Farewell From Drafting Points

Alas, my time at Reed Smith has come to an end and with it comes the end of Drafting Points. Writing posts for the blog has been an enjoyable and cathartic process for me. Some key take-aways from the posts:

  • Seek to adopt a set of drafting rules and principles to be applied consistently across contracts (regardless of the subject matter of those contracts).
  • Continually refine and question the efficacy of those rules and principles.
  • For each business point that needs to be conveyed in a contract, identify which category of contract drafting language is applicable and employ your drafting rules and principles accordingly.
  • Be prepared to bend and even break your drafting rules and principles if the practicalities of the situation warrant doing so. But do so with eyes wide open.
  • Keep on questioning conventional wisdom regarding contract drafting. Always seek to improve.

Thanks to Reed Smith and to all the subscribers and visitors to Drafting Points. Hopefully, the site has given you some food for thought, whether or not you agree with the positions that I take on contract drafting.

And I’m not hanging up my contract-drafting spurs. You’ll see me out there in the contract-drafting arena, preaching the good word of quality contract drafting.

All the best, and thank you.

Vinny

Every Contract is a Litigation Waiting to Happen (NYC Bar Association CLE)

On June 8, 2015, from 6 p.m. – 8 p.m. (NY time) I will be chairing a CLE at the NYC Bar Association, Every Contract is a Litigation Waiting to Happen. I’m proud to say that I’ll be joined by two esteemed attorneys: Casey Laffey (my litigation colleague at Reed Smith) and Hon. Vincent J. Martorana (my dad and District Court Judge in Suffolk County, NY for the First and Fifth Districts). The program will deal with contracts, contract drafting, and contract interpretation. But we’ll take a different approach from my usual contract-drafting courses. Instead of focusing on how to say things clearly in contracts, we’ll explore what happens when contract counterparties (and their respective counsel) do battle over language in a contract. In doing so, we’ll address some of the practicalities and psychology associated with contract disputes. And my co-presenters will fire their canons of construction at my ivory tower of contract-drafting principles. (See what I did there?) Here’s the agenda:

  • Introduction; the Goals of a Contract
  • Some Contract-Interpretation Principles
  • Common Sources of Contract Language Dispute
  • Practical Concerns
  • Telling the Judge What to Do: Interpretive Boilerplate
  • Examples
  • Concluding Tips; Q&A

You can go here to register. For those of you in the New York area, hope to see you there!

Contract-Drafting Bulletin (February 2015)

I am proud to announce that we’ve launched our inaugural issue of the Reed Smith LLP Contract-Drafting Bulletin. You can obtain a copy by clicking here. Thanks to my co-authors: Leah Braukman, Marla Guttman, and Donna Salcedo.

In this issue:

  • Does Quality Contract Drafting Matter?
  • Shall I Dispense with ‘Shall’? Not Entirely
  • Interview with a Commercial Litigator (thanks to John Webb)
  • World of Boxing LLC v. King
  • Comments to a Basic Confidentiality Obligation

Stay tuned for future issues!

Upcoming CLEs: January 2015 – June 2015

For those of you who need CLE credit (or who are otherwise just interested in contract drafting or M&A), below is a list of some upcoming CLEs that I’ll be giving during the first half of 2015. (Note: The availability of CLE credit for these programs is subject to rules of the applicable jurisdiction.) Check back to this list from time to time for updates, 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.

 

January 22, 2015, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Written Representations in M&A Contracts

 

January 26, 2015, 6 p.m. ET – 9 p.m. ET New York City Bar Association (NYC – Live at the NYC Bar Association) Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

February 10, 2015, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

 

February 24, 2015, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Letters of Intent: What to Consider Before Your Deal Becomes a “Deal”

 

March 3, 2015, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Essential Concepts in Drafting Contracts: Using Language to Ensure Desired Outcomes

 

March 17, 2015, 9 a.m. ET – 12:15 p.m. ET Practising Law Institute (NYC – Live at PLI) Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider 2015

 

March 25, 2015, 6 p.m. ET – 9 p.m. ET New York City Bar Association (NYC – Live at the NYC Bar Association) Intermediate Concepts in Drafting Contracts

 

March 26, 2015, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Select Issues in Contract Drafting: Formulas, Attachments, Ambiguities, and More

