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Teaching Contract Skills to Teaching Contract Skills to Young LawyersYoung Lawyers

August 4, 2006August 4, 2006ABA 2006 Annual MeetingABA 2006 Annual MeetingSection of Business LawSection of Business Law

Charles M. Fox

(c) 2006 Fox Professional Development (c) 2006 Fox Professional Development LLCLLC

©© 2006 Fox Professional Development LLC. The materials appearing 2006 Fox Professional Development LLC. The materials appearing herein have been prepared by herein have been prepared by Fox Professional Development LLC in connection with the panel diFox Professional Development LLC in connection with the panel discussion on scussion on ““Real Writing for Real Real Writing for Real Lawyers: Training Business Lawyers to DraftLawyers: Training Business Lawyers to Draft”” held on August 4, 2006 at the ABA 2006 Annual held on August 4, 2006 at the ABA 2006 Annual Meeting Meeting –– Section of Business Law. These materials may not be reproducedSection of Business Law. These materials may not be reproduced in whole or part without in whole or part without the prior written consent of Fox Professional Development LLC.the prior written consent of Fox Professional Development LLC.


Contracts vs. other kinds of writingContracts vs. other kinds of writing

• A contract is not written to convey information or to persuade or entertain the reader– The goal of the contract drafter is to precisely

reflect the “meeting of the minds” in a way that will be understood exactly the same by all readers

– The importance of the contract negotiation and drafting process in arriving at the meeting of the minds



• Contracts create legally enforceable rights and obligations

• They act as a roadmap for business relationships



• For the first time in their lives, young lawyers are permitted and encouraged to plagiarize


The importance of The importance of precisionprecision


Contract interpretationContract interpretation

• Two of the most important rules are:– The parol evidence rule.

• Extrinsic evidence as to the intention of the parties may not be introduced to vary or contradict the terms of an integrated contract.

– The plain meaning rule.• A provision that is clear and unambiguous on its

face will be so interpreted, without reference to extrinsic evidence of what may have actually been intended.



Your client is a toy manufacturer that is planning to sell its manufacturing operations (it intends to outsource all manufacturing in the future). All of the manufacturing assets are owned by one of its subsidiaries. The client is a licensee under a trademark license agreement that provides: “Licensee shall not sell any assets constituting a separate line of business.”

What advice do you give your client as to how to structure this transaction?



Your client wants to pay a dividend to its owners. It is subject to a note purchase agreement that prohibits all cash dividends and similar cash payments in respect of equity.Your client proposes the following: it will create a new subsidiary, capitalize it with cash, and then distribute the shares of the subsidiary to the stockholders.Can your client do this in compliance with the dividend covenant?


Contract interpretationContract interpretationYou are representing a bond issuer in a $100 million public offering. The proceeds of the offering are to be used by the issuer to invest in technology. You discover in due diligence a long-term capitalized lease that contains the following provision:“If Lessee shall issue securities in a public offering in which the net proceeds exceed $50 million, the first $25 million of net proceeds shall be deposited in the Escrow Account.”

The CFO of the issuer tells you that the deposit requirement was only supposed to apply to proceeds of equity offerings.


When precision must When precision must be sacrificedbe sacrificed


Borrower will not violate any Borrower will not violate any law, rule or regulation.law, rule or regulation.


Borrower will not violate any law, rule or regulation.Borrower will not violate any law, rule or regulation.

Borrower will not violate any Borrower will not violate any materialmaterial law, rule or law, rule or regulation.regulation.

Borrower will not violate any law, rule or regulation Borrower will not violate any law, rule or regulation in in any material respectany material respect..

Borrower will not violate any law, rule or regulation Borrower will not violate any law, rule or regulation if if such violation could reasonably be expected to have a such violation could reasonably be expected to have a material adverse effect on the financial condition of material adverse effect on the financial condition of BorrowerBorrower..


Would vs. couldWould vs. couldYour client is a party to a lawsuit, described in the next slide. Would this lawsuit have to be disclosed under the following alternative versions of the same representation?

– The Company is not a party to any threatened or pending litigation that could have a material adverse effect on its business or financial condition.

– The Company is not a party to any threatened or pending litigation that could reasonably be expected to have a material adverse effect on its business or financial condition.

– The Company is not a party to any threatened or pending litigation that would have a material adverse effect on its business or financial condition.


Would vs. couldWould vs. could

A competitor has sued your client for trademark infringement, claiming the “Dolly Llama” toy infringes on their “Do’ed up Doggie” concept. The client’s IP lawyer says that the plaintiffs have no more than a five percent chance of successfully enjoining the client from manufacturing or selling any Dolly Llama product.


ReasonablenessReasonableness

Licensor may terminate the License if it has Licensor may terminate the License if it has determined that there has been a material determined that there has been a material adverse change in Licenseeadverse change in Licensee’’s financial s financial condition.condition.

Licensor may terminate the License if it has Licensor may terminate the License if it has reasonablyreasonably determined that there has been a determined that there has been a material adverse change in Licenseematerial adverse change in Licensee’’s s financial conditionfinancial condition..


Should you avoid Should you avoid legalese?legalese?


Acceleration clauseAccountAccount partyAccount receivableAccretionAcquisitionAcquisition agreementAdditional insured indorsementAffiliateAffirmative covenantAgentAgreement in principleAll or substantially allAmendmentAmendment and restatementAmortizationAnti-assignment clauseAntidilution provisionAnti-layering provisionArbitrationArm's lengthAsset-based loanAsset purchase agreementAsset sale covenantAssigneeAssignmentAssignment and acceptanceAssignorAttorney-in-factAuditAudit opinionAutomatic stayBack-endedBalance sheetBankruptcy-remote entityBasis pointBasketBelt and suspendersBeneficial ownershipBeneficiaryBest effortsBill of ladingBill of saleBlackliningBlanket lienBlocked accountBoard resolutionsBoilerplateBondBook-entryBorrowerBorrowing baseBreachBreakage provision

Break-up feeBring-downBulk transferBusiness interruption insuranceCallCall premiumCall protectionCapital accountCapital contributionCapital expenditureCapitalizationCapitalized leaseCarried interestCarveoutCash collateralCash equivalentsCash flowCash flow statementCash management systemCash payCasualty lossChange of control provisionChattel paperChoice of lawClawbackClosingClosing checklistCollateral agentCollateral assignmentComfort letterCommercial paperCommitment Commitment letterCompoundingConcentration accountCondition precedentCondition subsequentConfidentiality agreementConformed copyConsentConsent and agreementConsent solicitationConsiderationConsignmentConsolidatedConsolidatingConstruction loan agreementContingent liabilityContribution agreementControl agreementConversionCounterpartsCounterpartyCoupon

Covenant not to competeCoverage ratioCredit agreementCredit enhancementCredit facilityCredit ratingCredit riskCredit supportCreditorCross-accelerationCross-defaultCross reference Cure periodCurrency riskCurrency swapDebentureDebt incurrence testDebtDebt covenantDebt securityDebt serviceDebtorDebtor-in-possessionDeedDeliveryDepreciationDemand registration rightDerivativeDIP financingDirect order of maturityDirectly or indirectlyDiscountDispositionDissolutionDivestitureDividendDocumentDocument of titleDocumentary letter of creditDollar for dollarDrag along rightDrawdownDrop-dead dateDue diligenceDue diligence outDuly authorizedDuly organizedEarn-outEasementEBITDAEncumbranceEnforceabilityEnforceability opinionEngagement letter

