily write: The Sellers acknowledge that the Sellers’ breach…

However, this is not a hard-and-fast rule for me. I will accept the passive voice if it helps relieve an ambiguity. In this case, I want to be clear that a breach by any of the Sellers (i.e., one or more of the Sellers) will trigger the provision at issue. Using the Sellers’ breach refers only to a collective breach by the Sellers. And using any Seller’s breach arguably extends the reference to one and only one of the Sellers. I’d therefore go with: The Sellers acknowledge that breach by any of the Sellers…

 

2) of one or more of their obligations under section X

Whenever dealing with a plural subject (in this case, the Sellers), I try to be on the look-out for ambiguity as to whether the object of the sentence is meant to point to a “respective” object or a “collective” object. For example, in a contract, there could be a distinction between the Sellers collectively providing notice to a party and each Seller separately providing notice to a party. In this part of the draft provision, there’s arguably ambiguity as to whether the reference is to obligations that the Sellers are required to discharge through collective action or whether the reference is to separate obligations of each Seller (or to both). (If section X contains only individual obligations or only collective obligations, then I suppose the clarification is unnecessary.) Also, I think that one or more could be shortened to any. Finally, as I discuss below, I try to avoid pronouns; I would remove the their.

Thus, I would rephrase as follows: of any of the collective or respective obligations of any of the Sellers under section X…

(The truly picky among us could also argue whether that or in the sentence is meant to be an exclusive or or an inclusive or, and whether the distinction in this case is meaningful. Let’s save that analysis for another day.)

For my thoughts on limiting the reference to section X rather than extending it to all provisions of the contract, read on…

 

3) could cause the Purchaser to suffer irreparable harm

Although could probably better characterizes whether the Purchaser will or will not suffer irreparable harm, do we gain anything by using could? In other words, do we need the Sellers to acknowledge something that is a possibility? Perhaps. After all, at least some courts seem to give some weight to acknowledgments of irreparable harm. But can’t we go further and have the parties deem it to be the case that the Purchaser would suffer irreparable harm? Although it’s true that the Purchaser might not actually suffer irreparable harm, the whole point of the concept of deemed is to potentially create a legal fiction. So why not say: the Purchaser will be deemed to have suffered irreparable harm? And doesn’t the argument that the court need not respect that particular legal fiction in fact apply to all uses of deem, not just in this instance? Why not just deem away—swing for the fences, don’t bunt—and let the chips fall where they may?

This led me to more fundamental questions:

  • Under what circumstances will a court not respect what the parties to a contract deem to be the case? And, if such circumstances exist, can contract language have an impact in improving or hurting the chances that a court will respect a legal fiction in any given instance?

This is probably the subject of a separate blog post, but I will address it briefly here since it is central to my thoughts on the irreparable harm provision (and to boilerplate provisions generally).

The concept of deemed applies when the parties to a contract wish to create or potentially create a legal fiction. For example, suppose that a basket contains green peppers and red peppers and that Peter Piper is obligated under a contract to blindly pick a pepper from that basket. Suppose, further, that the parties provide in the contract: Each pepper that Peter Piper picks from the basket will be deemed to be green. As a factual matter, Peter Piper can pick a green pepper or a red pepper. But in the magical world of contracts, regardless of whether Peter Piper picks a green pepper or a red pepper, he will be deemed to have picked a green pepper. Ah, the beauties of legal fiction.

But how far can this whole deemed concept be taken? In the case of Peter Piper, the parties can use contract language to deem an object to have a quality that it clearly does not have. (Red is not green.) What about in the case of a quality that is less clear-cut, like whether a party has suffered irreparable harm? It should be even easier to apply a deemed concept because there’s at least theoretically a greater chance that reasonable minds can differ about what constitutes irreparable harm (whereas it’s much tougher to argue that red is green). But, somewhat paradoxically, this does not turn out to always be the case.

For example, in a liquidated damages provision, the parties are agreeing in a contract, in advance, to the amount of damages that a party will be deemed to have suffered if the other party breaches that contract. Courts will generally uphold a liquidated damages provision, but not a “penalty.” So when will a court hold that a stipulated amount (i.e., a deemed amount) of damages constitutes liquidated damages and not a penalty? Generally, it will do so where the damages resulting from the breach are difficult to ascertain and where the deemed amount is a reasonable forecast of the compensatory damages incurred by the non-breaching party as a result of the breach. So even if the parties want to create or potentially create a legal fiction as to the damages resulting from a breach, it is to their benefit if that legal fiction closely approximates (with a reasonably likelihood) the court’s best guess of the actual damages (or if the actual damages are very difficult to approximate).

