Contract Countdown: Top 10 things you should know
about emerging trends in Contract Drafting
9. Because there is little zero-based drafting, the first challenge is to start from
a winning position.
Drafting is a collaborative process in the sense that virtually all drafting begins with a document used in a prior transaction. Most firms develop a portfolio of “standard” forms for transactions that are similar in nature. Be careful that the form you use as your starting template is drafted from the same perspective as the current transaction. For example, if your firm represents the buyer in the current transaction, look for a form from a prior transaction in which your firm also represented the buyer.
Occasionally, you may be asked to draft a contract where no suitable model form exists. Zero-based drafting for novel transactions is more challenging because you must anticipate nuances and circumstances that may arise during the term of the transaction and craft language to provide for these legal issues. Even so, language can usually be borrowed from prior documents to simplify the drafting process. For example, in the early 1990’s, law firms were engaged to draft website development agreements for companies that were, at the time, early pioneers in what became a booming industry. Although no model forms existed at the time, drafters were able to borrow and adapt language regarding ownership of the intellectual property, confidentiality covenants, payment terms, and boilerplate from software development agreements to fit the current transaction. A decade or so later, these same drafters borrowed language from software licenses to create internet access services agreements.
Virtually every sentence in a contract can be drafted so it favors one party or the other. Most provisions can also be drafted more neutrally, so the right or obligation is reciprocal. The key is better stated in a negative manner: don’t start from a losing position! It’s surprising how often in actual practice a client’s “standard form” actually favors the other party. For example, purchase agreements for goods and services routinely exclude the warranty of fitness for particular purpose, yet this UCC warranty only comes into effect when the seller is aware of the buyer’s intended use, and the buyer relies on the seller’s recommendation to purchase it. Why would a buyer who has relied on the seller’s advice that the product is appropriate for buyer’s purposes automaticallyexclude this warranty?[4] Sometimes, the parties negotiate to exclude the warranty, but too often it is excluded simply because the drafter inserted familiar language from another form.
Sometimes, careful editing will reveal that an entire section is out of order. For example, a shareholders’ agreement ordinarily should not begin with a section called, “Removal of the CEO,” and a merger agreement should not begin with a reciprocal indemnification provision. Other times, a single sentence may be out of order, like when a stray entire agreement provision is included in the introductory paragraph of the contract. Eventually, thinking it has been omitted, someone in the drafting chain will add another entire agreement provision in the boilerplate section, resulting in contextual ambiguity as to which should control.
A term may be applicable to more than one topic within the document. For example, if a transaction provides for a termination fee, the drafter could logically include this information in both the compensation and payment section and the termination section of the document. Avoid drafting the same information into multiple sections to eliminate contextual ambiguity caused by internal inconsistency that can occur when one section is revised but not the other. Group all of the relevant information in the same section, and cross-reference as necessary to direct the reader where to find the information. Even so, strive to minimize cross-references within a document because cross-references can be distracting and confusing to readers.
7. A poorly drafted definition poisons every provision in which it is used.
“This Agreement is between International Business Machines Corporation, a Delaware corporation (“IBM”) and Meritage Partners, LLC, a Georgia
Defined terms help the parties resolve semantic ambiguity where a word or phrase could have more than one possible meaning. For example, does “IBM” refer to the parent holding company or a specific subsidiary for
Some definitions appear in the middle of a sentence, some definitions are set off as a separate sentence, and other times the drafter may elect to create an entire glossary. If the definition appears in the middle of a sentence, the first issue is where to place the parenthetical and what information should be included in it. Generally, the parenthetical should be placed immediately after the information that identifies the term:
E.g., The Internal Revenue Code of 1981 (the “Code”) is determinative.
Not: The Internal Revenue Code (the “Code”) of 1981 is determinative.
Not: The Internal Revenue Code of 1981 is determinative (the “Code.”)
If the definition is set off as a separate sentence or included in a glossary, use “means” if the definition is intended to be complete, or “includes,” if the definition is NOT intended to be complete. Do not use“means and includes,” because that infers that the meaning is both complete and incomplete, which causes ambiguity as to which interpretation was intended. Do not clutter definitions with useless extra words, like “shall mean,” “shall have the following meaning,” “has the following meaning,” or “shall mean and refer to.”