Environmental remediationEqual and ratable clauseEquitable ownershipEquitable subordinationEquityEquity sponsorERISAEscrowEscrow agentEurodollar interest rateEvent of defaultExcess cash flowExchange offerExculpation clauseExecutionExecution copyExhibitExit consentsFace amountFactoringFairness opinionFederal fundsFee mortgageFiduciary dutyFiduciary outFinancial covenantsFinancial statementsFinancing leaseFinancing outFinancing statementFiscal yearFixed rateFlex provisionFloating rateForbearanceForce majeure clauseForecastsForeclosureFraudulent conveyanceFront-endedFrozen GAAPFully paid and nonassessableFunded debtFunds flowFunds flow memorandumFurther assurances clauseGAAPGenerally accepted accounting

principlesGoing concern qualificationGolden parachuteGood standing certificateGoverning law provisionGrace periodGrant clause

GrossGross negligenceGross-up provisionGuaranteeGuarantee of collectibilityGuarantee of paymentGuarantorHaircutHair-trigger provisionHedge agreementHell or high waterHigh yield debtHold harmless provisionHolding companyHypothecation agreementImmediately available fundsIn advanceIn arrearsIncome statementIncorporation by referenceIncurrence covenantsIndebtednessIndemnity/indemnificationIndentureIndenture trusteeIndependent directorInitial public offeringInstrumentIntegration clauseIntellectual propertyIntercreditor agreementInterest rateInterest rate riskInterest rate swapInverse order of maturityInvestment covenantIpso facto clauseISDAIssuerIssuing bankJoint and several liabilityJoint ventureJudgment creditorJuniorKeepwellLandlord's waiverLeaseLeasehold interestLeasehold mortgageLegal descriptionLegal opinionLenderLesseeLessorLetter agreement

LEG

ALE

SE

?


Letter of creditLetter of intentLeverageLeveraged buyoutLeveraged leaseLIBORLicense agreementLicenseeLicensorLien covenantLimited liability companyLimited liability partnershipLine of creditLiquidationLiquidation preferenceLiquidityLocal counselLockboxMACMaintenance covenantsMake-whole provisionMandatory prepaymentMarginMarketMarketable titleMarket capitalizationMarket flex provisionMarket outMaterial adverse change clauseMaterial adverse effectMaterialityMaturityMerger agreementMerger clauseMerger covenantMilestonesMinority interestMinute booksMortgageMortgage satisfactionMortgageeMortgagorMutatis mutandisNatural personNegative covenantNegative pledge clauseNetNon-recourseNon-recurring changeNo raid clauseNo shop clauseNotarizationNoteNotional amount

ObligeeObligorOff-balance sheet liabilityOperating companyOperating leaseOpinionOptional prepaymentOrdinary course of businessOutParParachutePari passuParticipantParticipationParticipation agreementPartnership interestPayeePaying agentPayoff letterPayorPayment in kindPer annumPerfectionPerformancePersonPiggyback registration rightPIKPledge agreementPoison pillPolitical risk insurancePower of attorneyPreamblePrecedentPreferencePreferred stockPremiumPrepaymentPrepayment penaltyPresent valuePricing gridPriorityPrivate placementProfit and loss statementPro formaProject financingProjectionsPromissory noteProposal letterPro rataProvisoPurchase money debtPurchase price adjustmentPutQualified institutional buyer

Quitclaim deedRatableRating triggerReasonablyReasoned opinionRecitalsRecord ownershipRecording taxRecourseRedemptionRedliningRefinancingRegistration rightsReinvent the wheelReleaseRemediesRentRepresentationRestricted paymentRestricted payments covenantRestricted subsidiaryRestructuringRetained earningsRevolving loanRights agreementRoyaltySavings clauseScheduleSecond-tier subsidiarySecured partySecured transactionSecuritizationSecurity agreementSecurity interestSeller noteSeniorSetoff provisionShareholderShareholders rights planSide letterSignature pagesSolvencySolvency opinionSources and usesSovereign immunitySpecial purpose entitySpecific performanceSpreadSpringing lienStandby letter of creditStamp taxStandstill agreementStipulated loss valueStockholders equity

Stock purchase agreementStructural subordinationSubmission to jurisdictionSubordinated Subordination agreementSubrogationSubscription agreementSubsidiarySubstantive consolidationSuccessors and assignsSupplemental indentureSurety bondsSwinglineSyndicationSynthetic leaseTag along rightTakedownTargetTax indemnity10-b5 representationTender offerTerm sheetThird party beneficiaryTicking feeTitle insuranceTitle searchTo its best knowledgeTrade letter of creditTrancheTransactions with affiliates covenantTransfer restrictionsTrue saleTrusteeUltra viresUnconditionallyUnder waterUnderwriterUnderwriting agreementUnrestricted subsidiaryUpstream guaranteeValidityVendeeVendorWaiverWaiver of sovereign immunityWarehouse receiptWaterfall provisionWholly-owned subsidiaryWire transferWorking capitalWorking capital adjustmentWorkoutZero coupon

LEG

ALE

SE

?


Bad legalese?Bad legalese?• It is hereby agreed among the parties hereto that upon the

occurrence of each and every failure by Borrower to comply and perform in all respects with the covenants, restrictions and limitations set forth in Article 6, Lender shall have and be entitled to exercise, and shall be deemed to have and to be entitled to exercise, the right and privilege to cause the termination and extinguishment of theLoan Commitments, provided, however, that delivery of prior notice of said termination and extinguishment be made to Borrower.

• Seller shall use, and shall cause each of its subsidiaries to use, commercially reasonable efforts to obtain from each of their licensees (except under licenses with annual base royalty payments of less than $200,000), a consent to assignment substantially in the form of Exhibit S (or in such other form as Buyer may reasonablyapprove), by the tenth day before the Scheduled Closing Date.


Drafting conventionsDrafting conventions

• Trumping provisions– Provisos– “Notwithstanding anything herein to the

contrary”– “Except as provided in Section 6.5”– “Without limiting the generality of the

foregoing”


Drafting conventionsDrafting conventions

• “Including without limitation”• Incorporation by reference

Real Writing for Real Lawyers: Training Business Lawyers to Draft

ABA Annual Meeting 2006

August 4, 2006

Tina L. Stark Adjunct Professor of Law

Fordham University School of Law

Tina L. Stark (212) 799-7200

[email protected]

Representations and Warranties

1. A representation is a party’s statement of fact as of a moment in time intended to induce reliance by a second party, and based upon that reliance, intended to cause the second party to take an action.

Example of a representation of an owner of a car to a potential purchaser:

• The car has been driven 50,000 miles.

This statement is made today (a moment in time) by the owner to induce reliance by another party (to induce the potential purchaser to rely), and based upon that reliance, to cause the potential purchaser to take an action (to purchase the car).

In order to have a cause of action for misrepresentation, the recipient of the representation must have justifiably relied on it. It must not have known that the statement was false.

2. There are three types of misrepresentations:

• Honest or negligent misrepresentations, for which the remedies are rescission and restitutionary recovery.

• Fraudulent misrepresentations, for which the remedy is damages (and possibly punitive damages).

3. A warranty is a promise by the maker of a statement of fact that the statement of fact is true. The promise’s practical ramification is that the maker of the statement must pay damages to the recipient if the statement of fact is false and the falsity caused damages.