Forum selection clauses in a contract present a similar situation. A court will generally treat a forum selection clause agreed to ahead of time between the parties (akin to deeming that a given forum is appropriate for resolving a dispute) as prima facie enforceable, unless a party can demonstrate that the forum is unreasonable under the circumstances. This is similar to constructing a potential legal fiction that is respected, but only under certain circumstances. It pays, to some degree, for the parties to agree to a forum that is likely to be reasonable under the circumstances of anticipated disputes.

Back to the irreparable harm provision…

Let’s assume that irreparable harm is a prerequisite for finding that a party is entitled to an equitable remedy and that there is some benefit to openly acknowledging that irreparable harm in a contract, rather than leaving it up to a presentation of facts after the breach has occurred. (This assumption is perhaps the subject of further blogging…) Given what we know about deeming, should we go so far as to have the parties acknowledge that they will be deemed to have suffered irreparable harm? Contrary to my initial inclination, I think that my answer is “no.” The power of deemed is not unlimited. In fact, deemed might be detrimental given that there is some authority that narrowly tailoring your acknowledgment to be within the realm of reasonableness—and to perhaps state in a contract why it is within the realm of reasonableness (addressing the “why” in a contract is yet another source of frustration for me…)—might be the best way to go.

So, in the end (and for now…), I think that I agree with Ken’s could cause irreparable harm approach, rather than a will be deemed to have caused irreparable harm approach. I would also consider will likely cause irreparable harm.

And it also behooves the parties to try to “get it right” and identify those specific provisions of a contract that could in fact result in irreparable harm should there be a breach, rather than state that all breaches will result in irreparable harm and give rise to an equitable remedy.

I should also note that I take this approach somewhat begrudgingly. It feels like the parties will fare better if they placate a court and do a tap dance, notions that fly in the face of my feelings on freedom of contract. But, alas, the realties are what they are.

 

4) The Sellers further acknowledge

As Ken routinely and correctly notes, contract drafting is akin to computer code. The drafter focuses on functionality not rhetoric. We can do away with the further.

 

5) such a breach

I’m generally ok with such, although I admit it sounds a little lofty. And while it’s true that MSCD says that such, when used as a pointing word, can be replaced with something like the, this, that, these, and those, MSCD also says that such is acceptable when used to mean “of this kind.” Therefore, in this case, I’m ok keeping in the such.

 

6) that the Purchaser demonstrate that it would suffer

As a general rule, I don’t use pronouns when drafting contracts. It’s sometimes unclear as to what the pronoun relates. I would therefore change it to the Purchaser. In this case, there’s no ambiguity, so the change doesn’t really make a difference. But I try to be consistent in the application of my general rules, whether or not it makes a difference in any given instance.

 

7) could cause delay

In line with my point #3 above, I reluctantly acquiesce to a could cause or will likely cause construct. Grrr….

 

8) That being the case

Is this language necessary, or is it rhetoric? It answers the question “why?” But I’m not sure that addressing the reason for including language in a contract is, at least between sophisticated parties, something that should be addressed in computer code or contract drafting. I suppose that if we are subscribing to the idea that this provision needs to convince a court of something (rather than just deem it so), then addressing the “why” makes sense.

If we are going to include these words, I would note that the that, which is a “pointing word,” can in some instances be ambiguous as to what it is “pointing” to. The immediately prior sentence? All of the prior sentences in the section in which the that is included? Here, our brains can easily deduce that what is being pointed to are all of the preceding sentences in the section.

Finally, if we are ok with addressing the “why” of a provision, and we are comfortable that what is being pointed to as a basis for “why” is clear, then perhaps just go with Therefore in the interest of being concise.

 

9) the parties intend that

I’m not completely sold yet on language of intention. But I must admit that I have not yet read the third edition of MSCD. Until then, I am deleting this language and letting the sentence speak for itself, with the parties’ intention in this instance to be derived no differently than with respect to any other provision in a contract.