E.g., “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
Defined terms are handy tools in drafting, but all sorts of problems arise when they are not used correctly. Although drafting scholars recommend that defined terms should be used sparingly and carefully[5], drafters sometimes use them excessively and incorrectly. First of all, drafters can get so carried away defining things that they create definitions for terms that are not even used within the document! The opposite also occurs, and often, drafters use capitalized terms in a document as if they were defined terms, but no corresponding definition appears. Often, as a result of copying verbiage from other sources and poor editing, drafters inadvertently include definitions for the same word or phrase in multiple sections with conflicting, inconsistent meanings, resulting in contextual ambiguity. Many drafters "stuff" definitions with substantive provisions that should be included in the text of the document. Drafters often compile a glossary of defined terms, but the glossary does not include all of the defined terms used in the document. Careful editing will eliminate most of these problems.
Some authorities recommend that if a word is used in only one section, the word should be defined in that section. This may work well in theory, or in shorter contracts that have only a handful of defined terms, but usually spells disaster in more sophisticated documents with many defined terms. Because drafting is a collaborative process, often using language cut and pasted from various sources, an extraordinarily high percentage of contracts contain words defined multiple times with different meanings, resulting in contextual ambiguity as to which definition controls.[6] For this reason, if a document is long enough to warrant a glossary, ALL defined terms should be defined there.
Defined terms should match their intuitive meanings. Using defined terms to have counter-intuitive meanings may create a trap for the reader and the drafter as well, because our minds automatically infer reasonable meanings and reject absurdness, even when fully and explicitly informed.
6. Overlapping language in related documents should be avoided if possible and identical if not.
Sometimes, several different documents are all part of the same transaction. For example, if a client hires a new employee and grants a stock option, the parties may enter into an employment agreement, a stock option agreement, and a shareholders' agreement. To the greatest extent possible, avoid drafting the same subject matter into multiple documents. If the subject matter is addressed in more than one document, it is crucial that the overlapping provisions match identically. If the overlapping provisions are not identical, the inconsistencies create contextual ambiguity that a highly-trained professional will be happy to exploit.
5. Using active voice helps eliminate ambiguity.
The English language has two “voices” – active and passive. “Voice” describes whether the subject of the sentence is acting or being acted upon. In active voice, the subject of the sentence is doing something; in passive voice, the subject of the sentence is having something done to it. Sentences written in passive voice usually are formed using “is,” “was,”or another form of the helping verb “to be” along with a main verb that ends in–ed. Lawyers have grown quite fond of using passive voice because it seems somehow more polite. Passive voice does not point a finger, it merely says something has been done or will have to be done in the future. For example, “Mistakes were made,” or“Payment will be made to Vendor.” However, using passive voice improperly can cause several problems in legal documents; the first is that passive voice adds unnecessary words (a.k.a. “clutter”) to sentences. The most serious problem is that use of truncated passive voice may cause ambiguity if the document fails to specify which party is required to act.
4. “Shall” is used incorrectly most of the time.
"Shall" is chronically misused in legal drafting to mean many different things interchangeably, often within the same paragraph, by even the most experienced lawyers. The word is used just as often in an attempt to create or negate rights, create or negate privileges, and to create conditions as it is used to create duties. New drafters should beware that the word“shall” is misused in template documents far more often than it is used correctly, and it is incumbent upon enlightened drafters to correct misuses by understanding that the language used to create duties, rights, privileges, and conditions, or to negate them, should logically be different.
Even in otherwise well-written documents, it is not uncommon to find the word "shall" used as often as 20 times per page of text, with a rate of misuse as high as 90%. If the word "shall" is used when "may" is meant, the word could be construed to mean "may" when a duty is intended. In almost any legal document, the word "shall" can be found:
· to impose a duty on the subject of the sentence;
· to impose a duty on an unnamed party, such as "notice shall be given," or "Defective products shall be examined";
· to mean "may," as in "shall be entitled to assign";
· to mean a conditional duty, as in "changes to the proposed specifications shall be submitted." (no duty exists in this example unless changes are submitted);
· to be used as a modal verb, such as "notice shall have been given when..."; and
· to express an entitlement, as in "Licensor shall be reimbursed for expenses.”
Note that defective products do not have a duty to be examined, and notice does not have a duty to be given. Only a party to a transaction can have a duty under the written document.
What a proviso means in a contract is unclear; hence, the inherent ambiguity in using them. Drafters use provisos to accomplish many different things, so courts are forced to interpret them on a case by case basis. Because provisos in contracts have been interpreted so many different ways, a drafter cannot be sure that a court would interpret a proviso as the drafter intended, or even that opposing counsel interprets it in the same way. Provisos have been held to create:
· a condition: The prevailing judicial view seems to be that a proviso is generally used in a
contract to introduce a clause that states a condition.[11]If a “safe” use of provisos existed, this
would be it.[12]
· a duty: Some courts have held that a proviso always implies a condition unless subsequent words change it to be a covenant.[13]
· a limitation: Provisos in contracts are sometimes interpreted to limit the scope of the preceding phrase or sentence.[14]
· an exception: Provisos are sometimes interpreted to carve an exception to the scope of the preceding phrase or sentence.[15]
· an additional requirement: Provisos are sometimes interpreted to add new requirements to the scope of the preceding phrase or sentence.[16]
Another problem with provisos is that they sometimes appear in tandem as counsel for each party seeks to alter the scope of the original provision. These inserts would best be stated as separate sentences.