4. Every statement that is a representation is simultaneously a warranty. The same words are used to create both concepts. The classic way of creating representations and warranties is to use language along the following lines:

• The Borrower represents and warrants to the Bank as follows:

5. Representations and warranties are risk allocation mechanisms. There are flat representations and qualified representations.

Stark Legal Education, Inc. © 1993-2006

Stark Legal Education, Inc. © 1993-2006 2

A flat representation is a statement that is posited as an absolute, without any kind of wiggle room. For example:

• The Seller represents and warrants that the car has been driven 50,000 miles.

A flat representation is the most risky type of representation for the person making the statement. Any error results in the recipient of the representation having a claim for damages or other appropriate remedy.

A qualified representation is a statement that moderates the flat statement. For example:

• The Seller represents and warrants that the car has been driven approximately 50,000 miles.

• The Seller represents and warrants that there is no material default under any contract to which Seller is a party.

By adding the qualifier “approximately” to the representation, the Seller has given itself some leeway. Now, a small, immaterial error will not result in a misrepresentation. Thus the Seller’s risk has decreased and the Buyer’s risk has increased.

6. Representations and warranties may be drafted with respect to the present or past. They should not, however, be drafted with respect to the future for two reasons. First, a representation and warranty with respect to the future is, in reality, a disguised covenant and should be drafted as a covenant. The benefit of the covenant is that it proffers the possibility of an additional remedy beyond damages: specific performance.

The second reason that representations and warranties should not be drafted with respect to the future is that the courts will not give them effect. The cases hold that representations or warranties as to the future are merely the opinion of the maker of the statements.

Knowledge Qualifiers 1. No litigation is pending or threatened against the Seller.

2. Except as set forth in Schedule 3.03, no litigation is pending or threatened against the Seller.

3. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of the Seller, threatened against the Seller.

4. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller’s officers, threatened against the Seller.

5. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller’s three executive officers, threatened against the Seller.

6. Except as set forth in Schedule 3.03, no litigation is pending or, to the knowledge of any of the Seller’s three executive officers, threatened against the Seller. For the purposes of this provision, "knowledge" means

(a) each executive officer’s actual knowledge; and

(b) the knowledge that each executive officer should have had after diligent investigation.

7. Except as set forth in Schedule 3.03, the Seller does not know, and has no reasonable grounds to know, of any basis for assertion against it of any claim or liability.

8. Whenever the Seller makes a representation and warranty "to its knowledge," the Seller has inquired of one or more of the following personnel regarding the matters that the representation and warranty covers: the President, the Vice President and General Manager, the Vice President of Purchasing, the Secretary, and the Treasurer.1

1 To enhance the readability of this provision, a drafter could tabulate the list of personnel.


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Covenants

1. A covenant is a promise to do or not to do something.

2. Covenants are another kind of risk allocation mechanism. They establish a standard of liability. That standard can change by changing the degree of obligation.2

• The Seller shall maintain the equipment in good condition.

• The Seller shall maintain the equipment in good condition, ordinary wear and tear excepted.

• The Seller shall maintain the equipment in accordance with industry standards.

3. Covenants should be drafted using shall. The plain English movement decries the use of shall and uses will instead. This is appropriate in the context of a consumer contract. But in a complex commercial agreement, which needs to distinguish the future from the imperative, using different words for the future and imperative makes sense.

4. Remedies for breach of a covenant:

• Damages

• Possibly specific performance

2 My colleague, Alan Shaw, coined the phrase degree of obligation.


Rights

A contract right flows from another party’s duty to perform. The person to whom the performance is owed has a “right” to that performance. Therefore, when there is a duty, there is a correlative right. Although there are often business and legal reasons to express a provision as a duty, the provision can be expressed as a right. For example:

• If the Seller paints the bedroom, the Seller is entitled to an increase in purchase price of $1000. (drafted as the Seller’s right)

• If the Seller paints the bedroom, the Buyer shall pay an additional $1000 in purchase price. (drafted as the Buyer’s duty)

In both examples, the Seller is paid an additional $1000 upon the painting of the bedroom. The difference is the focus: the Seller’s right to payment versus the Buyer’s duty to pay.

Note, that in both examples there are conditions precedent. We have already looked at conditions precedent to the obligation to perform – as in the second example where the painting of the bedroom is a condition precedent to the obligation to perform (a duty). In the first example, however, the Seller’s painting of the bedroom is a condition precedent to the right to an increase in purchase price. As a right is the flip side of the duty and there is a condition precedent to the obligation to pay the increased purchase price, logically there should also be a condition precedent to the right to payment – and there is. Whether the language in the first example or the second example is used, the result is the same: no payment unless the bedroom is painted.


5

Conditions Precedent

1. There are three types of conditions precedent:

• A condition precedent is a state of facts that must exist before a party has an obligation to perform; for example, a condition precedent to the closing of an acquisition agreement.

• A condition precedent is a state of facts that must exist before a party has a right. A contract right flows from another party’s obligation to perform. The person to whom the performance is owed has a “right” to that performance. Therefore, when there is an obligation to perform, there is a correlative right. Each is the flip side of the other. Although there may be business and legal reasons to express a provision as an obligation, the provision can be expressed as a right.

• If the Seller paints the bedroom, the Seller is entitled to an increase in purchase price of $1000.

• If the Seller paints the bedroom, the Buyer shall pay an additional $1000 in purchase price.

• A condition precedent is a state of facts that must exist before a party may exercise discretion.3 A common example is that a borrower’s default must exist under a credit agreement before a bank may exercise its remedies. Stated differently, once there is a default, a bank has the discretionary authority to exercise its remedies. It may choose not to. It may instead decide to waive the default. But the bank may not exercise any of its discretionary authority unless there has first been a default.

2. Whenever there is a condition precedent, it must be paired with an obligation (the covenant), a right, or discretionary authority.

• A condition precedent to an obligation and the obligation.

3 See the discussion of discretionary authority that begins on page 8.


• A condition precedent to a right and the right.

• A condition precedent to discretionary authority and the discretionary authority.

3. The proper way to draft a condition precedent to an obligation to perform is by using the verb “must.” This rule is rarely honored. Instead, most drafters use the false imperative.

• All covenants must have been performed.

• All covenants shall have been performed.

4. There is no one right way to draft a condition precedent to discretionary authority. If the condition precedent is couched as an if clause, it should be drafted in the present tense:

• If the Borrower fails to pay interest when due, the Bank may foreclose upon its security.


7


Discretionary Authority

Discretionary authority gives its holder a choice.1 In the following example, a party may decide when to terminate the agreement. Discretionary authority is often used in this way.

• Either party may terminate this Agreement at any time by sending written notice to the other party.

Discretionary authority is sometimes couched as permission to do something, often appearing as an exception to a prohibition

• The Borrower shall not invest in any Person, except the Borrower may invest in any wholly-owned subsidiary of the Borrower.

The exercise of discretion is often subject to a condition precedent having occurred. A classic example of the interplay between a condition precedent and discretionary authority occurs in a loan agreement. Imagine that Bob has taken out a mortgage to finance a house that he is buying. In one of the later articles of his loan agreement with the bank, that agreement sets forth the remedies to which the bank is entitled upon an event of default:

• If there is an Event of Default, the Bank may accelerate the Loan and foreclose upon its security [Bob’s house]. . .