 

10) if the Sellers breach one or more of their obligations under section X, for purposes of

Consistent with my prior remarks, I would go with if any of the Sellers breach any of the respective or collective obligations of any of the Sellers under section X. I might even consider using a defined term for any of the respective or collective obligations of any of the Sellers under section X. For now, I will forgo using a defined term, but it might make more sense if more than one section is referenced.

Additionally, for conditional sentences, I am a big fan of using an if…then construct to clearly distinguish between a conditional clause and a consequent. As a general rule, doing this eliminates potential ambiguity as to the boundaries of the conditional clause and the consequent within a sentence. And I use this as a general rule even if, in the given clause, you could get by without the then.

Given all of this, I would rephrase this part of the provision to read: if any of the Sellers breach any of the respective or collective obligations of any of the Sellers under section X, then, for purposes of…

 

11) granting an equitable remedy

I think that what we’re trying to get at here is the purpose of determining whether a court should grant an equitable remedy in respect of that breach.

 

12) any court will assume

This strikes me as too bold given the tap dance around deemed that we did above. Let’s go with any court should assume. Perhaps the parties intend that…any court will assume leaves you in more or less a similar place.

 

The End Result

 

So I would redraft Ken’s provision as follows:

The Sellers acknowledge that breach by any of the Sellers of any of the collective or respective obligations of any of the Sellers under section X [could]/[will likely] cause the Purchaser to suffer irreparable harm, namely harm for which damages would be an inadequate remedy. The Sellers acknowledge that requiring, as a condition to obtaining an injunction, a restraining order, or any other equitable remedy with respect to such a breach, that the Purchaser demonstrate that the Purchaser would suffer irreparable harm [could]/[will likely] cause delay that results in the Purchaser’s suffering irreparable harm before any equitable remedy is granted. Therefore, if any of the Sellers breach any of the respective or collective obligations of any of the Sellers under section X, then, for purposes of determining whether a court should grant an equitable remedy in respect of that breach, any court should assume that that breach would cause the Purchaser irreparable harm.

 

A Final Note

 

I struggled with this analysis. I struggle with boilerplate provisions in particular because many purport to tell a court how to do its job, as if the court were bound by the contract in which the boilerplate is included. So I suspect that my opinions on irreparable harm provisions and other contract boilerplate will continually evolve. That’s ok. That’s beneficial. It’s the constant questioning that helps strengthen contract drafting, interpretation, and analysis as a whole. Stay tuned for more.

 

I would like to thank my colleague, Steven Peretz, for his help in researching and discussing the case law and doctrine relating to the concept of “deemed” and for his review of this blog post.

Top o’ the Contract

By Vincent R. Martorana on Posted in Specific Words and Phrases

It’s been awhile and I thought that I’d take this festive opportunity (well, yesterday’s festive opportunity) (1) to discuss some practice pointers for drafting the preamble to your contract and (2) to include an apostrophe in a blog title. So pick up a beverage of your choice, sit back, and have a read.

Let’s have a look at a sample preamble:

This Licensing Agreement (this “Agreement”), dated March 17, 2013 (the “Effective Date”), is made between Tasty Ale House, LLC, an Ohio limited liability company (the “Licensor”), and Give Me Beer Co., an Idaho corporation (the “Licensee” and, collectively with the Licensor, the “Parties”).

Some things to note:

 

1) The preamble should be a sentence. The preamble should be a grammatically correct sentence, not a sentence fragment. (There’s a verb in there.) Alternatively, you could state all of the information in somewhat of a tabular format. For example:

Agreement: License Agreement
Effective Date: March 17, 2013
Licensor: Tasty Ale House, LLC, an Ohio limited liability company
Licensee: Give Me Beer Co., an Idaho corporation

I’ve seen that approach in UK contracts, but not in US contracts. But it seems like a sensible alternate approach.

 

2) Include jurisdiction and entity type. When identifying the parties, I include each party’s jurisdiction of organization and entity type. By doing so, I precisely identify an entity. There could, for example, be a New York limited liability company named “Tasty Ale House, LLC” or an Idaho limited liability company named “Give Me Beer Co.”

 

3) Use between. There’s authority out there that says that between will do the trick when describing who is party to a contract, even if you’ve got more than two parties to that contract. So I’ve given up on distinguishing between between and among. On a related point, if I’m dealing with more than two parties but only two “sides,” I use the on the one hand…on the other hand cadence to emphasize who’s on whose side for purposes of enforcing rights (although I admittedly also specify this in the operative provisions, as well). Thus:

…between Party A and Party B, on the one hand, and Party C, on the other hand.