2. “And/or” is an “abomination.”
Of all the imprecise words used in drafting, drafting scholars and judges rail most viciously against the use of “and/or,” yet use of it seems to be proliferating in current practice! The six English appellate judges who first construed “and/or” came up with six different interpretations.[18] Since both “and” and “or” can be ambiguous, combining them into one term multiplies the problem exponentially. Either the drafters who use it are unaware of the wrath it engenders among scholars and judges, or they don’t care! Beware! The careless drafter’s foible with respect to “and/or” is the ambitious litigator’s delight. Judges repeatedly express extreme displeasure over the use of “and/or”:
· “We are confronted with the task of first construing “and/or,” that befuddling, nameless thing, that Janus-faced verbal monstrosity, neither word nor phrase, the child of a brain of someone too lazy or too dull to express his precise meaning, or too dull to know what he did mean, now commonly used by lawyers in drafting legal documents, through carelessness or ignorance or as a cunning device to conceal rather than express meaning with view to furthering the interests of their clients.[19]”
· “(t)he abominable invention, “and/or”, is as devoid of meaning as it is incapable of classification by the rules of grammar and syntax”[20]
· “(t)hat linguistic abomination….”[21]
· “In the matter of the use of the alternative, conjunctive phrase ‘and/or,’ …we take our position with that distinguished company of lawyers who have condemned its use. It is one of those inexcusable barbarisms which was sired by indolence and damned by indifference, and has no more place in legal terminology than the vernacular of Uncle Remus has in Holy Writ.”[22]
· “…[we] deplore the use in contracts and statutes of that hybrid, contradictory combination, frequently as bewildering, mystifying, and perplexing as Poe’s raven – or was it fiend? On the ‘night’s Plutonian shore.’”[23]
· “I confess I do not know what is meant by the use of the phrase ‘and/or.’ There is no reason why a statute, contract or legal document of any kind cannot be stated in plain English. The use of the symbol‘and/or’ has been condemned by some courts and should be condemned by every court.”[24]
1. Shorter is better.
When the client you are representing is highly sophisticated, it may be possible to use longer sentences without sacrificing comprehension. Even so, beware that the audience of a legal document is often much broader than the client itself, and may include parties who are adversarial to your client’s interests. Also, beware of the collaborative nature of drafting, and the fact that the document you draft for one transaction will likely be used again under different circumstances.
[1] Including, for example: Columbia , Yale, University of Texas , Vanderbilt University , University of Florida , University of Virginia , Northwestern University , Washington & Lee University , and University of Houston University of Georgia
[3] The report was based on a study of 16 U.S. and Canadian law schools, including Notre Dame, NYU, Vanderbilt, and University of Texas
[4] A buyer client may have made the decision that it would rather give up its UCC warranty rights in every purchase than to have to negotiate the provision on a case by case, but this should be based on an intentional decision of someone having appropriate authority, not on happenstance or ignorance.
[5] Most lawyers are surprised to learn that legal drafting scholars recommend that defined terms should be used sparingly, if at all. BRYAN A. GARNER, GARNER ON LANGUAGE (2009), at 185-186.
[6] I conservatively estimate that at least 80% of the contracts I reviewed during my practice, spanning over two decades, contained words defined multiple times with multiple different meanings. Reed Dickerson also mused that drafters are prone to this error, and the problem has gotten worse with the advent of personal computing. Although I agree with Mr. Adams (infra, note 9) that the legal profession can learn certain new tricks, this issue is more complicated. While the analysis of whether “shall” is used correctly, for example, is based on its usage in a single sentence, the question of whether a defined term has been used consistently involves analysis of the entire document. I am convinced, given the collaborative nature of the drafting process where lawyers for both parties participate in crafting the language, the only foolproof method to avoid inadvertent duplication in a lengthy document is to group ALL defined terms in a single section. When the defined terms appear alphabetically, side by side, duplication becomes obvious.