Here, the Bank has no authority to accelerate the Loan and to foreclose unless there has been an Event of Default. Once that exists, the Bank must decide whether it wishes to accelerate the Loan and to foreclose. The Bank is not required to do so. It has discretion. Alternatively, it could waive the default or grant Bob extra time to comply with the loan covenant.

Regardless of how a party exercises its discretionary authority, its exercise does not create a correlative duty in the other party. Other duties may flow from the exercise of discretionary authority, such as an obligation to pay penalty interest, but there is no duty that is the flip side of the discretionary authority.

1 A person who has discretionary authority is sometimes said to have a privilege.


Declarations5

A declaration is a statement of fact to which the parties agree. It is akin to a stipulated fact in a lawsuit. The parties agree on the fact but not necessarily on how it is going to be used. Some declarations have no substantive effect, except in conjunction with another provision; some have a substantive legal effect on their own. A party cannot sue on a declaration. There are no remedies associated with it.

• The purchase price is $21 million (the “Purchase Price”).

The example is a declarative sentence, in essence a definition. Standing by itself, the definition of Purchase Price has no substantive ramifications within the contract. Nobody is doing anything with or to it. It cannot be breached because neither party has any rights or duties with respect to a mere definition. Instead, the statement of Purchase Price must be kicked into action by its inclusion in another provision. For example:

• The Buyer shall pay the Seller the Purchase Price at the Closing.

Only by being kicked into action does the Buyer have a duty to pay at the Closing, and the Seller have the right to declare a breach upon the Buyer’s failure to pay.

The governing law provision is a paradigmatic example of a declaration that has legal effect on its own. It is a statement of policy. It states what state’s law will govern the contract. Unlike definitions that must be kicked into action to serve a purpose within the contract, the governing law provision has a substantive effect by its mere inclusion in the contract.6 As with any other declaration, there are no remedies associated with it.7

• The internal laws of New Jersey cover all matters arising under or relating to this Agreement.

Declarations should be drafted in the present tense because, when read, a contract provision should always apply to the current situation.

To test whether a statement of fact is a declaration, ask two questions:

5 The text and footnotes are based on excerpts from NEGOTIATING AND DRAFTING CONTRACT BOILERPLATE (Stark et al eds. 2003). 6 See Dickerson, The Fundamentals of Legal Drafting 185 (2d ed. 1986). 7 “Third-Party ‘Closing’ Opinions: A Report of the TriBar Opinion Committee,” 53 Bus.Law. 605-606, 620 (1998). See also Burnham, supra § 2.02 n. 1, at 386.

(a) Is one party making the statement of fact to the other party and is the other relying on it? If the answer is yes, then the statement is a representation and warranty. If the answer is no, then the statement of fact is probably a declaration.

(b) Does one party want to be able to sue the other party for damages based on the statement of fact? If the answer is yes, then the provision cannot be a declaration. It must be either a representation and warranty or a covenant. Those are the only contract concepts for which a party may sue for damages.



Drafting Contracts and

A Handbook on Contract Drafting By Tina L. Stark

Drafting Contracts is a new drafting textbook designed for use in an upper-level drafting course. In addition, many aspects of the textbook can be integrated into other courses -- for example, a first-year contracts course, a mergers and acquisitions course, or a transactional clinic. Integral to the textbook will be a CD-ROM and a detailed teacher’s manual. The CD-ROM will include PowerPoint slides that can be used while teaching and sample answers to the drafting exercises that can be distributed to students upon the completion of assignments.

Drafting Contracts emphasizes the nexus between the business deal and the contract, both in the material taught and in the exercises students work on. The course’s organization reflects its pedagogy. Chapter 1 provides the framework for the course. It introduces students to the building blocks of contracts: representations and warranties, covenants, and conditions precedent. It then shows students how and why a drafter chooses a specific contract concept. It does this by teaching the analytic skill of “translating the business deal into contract concepts.” By teaching this skill in the beginning of the course, students can layer knowledge of how to draft on top of a framework that has taught them what they are drafting. Chapter 17, Adding Value to the Deal, is the other chapter that deals specifically with the connection between the business deal and drafting. The other chapters of the textbook, while concentrating on other drafting issues, nonetheless remain sensitive to how the business deal affects drafting in subtle ways.

After teaching students the translation skill, Drafting Contracts then sets out the framework of an agreement and works through it from the preamble to the signature lines, in each instance discussing the business, legal, and drafting issues that occur in each part of a contract. Only after these chapters does the textbook turn to drafting rules for good writing and to techniques to enhance clarity and to avoid ambiguity. (I have found that students are better able to grasp this material when they understand what it is that they are drafting. For similar reasons, the Chapter on the drafting process comes at the end of the book. When students understand what the end product will be, they have an easier time understanding the rules on how to build it.)

The later chapters of Drafting Contracts address some of the more sophisticated ways that some of the basic drafting rules are applied.

* * * * * *


A Handbook on Contract Drafting is a treatise based upon Drafting Contracts. It will include much of the same material, as well as some content geared toward the sophisticated practitioner.


Table of Contents

Chapter 1 Translating the Business Deal into Contract Concepts

Chapter 2 Using the Building Blocks to Construct a Contract

Chapter 3 The Introductory Provisions: The Preamble, Recitals, and Statement of Consideration

Chapter 4 Definitions

Chapter 5 The Action Sections

Chapter 6 How to Draft the Building Blocks of a Contract

Chapter 7 General Provisions

Chapter 8 Signatures

Chapter 9 Good Writing and the Drafting of Contracts

Chapter 10 Clarity through Format

Chapter 11 Clarity through Sentence Structure

Chapter 12 Legalese

Chapter 13 Ambiguity and Vagueness

Chapter 14 A Potpourri of Other Drafting Considerations

Chapter 15 Adding Value to the Deal

Chapter 16 Drafting Numbers and Financial Provisions

Chapter 17 Organizing a Contract and its Provisions

Chapter 18 Effect of the Common Law and Statutes on Drafting

Chapter 19 The Drafting Process

Chapter 20 How to Review and Comment on a Contract

Chapter 21 Amendments, Consents, Waivers, and Side Letters

Chapter 22 Drafting and Ethics

Chapter 23 Additional Exercises


In the first class of the semester, I ask two students to engage in the mock negotiation of the purchase of a used car. I use it to teach the translation skill. The exercise engages the students right away and breaks the ice. For homework, they then draft the following car purchase agreement. It’s an easy way for them to begin drafting, and most of them are chomping at the bit to put pen to paper. I don’t grade this exercise as the students don’t yet know enough. In a subsequent graded assignment, they redraft their agreements and include additional business points.

Exercise 2-1 – Part 1

Draft a car purchase agreement using the following facts:

1. The parties are Indira Balram, the seller, and Lydia Rogers, the buyer.

2. The car is a red, 2002 Acura. 3. It has been driven 26,000 miles. 4. The purchase price is $11,000. 5. The car has been maintained in accordance with the owner’s

manual and is in good operating condition, normal wear and tear excepted.

6. The closing will take place on the last day of the next month. 7. Between the day of signing and the closing, the seller promises not

to paint the car and not to drive it more than 500 miles. The seller also promises to continue to maintain the car and to garage it.

8. The buyer only has to close if the covenants have been performed and the representations and warranties are true on the closing date, except to the extent the agreement contemplated that specific facts might change.