That’s not a hard and fast rule. It starts to break down when you’ve got more than two “sides” (e.g., a multi-member operating agreement).

Whatever you do, do NOT use by and between or by and among. The by and is just rhetoric.

 

4) No need for an “as of” date. The parties can elect when a contract is to be effective between them. Using as of doesn’t make the contract more or less retroactive or prospective. If there is a genuine concern about the time difference between the date on which a contract is signed and the date on which that contract is to be effective, then address the issue head on in the operative provisions. And remember: the contract should reflect the true intent of the parties. If, for example, the parties are “papering” an oral contract between them, then the contract should not claim that the oral contract came into existence before it actually did in order to gain some advantage vis-a-vis a third party. Retroactive effectiveness is fine between the parties. But don’t expect the IRS to believe that a transfer pricing agreement signed tomorrow has been in place for three years.

 

5) Omit descriptive relationships between the parties. To keep the preamble lean, I tend to save descriptive relationships between the parties for the recitals. For example, in the phrase

…and SubCo., a Delaware corporation and a direct and wholly owned subsidiary of the Parent,..

I would omit: and a direct and wholly owned subsidiary of the Parent.

If the relationship is important, then I’ll include in the operative provisions of the contract a representation as to that relationship.

 

6) Define “Parties”. I usually define the term “Parties.” This is also not a hard and fast rule. But I have encountered enough contracts for which I need to use “party” (lowercase) in the contract to mean something other than a person that is party to the contract at issue. Also, in certain instances, I might have one or more persons as a party to a contract for limited purposes. In those instances, I find it helpful to include those persons within the definition of ”Parties” (e.g., in provisions to which all persons signing the contract are bound).

 

7) Define “Effective Date”. I find that this is a useful term to have defined in most contracts. At a minimum, I end up using the term on the signature page:

The Parties are signing this Agreement as of the Effective Date.

It’s not as long as (and also not as potentially ambiguous as) the date of this Agreement, the date hereof, and the date first written above.

 

So there you have it. Nothing earth-shattering. But some food for thought the next time you start drafting a contract.

Letters of Intent: Non-binding and Binding Provisions

By Vincent R. Martorana on Posted in Categories of Contract-Drafting Language

A couple of days ago, I came across a discussion concerning letters of intent, term sheets, memoranda of understanding, etc. (which I will refer to in this post simply as “LOIs”) on a LinkedIn group started by fellow contract-drafting devotee Willem Wiggers. Business parties will often “enter into” these pre-definitive-document documents in an attempt to sketch out the basic terms of a deal, without yet binding themselves to that deal.

I regularly draft and negotiate LOIs. Much like an all-you-can-eat Vegas buffet, they come with their fair share of benefits and traps. Here are some observations on non-binding and binding provisions in LOIs:

1) Be clear as to non-binding nature. In the U.S., as with other jurisdictions, if an LOI is to be non-binding, then the parties must be very clear about that. Otherwise, a court could construe the LOI as a binding contract between the parties if the material terms are spelled out in sufficient detail.

2) Some provisions are meant to be binding. There are often portions of an LOI that the parties want to be binding, such as provisions concerning confidentiality, exclusivity, and an obligation to pay a deposit that is subject to forfeiture. There is also often a provision of the LOI specifying which provisions of the LOI are binding and which are not.

3) Use will for non-binding concepts. To further distinguish between those provisions of an LOI that are to be non-binding statements of intent and those that are to be binding obligations, I use will to convey non-binding intentions and shall to convey obligations. As I mentioned in a prior post, I take this approach in contracts generally: will = futurity; shall = obligation. Reminder: never use shall for rhetorical emphasis, as in: This agreement shall constitute the complete agreement between the parties.

4) Duty to negotiate in good faith. Note that, if an LOI contains a binding obligation to negotiate in good faith toward the execution of definitive documents, then the non-binding terms of the LOI could have implications on that binding provision. For example, the terms of the non-binding provisions might have some “bite” in the context of a court trying to determine whether one party breached a binding obligation to negotiate in good faith. So, if there’s a binding obligation to negotiate in good faith in an LOI, don’t be too quick to run roughshod over the content and phrasing of the non-binding provisions (especially if a good faith deposit has been placed in escrow).