 

April 14, 2014, 1 p.m. ET – 2:30 p.m. ET Commercial Law WebAdvisor (Webinar) Drafting Contract Boilerplate: Standard Provisions That Work for Your Client

 

June 8, 2015, 6 p.m. ET – 9 p.m. ET New York City Bar Association (NYC – Live at the NYC Bar Association) Every Contract is a Litigation Waiting to Happen

 

June 12, 2015, 9 a.m. ET – 12:00 p.m. ET Practising Law Institute (NYC – Live at PLI) Acquiring or Selling the Privately Held Company 2015

 

June 16, 2015, 9 a.m. ET – 4:30 p.m. ET New York State Bar Association (NYC – Live at The New York Hotel Pennsylvania) The Nuts & Bolts of Contract Drafting

Thank You and Happy Holidays

Just a quick post of thanks to those of you who follow Drafting Points and attend my continuing legal education seminars. From time to time, I receive notes of appreciation and encouragement from Drafting Points readers and those who listen to or attend my seminars on contract drafting and contract interpretation. Although contract drafting is one of my passions, these comments help keep me going. I hope that my thoughts have been helpful and, at a minimum, have piqued your interest in questioning and improving upon the language in contracts that you draft and that come your way. Stay tuned for more to come in 2015!

 

Thank you and have a safe and happy holiday season!

Ten Contract-Drafting Flaws That Are Like Nails On A Chalkboard

It’s been a long while since I’ve posted. Today’s post is motivated in part by my frustration at contract-drafting flaws that I routinely come across. It is also motivated in part by the person who is sitting behind me this evening (well, Friday evening, since I won’t post this until Monday) on the train ride home yammering on a cell phone. Both are like nails on a chalkboard.

Here are 10 things NOT to do when drafting a contract:

1) Do NOT use “shall” for rhetorical emphasis, i.e., do NOT use “shall” as a proxy for “I really mean it!” Example: There is no need to say “This Agreement shall be governed by New York law.” The Agreement simply “is” governed by New York law. As I discuss in this post, use “shall” only to convey an obligation.

2) Do NOT use WITNESSETH anywhere in your contract. That goes equally for W I T N E S S E T H.

3) Do NOT write: “Party X may give notice to Party Y…” or “Party X may notify Party Y….” Was Party X otherwise prohibited from giving notice? This is an example of my general rule against conveying “naked discretion”: giving a party “permission” to do something that it isn’t explicitly or implicitly prohibited from doing.

4) Do NOT purport to obligate anyone who did not sign on the dotted line, as in “Party X’s affiliates shall not sell any Goods.” More on that here.

5) Do NOT base a condition on a desire, as in “If Party X desires to exercise the Call Option, then Party X shall give notice…” The first problem with that phrasing is that it’s a fairly difficult task to determine when Party X has such a desire. The second problem is that, because the word “shall” is used in the consequent clause, Party X now has an obligation to give notice as soon as it “desires” to exercise the Call Option. More on this point here.

6) IF YOU WANT SOMEONE TO READ TEXT THAT IS REALLY REALLY IMPORTANT, THEN DO NOT USE ALL CAPS. CONSIDER USING BOLD FONT. IT IS VERY DIFFICULT TO READ ALL CAPS. IN FACT, WHEN I ENCOUNTER A PARAGRAPH IN ALL CAPS, MY FIRST INSTINCT IS TO SKIP OVER IT (OR TO PERHAPS READ IT IN MY ROBOT VOICE). ALSO, YOU LOSE THE BENEFIT OF ANY DEFINED TERMS IN THE PARAGRAPH; YOU CAN’T DISTINGUISH BETWEEN THE LOWERCASE “SECURITY” AND THE DEFINED TERM “SECURITY.” FINALLY, THERE IS A GREATER CHANGE THAT YOU WILL MISS ERRORS OF YOU USE ALL CAPS.

7) Do NOT use language of obligation when you want to convey something that is occurring by virtue of the text. For example, if you want a document to amend a portion of an existing agreement, then don’t write: “The Parties shall amend the Existing Agreement as follows…” All that does is obligate the Parties to amend the Existing Agreement; it doesn’t actually amend the Existing Agreement. Instead, write: “The Parties hereby amend the Existing Agreement as follows…”

8) Do NOT write “NOW, THEREFORE [blah, blah]” in the lead-in to your contract, whether or not in ALL CAPS. “The Parties hereby agree as follows:” will suffice.