Exercise 2-1 – Part 2

Redraft the Car Purchase Agreement using these additional facts. For the purposes of this exercise, assume that the contract has not yet been executed. Stated otherwise, each of these provisions is part of the original contract and are not amendments to an agreement that is already in effect.

1. The Buyer has decided that it is appropriate to do a bit of due diligence and not to rely solely on the Seller’s representations and warranties. The Seller has agreed that the Buyer has the right not to close if a mechanic of

the Buyer’s choice determines that the car is not in the condition represented. (Think through the real world steps that will be necessary for the Buyer to accomplish the inspection. Remember that during the gap period between signing and closing the Seller has control of the car.) The Buyer has agreed to pay for the inspection.

2. The Seller is insisting on a downpayment of 10%, plus an additional 10% after completion of the mechanic’s inspection.

3. The car’s Vehicle Identification Number is 23456.

4. The Buyer has been looking for a job as an associate at a law firm and has received an offer from Hie Power & Stress LLP. She wants to be able to call off the closing if she does not receive the promised $5,000 sign-on bonus. In order to induce the Seller to accept this proposal, the Buyer agreed that if the Buyer did not close because she did not receive her sign-on bonus, the Seller could keep the downpayment. The Seller would also like some assurance in the contract that the Buyer has received an offer from a law firm.

5. The Seller has agreed to deliver the car, the keys, and any manuals to the Buyer’s home no later than the Closing Date.

6. Make sure to follow the cash and provide for all appropriate contingencies as to its payment – both if the transaction closes and if it does not close. If you believe the agreement is unclear who is entitled to the money under a particular circumstance, choose one of the possibilities and draft a cover memo explaining your choice.


The following is an excerpt from an exercise that we do in class after covering the materials in Chapters 1 and 2.

Exercise 2-2

For the purposes of this Exercise, assume that it is March 1, 20X6.

From: Senior Associate

To: Overworked Junior Associate

Date: March 1, 20X6

As you know, Corporate Partner went on vacation last week and left me in charge of one of his matters. As I will be conducting the negotiations, I need your assistance in churning out the documents. Please review the deal terms that follow and then annotate this memo, indicating how you would translate each deal term into contract concepts. Specifically, state which of the following contract concepts is the appropriate concept to express the business deal. Do not draft the provision.

• Representation and warranty

• Covenant

• Right

• Condition precedent

Condition precedent to an obligation (a covenant) Condition precedent to discretionary authority

• Discretionary authority

• Declaration

* * * * *

Administrator is currently executive vice president at Holistic Hospitals Corp. and is party to an Employment Agreement, dated as of April 1, 20X3, with Holistic that purportedly ends March 31, 20X6 (Holistic Employment Agreement). Healthy Hearts is very concerned about the Holistic Employment Agreement. According to Administrator, she is not permitted by the terms of that employment agreement to show it to Healthy Hearts. Healthy Hearts is concerned that it not tortiously interfere


with that contract. Administrator insists that she is free to enter into the employment agreement with Healthy Hearts and that doing so will not put her in breach or in default of the Holistic Employment Agreement. Please see if you can put in some provision that will give Healthy Hearts comfort on this point. Specifically:

(a) Healthy Hearts wants to show that it entered into its employment agreement with Administrator in the good faith belief that it was not causing a breach or a default.

(b) Healthy Hearts wants to be able to sue Administrator if the employment agreement with Healthy Hearts in fact causes a breach or a default under the Holistic Employment Agreement.



Tina L. Stark

Tina L. Stark has lectured on law and business issues at programs in the United States, Canada, England, and Italy. Currently, she is Adjunct Professor of Law at Fordham University School of Law where she teaches a course in drafting commercial agreements, a clinic that teaches transactional skills, and a seminar on business. Ms. Stark has been teaching at Fordham since 1993.

In addition to her teaching responsibilities at the law school, Ms. Stark is principal of Stark Legal Education, Inc., a New York City consulting firm that develops and conducts continuing legal education seminars. Ms. Stark’s teaching emphasizes the relationship between law and business, and draws upon her experience both as a corporate law partner at Chadbourne & Parke LLP and as a banker at Irving Trust Company.

While at Chadbourne, Ms. Stark had a broad-based transactional practice, including acquisitions, dispositions, recapitalizations, and financings. In addition, she developed and implemented the firm’s corporate training program.

Ms. Stark received her A.B., with honors, from Brown University and her J.D. from New York University School of Law, where she was a contributing editor to the Journal of International Law & Politics. After law school, Ms. Stark clerked for Judge Jacob D. Fuchsberg of the New York State Court of Appeals and was an associate with Barrett Smith Schapiro Simon & Armstrong.

Ms. Stark is the editor-in-chief and co-author of Negotiating and Drafting Contract Boilerplate, publisher, American Lawyer Media (2003). Her textbook, Drafting Contracts is to be published in 2006, and her drafting treatise, A Handbook on Drafting Contracts, is to be published in 2007.

Why Johnny Can’t Draft Technology Agreements by Professor Michael D. Scott

Southwestern Law School, Los Angeles During my 29 years of private practice I encountered many very good transactional attorneys who could draft sensible and meaningful agreements for their clients. They were truly facilitators, helping to make the transaction happen while insuring that their client’s interests were being protected. Unfortunately, I ran into many more attorneys who claimed to be “experts” in drafting and negotiating technology agreements, who were neither. Most had access to many “tried and true” forms (either from their firm’s precedent files, or from a book or web site), and could provide an agreement that looked reasonably good on the surface. But it didn’t take more than a few minutes of review to determine that the document did not reflect the deal points agreed upon by the parties. Some times these attorneys would be receptive to reasonable changes needed to make the language of the contract match the expectations of the parties. Other times, they were very defensive and resisted even changes that would help their client’s position. These attorneys were afraid to “lose face” in front of their client, and so would argue vociferously to retain language that was not right, and often didn’t make any sense in the deal. Many hours and many thousands of dollars in attorneys’ fees would often be expended to get the contract where it should have been in the first place. The parties were both upset that the deal was taking too long and costing too much to memorialize in writing. Often the attorney that pointed out the egregious errors would be the one blamed for the delays and cost increases. But, of course, it was the attorney who was ill-prepared to draft or negotiate the finer terms of the deal. Now that I am teaching law full time and have had a chance to examine not only what is being done at my law school, but to talk to professors at other schools and to peruse current course offerings at even the most prestigious law schools, one thing is clear – law students are not being adequately trained in what it takes to draft cogent, complete and usage contracts. Oh, they are being inculcated with the niceties of contract doctrines. But in real life how many times do you run into a technology contract that lacks consideration or violates the Statute of Frauds? The problem with most contract courses is that students never see real contracts. If they are lucky, a case they are reading will quote a paragraph or two from the contract in dispute to make a point. There are courses in law school that touch on some of the major issues facing attorneys in this field – IP courses often discuss issues relating to licenses, ownership and control; the course in sales discussed Article 2 of the U.C.C. and such important issues as warranties, disclaimers, limitations on liability and remedies, etc.; and an ADR course will often parse contractual provisions relating to arbitration or mediation. Seldom, however, are there courses that actually go through actual contracts, pull them apart and put them back together much improved. Certainly there are a number of general contract drafting courses that address some of the important issue in technology contracts. But there are none that I have been able to find that provides a comprehensive look at technology contracts and contracting at the level required to actually practice law in this area. And that is too bad, since it is sorely needed. Law firms today do not have the time or the resources to train somewhat how to draft a good contract. Is it any wonder that most ads for transactional attorneys want someone with 3-5 years of experience? It takes that long to become proficient in

negotiating and drafting the myriad of agreements required by technology companies, as well as those companies that purchase technology goods and services. While law schools can’t provide students with years of practical experience, through courses, externships, summer clerking programs, and post-graduation CLE programs, law schools could do a much better job in preparing students to be successful transactional attorneys.