5) Binding boilerplate. Other binding aspects of an LOI often include your typical “boilerplate” provisions: choice of law, submission to jurisdiction and venue, rules on interpretation of the LOI, etc. These provisions become increasingly important as soon as there is one non-boilerplate provision in the LOI that is binding; at that point, your analysis with respect to the applicability of contract boilerplate (putting aside the “optics” of the LOI) should be no different than with respect to a contract containing only binding provisions.

6) Psychological impact of non-binding provisions. Finally, the non-binding terms of an LOI of course serve as a basis against which to negotiate the terms of definitive deal documents. A party faces a psychological uphill battle if that party seeks to introduce terms that conflict with non-binding provisions in an LOI. And this psychological impact should not be underestimated; in fact, it might as a practical matter be of greater importance than the enforceability of a provision in the LOI. I ventured into contract psychology in this post and suspect that there will be more to come in this area.

The moral of the story is that “non-binding” LOIs must be treated with care. Stay tuned for more on the topic.

A Guide to Contract Interpretation

By Vincent R. Martorana on Posted in Contract Interpretation and Construction

To build on my prior post, An Initial Thought on the Impact of Formatting and Contract Psychology, which stresses the need for transactional attorneys to put on their “litgator’s caps” from time to time, I’m making available a brief guide on contract interpretation that my colleague, Michael Zitelli, and I recently published. You can obtain a copy of the guide by clicking on the following link:

A Guide to Contract Interpretation

The guide includes a brief introduction on our philosophy regarding contract interpretation, a flow chart that illustrates the typical contract-interpretation process, and an outline of excerpts from recent opinions rendered by New York and Delaware courts (which form the basis for the contract-interpretation principles that we set forth in the guide).

Please feel free to send me any questions or comments that you might have on the guide or on contract interpretation generally.

Upcoming Contract-Drafting CLEs: February 2013 – June 2013

By Vincent R. Martorana on Posted in Miscellaneous

For those of you who need CLE credit (or who are otherwise just interested in contract drafting), below is a list of some upcoming CLEs that I’ll be giving during the first half of 2013. Check back to this list from time to time for updates (or you can click here for a complete list of my speaking engagements), and feel free to contact me should you have any questions. If it’s been made available, you can click on the applicable link to be directed to the venue’s web site for a description of the course and to register.

 

February 6, 2013, 12 p.m. EST – 1:30 p.m. EST
American Bar Association (Webinar)
Intermediate Concepts in Drafting Contracts

 

February 11, 2013, 6 p.m. EST – 9 p.m. EST
New York City Bar Association (NYC – Live at the NYC Bar Association)
Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

March 19, 2013, 9 a.m. EST – 12:15 p.m. EST
Practising Law Institute (NYC – Live at PLI)
Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

June 10, 2013, 9 a.m. EST – 4:30 p.m. EST
New York State Bar Association (Long Island, NY – Live at the Melville Marriott)
Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

 

June 12, 2013, 6 p.m. EST – 9 p.m.  EST
New York City Bar Association (NYC – Live at the NYC Bar Association)
Intermediate Concepts in Drafting Contracts

 

June 14, 2013, 9 a.m. EST – 4:30 p.m. EST
New York State Bar Association (NYC – Live at the New Yorker Hotel)
Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

 

An Initial Thought on the Impact of Formatting and Contract Psychology

By Vincent R. Martorana on Posted in Contract Psychology, Contract-Drafting Philosophy 101, Format

A conversation yesterday with my colleague, Herb Kozlov, gave me some serious food for thought on when the Vinny Martorana-”rules” of contract drafting need to be bent—or broken. My approach to contract drafting is to draft with a given set of universal contract-drafting rules in mind, but to temper those rules depending upon the given situation. If practicalities warrant bending or breaking those rules, do so only with eyes wide open. This approach has led me to intellectually and empirically ponder and explore the circumstances under which my contract-drafting maxims should be challenged.

 

To this end, I’ve been thinking a good deal over the last year or so about how litigators view contracts, which is often different from the way in which transactional attorneys view contracts. Transactional attorneys focus on the ex ante: what is necessary to get the deal done and to ensure that the parties understand what they are saying and what they must do under a contract. A litigator is called upon in the context of a dispute (or potential dispute) and almost reflexively searches for the boilerplate and interpretive provisions of a contract. As transactional attorneys, we’d do well to now and again put on (or discover…) our “litigator’s cap” when drafting contracts.