9) Do NOT state “not be deemed to be” when you really mean “be deemed not to be.” The former negates a “deemed rule”; the latter creates a “deemed rule.” For example, if you want to make clear that a certain action will not be considered “material,” then do not write: “[Action] will not be deemed to be material.” The action could still in fact be material. Instead: “[Action] will be deemed not to be material.”

10) Do NOT incorporate recitals into the operative portion of the contract by reference. The recitals are mere precatory language. They set forth background and are often loosely drafted. Do not place or purport to place operative language in the recitals. If you want to include an operative provision, then just write that provision in the operative portion of the document.

Re-read these. See how many you agree with. Now pick up a contract that you are drafting or that has come across your desk. Can you hear a screeeeeech?

A Guide to Contract Interpretation (July 2014)

In October of last year, my former colleague, Michael Zitelli, and I published an update to our Reed Smith white paper entitled 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).

The guide has been well received, and I’m happy to announce that I’ve published an updated version. You can obtain a copy by clicking on the following link:

A Guide to Contract Interpretation

The updated features of the guide include the following:

  • the analysis takes into account New York and Delaware court opinions from July 2013 to early July 2014;
  • added depth to certain sections to provide a more nuanced treatment of how courts approach interpretive issues; and
  • new sections discussing both interpretive issues and certain types of contracts and contractual provisions that merit special attention.

Additionally, I would like to thank Mike for his contribution in co-authoring prior versions of the guide, as well as Jordan M. Hook, Thomas James, and Aaron Spurlock for their assistance in preparing the current and prior versions of this guide.

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

Five Tips on Drafting Definitions

Definitions are a key part of any sophisticated contract. They provide an efficient way to package a concept and to employ that concept repeatedly in a contract. Here are five tips for drafting your definitions, including some “errors” in drafting definitions that I routinely encounter.

 

1) Do not use “shall” when defining a term.

The word shall should be used to convey an obligation, and should not be used otherwise in contract drafting. See my prior post on this: The Contract Drafter Shall Not Use “Shall” (Except to Convey Obligations). Definitions employ language of policy, not obligations. And please don’t use shall as a proxy for I really mean it. Rhetoric has no place in clear contract drafting. So don’t write:

“Securities Act” shall mean the United States Securities Act of 1933.

You’ve just tried to obligate the term “Securities Act” to mean something. You’re fired. Take a deep breath and use the present tense of the verb “to mean”:

“Securities Act” means the United States Securities Act of 1933.

 

2) In a definitional index, do not embed obligations or categories of language other than language of policy in your definitions.

Language of policy–the category of contract-drafting language used to convey the “rules of the game” for a contract–should be used when defining a term. As noted above, this means using the present tense of the verb “to mean.” (Or, if you’ve got a conditional definition, then you would use the future tense.) But do not sneak in other categories of contract-drafting language. For example, do not do the following:

“Closing Certificate” means a certificate in the form attached as Exhibit A, which the Seller shall deliver to the Buyer at the Closing.

I’m not saying that a court would not enforce the Seller’s obligation to deliver the Closing Certificate at the Closing. It’s just that you’ve lumped in an obligation in an unnatural place. The definitional index is supposed to tell the reader what contract terms mean, not what the parties’ respective obligations are.

 

3) A definition might vary depending on the context in which it is used.

Suppose that you want to include a definition for gross revenues for each party to a contract. That definition will vary depending upon the party that is being referred to in the sentence in which the definition is being used. You could get by with something like:

“Gross Revenues” means a Party’s gross revenues for the period beginning on January 1, 2014 and ending on (and including) December 31, 2014, calculated in accordance with the manner in which such Party prepares such Party’s financial statements during such period.

However, when used in a stand-alone definition in this manner, a Party begs the question: which Party? The implication is that there will be a reference to a particular Party in the operative provision when referring to the term Gross Revenues. But I like to make this “pointing reference” explicit in the definition:

“Gross Revenues” means, with respect to a Party, such Party’s gross revenues for the period beginning on January 1, 2014 and ending on (and including) December 31, 2014, calculated in accordance with the manner in which such Party prepares such Party’s financial statements during such period.

