GPSOLO March 2010
Business and Commercial Law
Drafting Effective Contracts
The following six practical guidelines that I provide to my students will assist any law student or practicing lawyer in successfully revising a form contract, tailoring it, and turning it into a well-drafted, complete, and effective contract that meets their clients’ needs.
Think through the life of the contract under various fact patterns. First, hypothesize performance. Every contract should clearly answer these six questions: (1) who is obligated to perform; (2) what is the obligation; (3) by when must the obligation be performed; (4) where will the performance take place; (5) how is the obligation to be performed; and (6) if performance involves money or goods, how much?
Second, envision nonperformance and default. The contract should protect your client by stating a remedy for the potential default of each obligation. Default provisions contained in most form contracts are rarely adequate, and they generally do not comply with the parties’ intentions; the remedy of the default provision is usually termination of the contract, and for many breaches the nondefaulting party still does not desire to terminate the contractual relationship.
Finally, consider the worst-case scenario. Assume that the parties become hostile toward each other, seeking to undermine the other party at every opportunity. Will the contract provide sufficient guidance to govern the relationship? Will it provide sufficient guidance to a court interpreting the contract or imposing remedies, if necessary?
Clearly and consistently set forth the parties’ rights and obligations. It is vital that the document clearly and precisely sets forth the parties’ contractual obligations and rights. It is also important that these duties and rights are consistently drafted throughout the contract. Although there are several acceptable choices of language to use when drafting, the key is to be consistent throughout the agreement. I teach my students to adhere to these guidelines: Whenever a party has a mandatory contractual obligation, state that obligation with the word shall, and never use the word shall to have any other meaning. You should be able to substitute “has a duty to” whenever you use the word shall.
On the other hand, whenever a party does not undertake a legal obligation but is entitled to exercise a right or privilege under the contract, state the authorization with the word may; you should be able to substitute “is authorized to” or “is entitled to” whenever you use the word may. The contract must clearly distinguish between a party’s mandatory legal duty subject to breach and his or her privilege to perform.
Finally, state conditions with the word must; you should be able to substitute “has to do X before Y will happen” whenever you use the word must. The key distinction between a mandatory duty and one that is conditional is that in the latter, the party’s legal obligation to perform does not become mandatory unless and until the condition is met.
Understand every provision of the contract. When using a form agreement, never leave in a provision because you do not understand its purpose (do not assume it must be important or relevant), and never take out a provision simply because you do not understand its purpose. You must review each provision until you understand it completely. Only then can you decide whether to include, omit, or modify that provision.
Use recitals and definitions to reflect the parties’ specific transaction. Although not part of the operative terms of the contract, recitals can effectively be used to state the parties’ intentions or to provide relevant background information. Because the contract may eventually require interpretation by a court, it should include within its four corners all of the information that may be useful to explain the parties’ contractual relationship, any past history, and the parties’ intentions that may not be clear from the operative terms of the contract itself.
Additionally, the use of definitions enables the drafter to tailor the meanings of certain terms used in the contract to the subject transaction, and it also can prevent inadvertent changes of language. Generally, if the word or phrase as used in the contract is intended to vary in any way from the standard dictionary definition of that word or phrase, or if the word or phrase does not have a standard dictionary definition, it should be defined within the contract. There are three basic types of definitions: (1) precise definitions, drafted using the word means; (2) enlarging definitions, drafted using the phrase “including but not limited to” after the definition, followed by illustrative examples; and (3) limiting definitions, drafted using the phrase “but does not include” after the definition, followed by the limitations of the definition.
I remind my students numerous times of the golden rule of contract drafting: Never change your language unless you wish to change your meaning, and always change your language if you wish to change your meaning. In an effort to teach them to draft contracts with the goal of avoiding litigation, ambiguity is not tolerated.
Use plain language. Contracts should be drafted with clarity and should be easy to read and understand by legal and lay audiences alike. Thus, omit legal jargon and unnecessary words, and eliminate wordy phrases from form contracts. A majority of available form contracts fail to adhere to this advice. They are strewn with “whereas,” “witnesseth,” and “to wit”—all of which detract from the readability and comprehension of the contract. It is also important to check to see if your jurisdiction has a plain language law, mandating contracts to be written in a clear and coherent manner using words with common meanings; in fact, in some states, plain language laws dictate the number of syllables in the words and the number of words in each paragraph of the contract. Failure to follow the application of plain language laws may impact the enforceability of the contract.
Use proper grammar, a clear writing style, and logical organization. Contracts generally describe events that will take place in the future, but it is a continually speaking document and should be drafted in the present tense. Draft using the active voice. Ask who is obligated to do something or to refrain from doing something, and make the subject do the action. This is vital so that the contract clearly and unequivocally expresses the parties’ legal duties.
Draft useful headings and organize the terms around these headings. Even if your form contract contains a boilerplate provision stating that the headings should not have any operative meaning, the fact is that these headings are read by the parties, their counsel, and possibly a court; therefore, make them work. Keep sentences short, where possible, or use tabulation for clarity. Be sure to connect modifying words to what they modify. For example, in the phrase “the new house and car,” is the car new, too?
Finally, use proper punctuation to avoid costly misinterpretation of the contract. One legal dispute, for example, resulted in a finding that the contract could be terminated at any time with proper notice, contrary to one party’s understanding that the contract had an initial five-year term. This ruling was based solely on the (mis)placement of a single comma and saved the other party to the agreement an estimated $1 million by enabling it to terminate the contract within the first five years of the contract term.