Integrating Contract Drafting Skills and Doctrine Eric Goldman*

Abstract: This Essay is based on my remarks at the Teaching Writing and Teaching Doctrine: A Symbiotic Relationship? conference at Brooklyn Law School, February 2006. The Essay discusses the benefits and challenges of integrating the teaching of contract drafting skills and doctrine. The Essay then discusses some ways I have accomplished this integration.

Despite occasional celebrations of contracts as the epitome of freedom and autonomy, in

reality, contracts are heavily regulated. First, public policy prohibits some private exchange choices outright. Second, every private exchange is subject to default gap-filler provisions. Third, the parties may choose words that, due to inconsistent statutory or common law meaning, may not adequately express the parties’ desired agreement.

A contract drafter cannot accurately effectuate the parties’ intent without understanding this regulatory backdrop. Accordingly, contract drafting students must learn the doctrinal context applicable to their contracts.

But mastery of contract doctrine, alone, is insufficient for good contract drafting. Contract drafting also requires some technical skills that apply universally regardless of the contract’s substance.

In a perfect world, contract drafting students would learn both contract doctrine and technical drafting skills. However, classtime scarcity makes this ideal difficult to achieve in any one course. Simply put, teaching contract drafting is time-consuming. Teaching doctrine takes time because many contract types are subject to their own unique bodies of law and prevailing industry norms. Teaching drafting skills also takes time because each skill requires skill-specific exercises, and student mastery requires (time-consuming) repetition.

As educators, we cope with this time scarcity in one of two principal ways: (1) covering both contract doctrine and drafting skills in an integrated fashion (a tricky balancing act), or (2) segregating doctrine from skills-building.

While sometimes doctrine/skill segregation makes sense or is a practical necessity, integrating the pedagogy has significant benefits. Repeated exposure to doctrinal material through skills-building can provide unique insights into the rules’ policy justifications, legal contours and practical effects. In turn, when students have learned the applicable law, students engaged in skills-building exercises can better understand the importance of precise drafting and the consequences of poor drafting.

Therefore, as educators, we have a unique pedagogical opportunity to use drafting skills-building to reinforce doctrine. But how can we overcome the time scarcity in our courses? Let me offer three examples of ways that I have integrated drafting and skills training into my doctrinal courses. 1. Agreement Review

Sometimes I walk students through an actual agreement as a type of capstone review. After covering the substantive law, the agreement can illustrate how contract drafters respond to the underlying substantive law.

* Assistant Professor, Santa Clara University School of Law, and Director, High Technology Law Institute. Email: [email protected]. Website: http://www.ericgoldman.org. This Essay loosely tracks my remarks at the Teaching Writing and Teaching Doctrine: A Symbiotic Relationship? conference, Brooklyn Law School, February 2006.

mailto:[email protected]

http://www.ericgoldman.org/

For example, in Intellectual Property, at the end of the trade secret module I distribute a sample nondisclosure/“confidentiality” agreement.1 Nondisclosure agreements are ubiquitous in corporate and intellectual property settings, but many practitioners do not realize that these agreements are, at their core, trade secret licenses. To make this point, I walk students through each word of the agreement, pointing out how the drafting reflects the substantive trade secret law we just discussed.

In Software Licensing, I teach a module about the various exclusive rights of intellectual property owners:2

• A copyright owner has the exclusive right to “reproduce,” “distribute,” “prepare derivative works of,” “publicly perform,” “publicly display” and “digitally perform” a copyrighted work.3

• A patent owner has the exclusive right to “make,” “use,” “sell,” “offer for sale” and “import” a patented invention.4

• A trademark owner has the exclusive right to “use” the trademark in certain contexts.5 Then, I review the license grant section of an actual software license agreement to explain

how the language should reflect the statutory rights. I even include an agreement review exercise in Contracts. At the semester’s end, I distribute

a sample agreement6 and narrate it paragraph by paragraph. For example, we discuss the force majeure clause—a provision that lawyers typically gloss over mindlessly. However, because the students have just reviewed some force majeure cases,7 the force majeure clause suddenly has real-life meaning, and it becomes immediately clear how students can draft the contract to deal with unwanted default rules. 2. Drafting Lecture Modules

In some situations, I have brief drafting lectures to explain contract drafting issues. For example, online “privacy policies” are ubiquitous on the Internet and a mainstay of a cyberlawyer’s practice. In Cyberlaw, after we study online privacy law, I teach a brief module about “best practices” (both substantive and procedural) for drafting online privacy policies.8

In Copyrights, I typically spend a class covering some counterintuitive rules that dramatically affect contract drafting, such as a stringent statute of frauds9 and a non-waivable right to terminate ownership assignments or license grants 35-40 years after the transfer was made.10 Any lawyer drafting a copyright license or assignment needs to know these rules and to contemplate them in the contract. The drafting lecture module allows me to explain the practical consequences of these rules and make some practical suggestions.

1 http://www.ericgoldman.org/Courses/ipsurvey/formnda--mutual.htm. 2 http://www.ericgoldman.org/Courses/contracts/iplicensegrants.htm. 3 17 U.S.C. § 106. 4 35 U.S.C. § 271(a). 5 15 U.S.C. § 1125(a)(1). 6 http://www.ericgoldman.org/Courses/contracts/mktgservicesagmt.pdf. 7 E.g. Paradine v. Jayne, 82 Eng. Rep. 897 (King’s Bench 1647) (during English Civil War, an invading army ejected tenant from rented land); Taylor v. Caldwell, 122 Eng. Rep. 309 (Queen’s Bench 1863) (fire burns down event venue between contract formation and event date); Krell v. Henry, 2 K.B. 740 (Eng. C.A. 1903) (facility rental to watch coronation procession mooted when procession cancelled due to illness). 8 I affectionately call it “Grandma Goldstein’s 16-Step Recipe for Drafting Privacy Policies.” See http://eric_goldman.tripod.com/resources/privacyrecipe.htm. 9 The statute of frauds applies to ownership assignments and exclusive licenses. See 17 U.S.C. § 204(a). 10 17 U.S.C. § 203.

http://www.ericgoldman.org/Courses/ipsurvey/formnda--mutual.htm

http://www.ericgoldman.org/Courses/contracts/iplicensegrants.htm

http://www.ericgoldman.org/Courses/contracts/mktgservicesagmt.pdf

http://eric_goldman.tripod.com/resources/privacyrecipe.htm

3. Drafting Exercises Finally, I occasionally incorporate drafting assignments into doctrinal courses. There is no

substitute for “doing” drafting, but drafting exercises are time-consuming. Here’s how I try to balance the competing demands for time.

Contracts (for me) is a one-semester four-unit course, so it is undeniably time-squeezed. Nevertheless, I add a three-step contract drafting exercise11 without sacrificing doctrinal coverage.