 

Herb’s a hybrid transactional attorney-litigator, so he offers a unique perspective on contract drafting, interpretation, and analysis. For example, consider some practical advice that transactional attorneys all too often don’t consider “before the fact”:

 

In the context of a dispute, a judge often has a very limited amount of time to assess whether arguments surrounding the interpretation of a contract provision are meritorious enough to warrant granting or denying summary judgment.

 

Given this reality, as Herb recommends, use plain English and consider breaking out key provisions—such as the various events and circumstances that constitute “Events of Default” under a contract—into separately itemized sub-paragraphs, rather than lumping them into a single (and long) paragraph. By doing this, you can clearly (and quickly) direct a judge to the “right result.”

 

Breaking sentences down into component parts is consistent with my style of drafting and my philosophy that drafting is like object-oriented computer programming. It makes a contract easier to read for both the parties to the contract and for the judge. But the implication is broader:

 

The formatting of a provision can influence the outcome of a dispute.

 

Read that sentence again. Putting aside certain statutory and case-law doctrine, from a purely intellectual standpoint, the formatting of unambiguous text in a contract between sophisticated parties represented by counsel shouldn’t matter. Whether I write text in bold or italics, in Times New Roman or in Century Gothic, or using a long paragraph or separately enumerated clauses (again, assuming no ambiguity): the substance of what’s being conveyed doesn’t vary.

 

Yet, as a matter of psychology, it might make all the difference in the world. And, in addition to influencing judges, it might also influence the parties’ actions before there is even a dispute. See, for example, my prior blog post Why NDA’s Matter and my query whether the key provision in non-disclosure agreements prohibiting the non-disclosure and non-use of confidential information should appear in bold font. This pre-dispute effect on behavior is perhaps a more-important consequence of formatting in contracts and one for which you won’t find statistics in case law.

 

Let’s take this reasoning a step further: if formatting and its psychological effects on the contract reader make a difference in the context of analyzing a contract after the fact, then formatting can be manipulated before the fact for good or for evil. For example, one party could “stuff” a one-sentence provision in contract boilerplate that could, as a substantive matter and unbeknownst to the other party, largely eviscerate the import of a 20-page article in that contract.

 

I must admit that all of this is very troubling to me from an intellectual standpoint. Yet, at the same time, it is very exciting. In fact, I’m establishing a new category of blog posts as a result: Contract Psychology. Stay tuned for more…

Ten Resolutions to Trim Down Your Contract in the New Year

By Vincent R. Martorana on Posted in Miscellaneous

Happy (belated) New Year! As we all ring in 2013 and strive to give up on our New Year’s resolutions no later than the end of the third week in January, I thought that I would provide you with some contract-drafting resolutions to help recharge (albeit in a dorky fashion) your “resolve.” And these are pretty easy to keep. Well, some of them are, anyway. Others will require letting go of some stodgy powdered-wig contract-drafting habits that are prevalent in many contracts. So if you’re reluctant to adopt all of these, perhaps shoot for just the low-hanging fruit.

I should mention that none of these are earth-shattering changes to contracts. Many just cut down on “text real estate” and stuffiness. Still, by implementing these on a regular basis in your contracts, you’ll take several steps closer toward more-streamlined contract drafting.

Here goes:

 

1) I will not write WITNESSETH. Really? Is this needed at the top of a contract? If we did not witnesseth the contract, would it still be valid? I’ll take that gamble. All this word does is convey to your contract reader that, to a certain extent, you copied and pasted from another contract blindly, at least in some respects. By the way, this goes for those lofty variants W I T N E S S E T H (i.e., with one space between each letter) and W I T N E S S E T H. (I’ll allow an exception to this resolution if you put your Witnesseth in Ye Olde English font.)

 

2) I will not write WHEREAS in the recitals. This is another example of a relic of times past. No need for WHEREAS, let alone in ALL CAPS. A bullet point or letter (as an outline) will do. Using a letter is sometimes worthwhile if you need to “point” back to a particular recital. (For example: “Business” has the meaning set forth in recital B.).