 

4) Be mindful of defined terms that require temporal references.

If the meaning of a particular term could change depending upon when the parties are making a particular determination, then you’ll need a temporal reference in your definition. I see this come up with the definition of Affiliate. Take the following obligation and definition:

Section 2.4 The Stockholder is permitted to Transfer any Shares that the Stockholder holds to any of the Stockholder’s Affiliates.

“Affiliate” means, with respect to a specified Person, any other Person that controls, is controlled by, or is under common control with such specified Person. [I’m putting aside for now what “control” means.]

Are we talking about a Person that is an Affiliate at the time the contract containing this definition and obligation is signed? Or are we talking about a Person that is an Affiliate at the time of Transfer of Shares? There could be a different set of “Affiliates” depending upon how you answer this question. In order to clarify things, you’d want to reference a timing element in the obligation in Section 2.4 and then update the definition of Affiliate accordingly:

Section 2.4 The Stockholder is permitted to Transfer any Shares that the Stockholder holds to any Person that, immediately prior to such Transfer, is an Affiliate of the Stockholder.

“Affiliate” means, with respect to a specified Person and at a given time of determination, any other Person that controls, is controlled by, or is under common control with such specified Person at such time.

Note that, by including a temporal reference in this definition, it means that a “time of determination” must be addressed  when using the defined term Affiliate in your operative provisions. Sometimes you can get away with implicit references:

The Company shall not transfer any Shares to any of the Company’s Affiliates.

When in doubt (“Affiliates” as of the time transfer, or as of the time that the contract is entered into?), err on the side of being explicit:

The Company shall not transfer any Shares to any Person that, as of immediately prior to such transfer, is an Affiliate of the Company.

 

5) Do not use more than one defined term per concept.

Do NOT do the following:

“Company” or “Verbiage Co.” means Verbiage Company, a Colorado corporation.

In the interest of brevity, just pick one. Remember, unlike other forms of writing, with contract drafting, we’re concerned about functionality, not rhetoric or how “nice” a given term “sounds” in a given context.

 

Feel free to disagree (bonus points if you use one or more defined terms in conveying your contention) and to pass along tips of your own.

 

Drafting Points Quiz (and Access to Webinar)

On Thursday, February 20, from 1 p.m. – 2:30 p.m. EST, I will be co-presenting a webinar for Strafford Webinars on certain provisions in private M&A agreements. I’ve got 10 free passes to give away. I’ll give them to the first 10 people who email me the correct answers to the following questions on contract drafting and interpretation. Answers are due by 7 p.m. EST on Wednesday. Good luck!

 

1) Which of the following sentences best conveys an obligation?

 

a) The Contract shall be drafted by the Attorney.

b) The Attorney must draft the Contract.

c) The Attorney shall draft the Contract.

d) The Attorney will draft the Contract.

e) The Contract shall be drafted.

 

2) In the post “The Battle of ‘Notwithstandings’ (Using Provisions from Bert and Ernie’s Sublease),” what drink did Bert ultimately decide to indulge in after dealing, yet again, with Ernie’s frustrating banter?

 

3) Which of the following is not a contract-interpretation principle noted in the updated A Guide to Contract Interpretation (October 2013) that Mike Zitelli and I co-authored?

 

a) The same words used in different parts of a writing have the same meaning.

b) The terms of the contract should be “harmonized” and read in context.

c) If the provision is ambiguous, then the parties’ intent becomes a question of fact.

d) A contract should be construed liberally, unless otherwise provided in the contract.

e) Parol evidence cannot be used to create an ambiguity.

 

4) In May 2013, Ken Adams posted his draft of an Irreparable Harm provision. I responded in this post with a draft of my own. What is the fifth word in my draft of an Irreparable Harm provision?

 

5) Last and final question: What’s the “last and final” stop of my morning commute?

Upcoming CLEs: February 2014 – July 2014

For those of you who need CLE credit (or who are otherwise just interested in contract drafting or M&A), below is a list of some upcoming CLEs that I’ll be giving during the first half of 2014. (Note: The availability of CLE credit for these programs is subject to rules of the applicable jurisdiction.) 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.

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