YourABA July 2012 Masthead

Draft clearer contracts to ensure
the results you seek

Many lawyers lose sight of, or are never taught, the fundamentals of drafting contracts, says Vincent Martorana, counsel with Reed Smith in New York. “The errors you see in contract drafting can be pervasive and can persist, and they can be present from a very junior associate but all the way up to the most seasoned attorney,” he says.

Martorana and Heather Dominguez Rahilly, an associate with Reed Smith, shared advice applicable to any lawyer who deals with contracts, regardless of his or her field, in a recent ABA CLE on what most lawyers fail to consider when drafting contracts.

Lawyers should aim
to use language that is precise, predictable and concise, say Martorana and Rahilly.


Martorana says lawyers should be operating at a certain base level of sophistication. “That's the level where you ask the questions upfront,” he says. “You say, well, if things don't go according to plan, what is the judge or the six or 12 people in a box going to do with this contract down the road? How can this be read in maybe not the most commonsense fashion to be used against my client?”

If you want to make a contract less subject to uncertainty, ask such questions and plug any holes. “If you don't think about things in that manner, the law may plug the holes for you,” Martorana warns. “The judge could bring in public policy, fairness doctrines, parole evidence. Or your adversary could plug the holes for you.”

Following certain drafting rules and principles will help reduce the holes as well. Lawyers should aim to use language that is unambiguous (no jargon), concise, predictable, precise, consistent and straightforward, advise Martorana and Rahilly. However, know that an improvement in one of these areas could result in a decline in another, Martorana says. “The most common example is if you clear up an ambiguity, it may take you a page to do so,” he says. “You're lengthening your contract for the benefit of being unambiguous. It's a valid tradeoff but may not always be the case depending upon the context.”


Legal archaisms

Some outdated words to avoid in contracts:

  • WHEREAS
  • NOW, THEREFORE,
  • IN WITNESS WHEREOF,
  • Do hereby/does hereby
  • Undertakes to

Martorana cites an example illustrating this point. “If you have someone on the other end of the table that is not represented by counsel and you serve up to them a 70-page document when they were expecting a five-page document, although your agreement may be technically correct and unambiguous, you may end up killing the deal,” he says. “In that instance, you've done a disservice to your client.”

Indeed, each component of a contract requires careful attention. With definitions, for example, make sure each term is clear, Rahilly says. “There is a lot of power in defined terms,” she says. “We can take an ordinary term and increase or decrease the scope of that term by how we define it. It's best for the parties to come up with these definitions rather than leaving them open to interpretation later on.”

What to watch out for, Rahilly says: Do not use more than one term for the same definition. Do not use “shall”; save that for creating obligations. And do not embed obligations within definitions. “The parties may miss the obligations here,” she says, “or the counter party could see this and think you were trying to mislead them and sneak it in. It could disrupt your negotiating dynamic moving forward.”

The language of performance portion of the contract uses the word “hereby” and is written in the active voice rather than the passive voice, Rahilly says. Sample language might be: The Licensor hereby grants the License to the Licensee.

Another key concept is learning the differences between “shall,” “will” and “must,” Rahilly says. Shall should be used to convey obligations; will conveys futurity and is sometimes used to create an obligation; and must is a condition to be satisfied. (“Must” often works when “shall” does not, according to the presenters.) Rahilly and Martorana say to avoid using: “is obligated to”; “agrees to”; “covenants and agrees to”; “shall be obligated to”; and “undertakes to.”

For more do's and don'ts when drafting contracts, listen to “Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider” here.

This CLE was co-sponsored by the General Practice, Solo & Small Firm Division, the Section of Environment, Energy and Resources, and the Young Lawyers Division.

 

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