 

3) I will not write NOW, THEREFORE in the lead-in. My general rule is that, since contract drafting is like a rulebook or computer code, there’s no need to explain in the operative provisions why the parties are doing what they are doing. I extend this general rule to the lead-in, though I’m not entirely adverse to the therefore concept in the lead-in. If you do want to include a therefore, just do away with the ALL CAPS NOW, THEREFORE variant and be brief. The Parties therefore hereby agree as follows: will do.

 

4) I will also shorten the lead-in generally. Here’s a typical long-winded lead-in:

NOW, THEREFORE, in consideration of the foregoing premises [huh?] and of the obligations, covenants, agreements, representations, and warranties herein, and for other good and valuable consideration, the receipt and sufficiency which the parties hereby acknowledge, the parties hereby agree as follows:

My fingers are now cramped from typing and I need to take a break…..

Ok, I’m back. There’s no need to recite all of that baloney unless you’re drafting by candlelight with a quill. The Parties hereby agree as follows: is fine. (As I note above, for now, I am ok if there’s a therefore included in the lead-in.)

 

5) To refer to an obligation, I will use the word obligation. This seems to me to be the most logical choice when referring to obligations. By doing this consistently you can do away with agreement (at least when referring to a discrete obligation, rather than a contract as a whole), the ever-biblical covenant, and the morbid undertaking. And don’t ever use shall be obligated to (which really means has/have a duty to be obligated to).

 

6) I will use shall to convey obligations (and prohibitions); I will not use shall otherwise. See my prior post, The Contract Drafter Shall Not Use Shall (Except to Convey Obligations), for my thoughts on this one.

 

7) I will not use for the avoidance of doubt. If you need to include these words, it means that there’s some doubt about the sentence that precedes them. Resist this urge and instead just remove the doubt in the prior sentence.

 

8) I will not use unless the context otherwise requires. This begs the question: when does the context otherwise require? This phrase is a time bomb in waiting because, if it needs to be invoked in a given instance, then there’s a decent likelihood of reasonable disagreement as to whether invoking it in that instance is proper. So avoid taking this drafting shortcut.

 

9) I will reference dates in an ordinary manner. Reference dates as you would customarily say them orally: January 14, 2013 rather than the 14th of January, 2013. (You could also follow the date reference with A.D. to avoid any possible interpretation that the contract is meant to be seriously retroactive.) The caveat on this is that it is somewhat of a US-centric rule. I often come across non-US contracts in which it is customary to express dates in the [day] of [month], [year] format.

 

10) I will remove the following miscellaneous provisions from my contracts:

a) The singular refers to the plural, and vice-versa. As a general rule, I do not like provisions that provide a safety net for bad drafting. With respect to this provision, I do not want singular and plural references to be read interchangeably. For example, suppose that there is more than one “Seller” in my contract and I have the following provision:

If a Seller breaches Section 3.2, then that Seller shall pay the Buyer $3,000,000.

I’m not sure how to read that sentence if the terms “Seller” and “Sellers” can be used interchangeably. Oh, I guess I could solve that quickly by using as the context requires and then call it a day and go have a beer. But it’s better to just say what you mean, and mean what you say.

b) Attachments are incorporated herein by reference. There’s no need to incorporate an attachment by reference. Simply referring to the attachment will suffice and, in fact, is more appropriate since you can pinpoint the purpose for which you are referring to that attachment. And chances are, you don’t want to incorporate the terms of an attachment by reference. For example, suppose that a license agreement is attached as Exhibit A to your merger agreement. You don’t want incorporate the grant of the license or any of the other terms of the license agreement into your merger agreement. Rather, you probably want to indicate something like: At the Closing, each of the Buyer and the Seller shall sign and deliver to each other a license agreement in the form attached as Exhibit A.

c) Any reference to a gender is a reference to the masculine, the feminine, and the neuter. This resolution is similar to resolution #10(a). Just get it correct. Refer to the proper pronoun. In fact, when I draft contracts, I try to do away with all pronouns. I do this because, often times, it is unclear to which noun a given pronoun “points” and personal style should be irrelevant.

 

There you have it. If anyone else out there in contract-drafting land has further tips, please send them along.

And stay tuned for more in 2013!