The exercise involves a hypothetical sports endorsement contract. In Step 1, the students enumerate the major issues that the contract should address. The students do not actually draft contract terms; this is just an issue-spotting exercise. I ask students to issue-spot from both sides to highlight the importance (and limitations) of perspective.

In Step 2,12 each student adopts a side (licensor or licensee) and drafts a clause addressing the endorser’s objectionable conduct (sometimes called a “morals” clause). Students do not draft the entire contract; that would be too hard and time-consuming.

In Step 3,13 students negotiate a morals clause against each other. The negotiation provides a capstone experience because students realize the limits of their drafting in Step 2. In Step 2, most students use extremely client-favorable language, not considering if an opposing party would ever agree to such language. In Step 3, students learn firsthand what happens to such language when an opposing advocate pushes back.

The negotiation exercise gives students a valuable perspective on the entire course. In many cases we study, the litigated contract provision (or lack thereof) does not make sense, encouraging students (and me) to disparage the litigants for their drafting failures. After the exercise, students realize that previously unfathomable contract language may result from negotiated compromise.

To save classtime for doctrinal coverage, the entire process takes place outside of class. Students draft and negotiate on their own time. After each step, I hold an optional review session for students. (About half of the students come). In the review sessions, we discuss both process and substance. Typically, I pose some questions to the students14 and then lead a guided discussion. This discussion usually reveals that students use different techniques and approaches to deal with the exercises, allowing their peers to consider the efficacy of those alternatives.

Students get some feedback from these sessions as they benchmark their choices against their peers’. Students also get feedback from (1) my written comments on their drafts, (2) a sample answer I draft,15 and (3) a compilation of student submissions so that they can see what their peers actually produced. Usually, after seeing their peers’ work, students realize that they were not alone in finding the problem difficult.

In Software Licensing, I give students a statute governing the effects of bankruptcy on a software license (Section 365(n) of the Bankruptcy Code).16 Section 365(n) is very confusing

11 See http://www.ericgoldman.org/Courses/contracts/2005contractssyllabus.pdf, pages 5-6. 12 http://www.ericgoldman.org/Courses/contracts/draftingexercise2.pdf. 13 http://www.ericgoldman.org/Courses/contracts/draftingexercise3.pdf. 14 For examples of the questions I use to prompt the discussion, see http://www.ericgoldman.org/Courses/contracts/draftingexercise3debrief.pdf. 15 See http://www.ericgoldman.org/Courses/contracts/draftingexercise1writeup.pdf and http://www.ericgoldman.org/Courses/contracts/draftingexercise2writeup.pdf. 16 11 U.S.C. § 365(n).

http://www.ericgoldman.org/Courses/contracts/2005contractssyllabus.pdf

http://www.ericgoldman.org/Courses/contracts/draftingexercise2.pdf

http://www.ericgoldman.org/Courses/contracts/draftingexercise3.pdf

http://www.ericgoldman.org/Courses/contracts/draftingexercise3debrief.pdf

http://www.ericgoldman.org/Courses/contracts/draftingexercise1writeup.pdf

http://www.ericgoldman.org/Courses/contracts/draftingexercise2writeup.pdf

due, in part, to poor statutory drafting. I also give students a real-life contract where the parties make elections under 365(n).17

I ask the students to figure out what the parties wanted to accomplish. Then, I ask students to redraft the provision to accomplish this goal in fewer words. I offer a prize to the student with the shortest redraft.18 The prize (though trivial in value) encourages students to evaluate every word carefully and eliminate unnecessary words.

Last time, I got responses ranging from about 35 words to over 150. One student took the position that no contract clause was needed at all (thus, she submitted a clause with zero words). This offered a wonderful opportunity to explore how and when contracts can rely on default statutory provisions.

As usual, I commented on each student’s answer, wrote up my own answer, and shared all submissions so students could see their peers’ drafting. Because the drafting and feedback principally took place outside of class, the students explored a complex doctrinal area and had an integrated skills experience without consuming much classtime.

Conclusion As professors, we face scarce classtime—too much to teach, not enough time to cover it all.

This scarcity pressures us to sacrifice skills training in our doctrinal courses (and doctrinal material in our skills courses) despite the unique pedagogical opportunities that arise from integrated coverage. I hope I have offered some helpful ways to overcome this challenge.

17 http://www.ericgoldman.org/Courses/contracts/bankruptcydraftingexercise.pdf. 18 I love Slinkies. Therefore, I maintain a supply of cheap Slinkies to give away in these types of situations. The winner of the redraft effort chooses a Slinky from my stash.

http://www.ericgoldman.org/Courses/contracts/bankruptcydraftingexercise.pdf

Ethical Issues inContract Drafting

Eric GoldmanMarquette Univ./Santa Clara [email protected]://www.ericgoldman.orgMay 2006

Conflicts—Parent/Subsidiary

You represent Parent in drafting and negotiating an intercompany services/license agreement with 90% owned Sub. Sub doesn’t have its own counsel. What do you need to do?Are you concurrently representing Sub in this transaction?

If yesNeed Rule 1.7(a) (or Rule 1.9) waiversMay need Rule 1.8(f) waiver

If noMight send no-engagement letterCan’t claim to be disinterested (Rule 4.3)

Conflicts—Start-Up Entrepreneurs

Joe and Karen plan to start Newco together. They need help with:

Entity selectionEntity formationFinancing transaction with outside investorIP contributions to NewcoRestricted stock purchase agreementsBuy-sell agreementVoting agreement

What do you need to do?

Conflicts—Start-Up Entrepreneurs

Step 1: Determine your client, put engagement letter in place, and get any required waivers

J or K onlyK and J jointlyNewco onlyK, J and Newco jointly

Step 2: Confirm non-clients don’t think you are representing them

No legal work for non-clientsStep 3: Each client gets equal treatment

Conflicts—Acquisition

You represent Seller in acquisition. Buyer requires employment agreements (with non-competes) from Seller’s key employees. Can you advise the employees on the employment agreements?

Argument for: Buyer’s counsel represents “company’s” interestsArgument against: thicket of divided loyalties and confidential information may make conflict too fundamental

If you represent Seller and key employees concurrentlyNeed engagement letters with key employeesNeed Rule 1.7 waivers (and perhaps Rule 1.8(f) waivers)

If you don’t represent key employees, make sure employees understand that! (Rule 1.13(e))

Strongly advise employees to get their own attorneysDon’t want “confidential” information from employees

Tricky Drafting

Buyer and Seller handshake on key terms. Seller’s lawyer Rachel offers to prepare the first draft. In doing so, Rachel:

Makes most provisions wildly client-favorable to increase Buyer’s negotiation costsIncludes client-favorable provisions that are void hoping Buyer won’t know thatMakes broad R&Ws but buries catch-all exclusions in the exceptions schedule“Hides” important provisions in unexpected parts of the contractDeliberately chooses ambiguous language for some sections to minimize effect of client’s concessions

Tricky Drafting

Has Rachel done anything wrong from a legal standpoint?Rule 4.4(a): “In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person”Attorney can’t lie or sandbag (Rule 4.1 and others)May jeopardize contract enforceability

Construed against drafterUnconscionableStatutes prohibiting void clauses

Has Rachel done anything wrong from other perspectives?Could damage business relationship with BuyerCould damage relationship with clientCould damage her own professional reputation

Practice pointersNot every client wants tricky draftingClients need to “own” drafts before drafts delivered to other side

Backdating

Ex 1: Vendor’s salesperson wants to backdate contract to increase his commission under bonus planEx 2: Jen hired April 1. Jen’s option grant mistakenly omitted from April stock option grants submitted to board. Omission discovered June 15, and price has increased in interim.