Free CLE Opportunity: Strafford Webinar (January 10)

By Vincent R. Martorana on Posted in Miscellaneous

This Thursday, January 10, from 1 p.m. EST to 2:30 p.m. EST, I will be giving a continuing legal education webinar for Strafford Webinars entitled M&A Contracts and the Role of Written Representations. You can get a course description by clicking here. Briefly, the course will deal with representations generally in M&A contracts, rather than any specific set of representations.

The registration fee is normally around $300. However, I know that, for many non-law-firm attorneys, CLE credit is hard to come by. So for those of you who are in-house attorneys, I am handing out—on a first-come first-serve basis—the 10 complimentary passes to the webinar that Strafford has generously given me.

If you’re an in-house attorney, here’s what you need to do to snag yourself a free pass: just be one of the first 10 in-house attorneys to email me (vmartorana@reedsmith.com) or to give me a call/voice message (212-549-0418) with a contract-drafting question that you have. Be sure to leave your name, email, and phone number and I’ll get back to you with my thoughts on your question (or perhaps I’ll address it in a follow-up blog post). I’ll also confirm whether you’ve got yourself a free CLE pass to the webinar and will provide instructions for listening in.

Enjoy!

When You Wish Upon an Option…

By Vincent R. Martorana on Posted in Substantive Provisions

If you’ve drafted or read contracts for even a couple of years, chances are you’ve come across an option. And chances are, many of the options that you’ve come across have been drafted improperly. Let’s have a look at two common incorrect techniques for drafting options and then look at some better practices for drafting them.

 

When you wish upon an option…

Here’s one of my favorites (read: I can’t stand this):

If the Holder desires to exercise the Put Option, then the Holder shall notify the Grantor that the Holder is exercising the Put Option.

Ugh. So if I’m the Holder and I wake up one morning with the desire to exercise the Put Option, then BAM! Suddenly, I have an obligation to notify the Grantor of that desire and to exercise the Put Option. That’s not really what was intended, at least I hope not. But that’s what the text seemingly requires. As a more practical problem, suppose that the Holder informally conveys to the Grantor orally or in an email that the Holder would like to exercise the Put Option in the next month. Could the Grantor claim that the Holder is thereby obligated to do so, pointing to the utterance or email as evidence of the Holder’s “desire”?

So please don’t base your option trigger (or any conditional clause, for that matter) on the existence or absence of “wishing,” “desiring,” “wanting,” “sorta-feels-like,” or any other kind of wishy-washy feeling.

 

Thank you for letting me mail a letter!

Ah, here’s another classic method for drafting an option:

The Holder is permitted to give notice to the Grantor that the Holder is exercising the Put Option.

When I see this phrasing, I say to myself: “Thanks so much for affording me the privilege of mailing you a letter or calling you on the phone!” Last time I checked, this kind of communication is not prohibited (and I would bet that most contracts don’t prohibit it). This phrasing is symptomatic of a larger problem, namely, purporting to “allow” a party to do something that the party isn’t otherwise prohibited from doing. (More to come on that topic in future posts.) Rather, it is often merely a pretext for the sentence that usually follows:

If the Holder so notifies the Grantor, then the Grantor shall…

Avoid this temptation. Don’t try to grant an option by purporting to allow a party to give a notice exercising that option.

 

Go with an “If…, then…” formulation

The way that I tend to draft options is with an “if…, then…” formulation. If the Holder gives a notice in accordance with certain requirements, then the Grantor is obligated to take certain actions. This phrasing can make for a long conditional sentence, but, to my mind, it most accurately accomplishes what is intended. To help shorten things up, you can use some defined terms. For example:

If the Holder provides a Put Notice [defined, e.g., by reference to an attached form of notice] to the Holder prior to the Put Exercise Deadline, then the Grantor shall purchase the Holder’s shares in accordance with this Section 4.1.

Click here for my prior post on conditional clauses generally.

As an alternative to this approach, if there is a complicated set of mechanics surrounding the exercise or implementation of the option, I’ll sometimes need to go with this:

The Grantor hereby grants to the Holder an option (the “Put Option”) to require that the Grantor purchase the Holder’s shares in accordance with this Section 4.1. In order to validly exercise the Put Option, the Holder must…

This is a little more stilted, but better does the trick than the basing the option trigger upon a feeling or “allowing” the option holder to provide a notice.

 

And now, if you’ll permit me to do so, I desire to put an end to this post and move on to other contract-drafting matters…