Ex 2A: Can you, with board approval, replace the list of April grant approvals to add Jen?Ex 2B: Can you draft action by uniform consent dated April 1 andget board approval?

Ex 3: Acme and Smith reach oral agreement on March 30 with understanding that agreement will be reduced to writing. Written agreement prepared April 15. Can the written agreement be dated March 30?

Backdating

Rule 8.4(c): “It is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit or misrepresentation”Depending on facts, backdating can be fraudulent or even criminalMy vote: Only Option #3 is permissible, and only if the agreement was enforceable March 30

But probably no Q1 revenue recognitionLessons

Tell the truth, even if it hurtsAttorneys can “cross the line” from facilitators to principals

Redlines

Jessica prepares inaccurate redline but claims it is accurateRisks

Bad etiquetteLoss of drafting privilegesDegradation of parties’ trustPersonal reputation loss

Legal consequencesContract reformationRule 8.4(c)

Practice pointersQA redlines you sendBe careful trusting the other side’s redlines!

Metadata

Joe drafts acquisition agreement. Joe exchanges file with client Ted, and each edits the file using Word’s “track changes” tool. Joe “accepts all” and emails the file to opposing lawyer Karen. Karen easily uncovers Joe’s and Ted’s prior comments.Metadata = “data about data.” Examples:

Author name/affiliationRevision historyTimestamping of all activity

Metadata

Did Joe do anything wrong?Risk of Rule 1.6(a) violation

NYSBA Opinion #782 (Dec. 2004): “Lawyers must exercise reasonable care to prevent the disclosure of confidences and secrets contained in ‘metadata’ in documents they transmit electronically to opposing counsel or other third parties.”

Risk of malpracticeDisclosure of confidential informationLoss of attorney-client privilege

Guaranteed embarrassmentPractice pointers

Never use native Word redlining toolUse “paste special” instead of clone-‘n’-revisePDF (or TIFF) solves most metadata problems (but raises other issues)

Lesson: every procedural step in “manufacturing” contracts may have substantive significance

Metadata

Did Karen do anything wrong?Norm #1: All’s fair in love and warNorm #2: Hidden data is ill-gotten benefit

NYSBA Opinion #749 (Dec. 2001): “A lawyer may not make use of computer software applications to surreptitiously ‘get behind’ visible documents”Practice pointers

Intentional snooping could be problematicAccidental discovery might prompt professional courtesy (like misdirected fax)

Anti-Contact Rule

Opposing businessperson emails contract draft to you, your client and her lawyer. Can you “reply to all”?Current Rule 4.2: “In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.”

Anti-Contact Rule

Client schedules “4 way” conference call to negotiate contract. At appointed hour, everyone but opposing lawyer dials in. What should you do?Practice pointers

Get permissions from opposing counsel early in relationshipEducate client about Rule 4.2

Duty to Correct Opponent’s Mistake

Company does Series C financingC gets liquidation preference over A & B. Due to drafting error, some Series B investors get “tagalong”rights triggered by liquidation eventNet effect: Series C liquidation preference is diluted

Assume Series B investors’ counsel realized this mistake during negotiations. Does the lawyer have a duty (legal or ethical) topoint out the mistake?Argument against

DarwinismLawyer duty-bound to advance client interests

Arguments forCheaper to avoid mistakes than correct them, especially if correction is legally inevitable Not ethical to take advantage of obvious mistakes

Ethical Issues inContract Drafting

Eric GoldmanMarquette Univ./Santa Clara [email protected]://www.ericgoldman.orgMay 2006

CONTRACT DRAFTING BIBLIOGRAPHY

“HowTo” books on contract drafting: Kenneth A. Adams, A Manual of Style for Contract Drafting (ABA 2004). Scott J. Burnham, Drafting and Analyzing Contracts (3d ed., Matthew Bender & Co. 2003). Howard Darmstadter, Hereof, Thereof, and Everywhereof: A Contrarian Guide to Legal Drafting (ABA 2002). Reed Dickerson, Materials on Contract Drafting (West 1981). Charles M. Fox, Working with Contracts: What Law School Doesn’t Teach You (PLI 2002) Thomas R. Haggard, Contract Law from a Drafting Perspective – An Introduction to Contract Drafting for Law Students (West Group 2003) Thomas R. Haggard, Legal Drafting: In a Nutshell (2d ed., West Group 2003) Thomas R. Haggard, Legal Drafting: Process, Techniques, and Exercises (West Group 2003) George W. Kuney, The Elements of Contract Drafting: With Questions and Clauses for Consideration (West Group 2003) Tina L. Stark, ed., Negotiating and Drafting Contract Boilerplate (ALM Pub. 2003) Prospective publication: Tina L. Stark, Drafting Business Contracts (Aspen Pub. 2006) Writing Style Books: Bryan A. Garner, The Redbook: A Manual on Legal Style (West Group 2002) Bryan A. Garner, Legal Writing in Plain English (Univ. of Chicago Press 2001) Richard C. Wydick, Plain English for Lawyers (4th ed., Carolina Academic Press 1998) Prepared by: Susan J. Irion. Not intended to be comprehensive.

General Propositions*

Compiled by Susan Irion, based upon the text: *Not intended to be complete statement of law in any jurisdiction George W. Kuney, The Elements of Contract Drafting: With Questions and Clauses for Consideration (West Group 2003)

Representations Warranties Covenants

Conditions

What

Statement of presently existing facts

Promise that facts are as stated

Promise to act/not act in future

Something that must be satisfied before another legal obligation exists

When Effective

Date contract executed; may terminate at closing

Closing At time covenant to be performed

Only triggers duties or rights

Purpose

Induces entry to agreement Establishes facts Creates duties, including duty to fulfill warranty

Prevents legal consequence to a party if other party doesn’t meet condition

Typical Remedies

Damages as of signing (pre-closing)

Maybe tort remedy if fraud or misrepresentation (could include punitives)

Rescission pre-closing Restitution (of depost, etc.)

Damages as of closing or sale

Maybe tort remedy if fraud or misrepresentation

Rescission post-closing

Damages (usually compensatory), or specific performance, as of time covenant to be performed

None (must be coupled with duty) (Except that a constructive condition is a promise and condition)

Limitations May be qualified, e.g.: 1) materiality (often $

amount), or 2) knowledge of particular

person as of date certain

Same as representations May be qualified as to: 1) Best efforts 2) Commercially

reasonable efforts 3) Etc.

May, as stated, apply to: conduct of parties, or external events

Drafting Basics Use present tense Combine representations and warranties

Same as representations Use “shall” for duties and “may” for rights Use active voice Cover who, what, when, where, why, how

Conditions as to conduct: use “must” or “if” Conditions as to event: use “if,” “when,” or “after” Sellers may want objective conditions; Buyers may want subjective

General Propositions*

Compiled by Susan Irion, based upon the text: *Not intended to be complete statement of law in any jurisdiction George W. Kuney, The Elements of Contract Drafting: With Questions and Clauses for Consideration (West Group 2003)

pp3

Documents

business relationships

material law

importance of precision

contract negotiation

contract drafter

integrated contract

couldyour client

material adverse effect