[7] THOMAS R. HAGGARD, LEGAL DRAFTING IN A NUTSHELL, 411 (2d 2003). Note that the addition of Professor Kuney as a co-author seems to have brought a calming influence on Professor Haggard, because the assertion that the ONLY proper use of the word “shall” is in statutory drafting has been relaxed a bit in the third edition. Compare: THOMAS R. HAGGARD AND GEORGE W. KUNEY, LEGAL DRAFTING IN A NUTSHELL, 385 (3d 2007).
[8] I disagree with this approach, simply because it seems to me that in modern times, “will” is used colloquially to signal a plan rather than an obligation. My observation is that the average person who says “I will” do something in casual conversation does not actually feel obligated to do it. “I will” expressed in casual conversation is generally understood and accepted to be subject to change if circumstances change. I believe stronger language is needed to elevate a plan to an obligation, so I prefer to use “shall,” precisely because it is not used often in every day conversation, and the difference in language conveys a stronger responsibility.
[9] GARNER, GARNER ON LANGUAGE at 179. BUT SEE KENNETH A. ADAMS, A Manual of Style for Contract Drafting (2004), at 24. Having successfully taught the correct use of the word “shall” to law students, I agree with Mr. Adams that the situation is not so bleak as to force the conclusion that the legal profession as a whole cannot also master the concept. I also agree with Mr. Adams that it is unlikely the American bar would adopt “must” as a viable alternative to “shall” without extreme coercion from the bench. While Mr. Garner prefers the ABC rule, the basic tenet of the ABC rule seems to be that the bar cannot be trusted to use the word “shall” correctly. SEE GARNER, GARNER ON LANGUAGE, at 176. Although I admire and appreciate Mr. Garner’s zealous efforts to improve the writing skills of the entire American bar, it seems somewhat inconsistent to devote one’s career to the pursuit of teaching excellence in legal writing, while at the same time deeming the pursuit to be futile! I hope we can prove ourselves worthy of his efforts.
[10] Ga. Banking Co. v. Smith, 128 U.S. Id.
[11] Black’s Law Dictionary defines a “condition” as a “future and uncertain event on which the existence or extent of an obligation or liability depends.” In other words, a condition is something that must happen before a duty arises.
[12] See, e.g., Western Publishing Co., Inc. v. Mindgames, Inc. 995 F. Supp 949, 954-955 (E.D. Wis. 1998); aff’d, 218 F. 3d 652 (7th Cir. 2000): “Although Paragraph 2 of the licensing agreement could have been better drafted, it is unambiguous. It states that the licensing agreement will automatically continue until January 31, 1994, if two conditions are met… Paragraph 2 thus set up requirements that have a recognized name in contract law: conditions precedent.” “This language also creates a condition. It imposes no duty on the licensee to pay a renewal fee.” Does this mean that provisos are not ambiguous? No, because the decision was based solely upon the facts and circumstances of this case.
[13]See, e.g., Marsh v. Marsh, 949 S.W. 2d 734, 744 (Tex. App. 1997): “While no particular words are necessary to create a condition, such terms as "if," "provided that," "on condition that," or some other phrase that conditions performance, usually connote an intent for a condition rather than a promise. In the absence of such a limiting clause, whether a contractual provision is a condition, rather than a promise, must be gathered from the contract as a whole and from the intent of the parties. Because of their harshness in operation, conditions are not favorites of the law, and courts are inclined to construe the provisions in a contract as covenants rather than as conditions.”
[14]See e.g., In Re Explorer Pipeline, 781 A. 2d 705, 719 (Delaware, 2001): “A proviso, as introduced here by the word "provided," acts as a limitation on the language that describes the scope of the provision and is read in reference to the specific scope of the language defining the provision's application.”
[15] Note that Charles Fox breaks ranks with most other drafting scholars who condemn EVERY use of provisos by stating that the only acceptable use of a proviso is to carve an exception that trumps the concept that immediately preceded it. CHARLES M. FOX, WORKING WITH CONTRACTS: WHAT LAW SCHOOL
[16] See e.g., Obsen v. Grosshans, 71 N.W. 2d 90, 97 (Neb.
[17] GARNER ON LANGUAGE AND WRITING at 180-181; ADAMS at 129-130; Thomas Haggard, The Ambiguous And and Or, 8 SCRIBES J. LEGAL WRITING 169-171 (2001-2002); Editorial,“And/Or,” 18 A.B.A. Journal 456 (1932); Dwight D. McCarty, That Hybrid "and/or," 39 Mich.
[18] In the first and second recorded cases interpreting “and/or,” Cuthbert v. Cumming, 156 Eng. Rep. 668 (Ex. D. 1855), aff’d, 156 Engl. Rep. 889 (Ex. Ch. 1855), and Stanton v. Richardson, 45 L.J.O.B. (H.L. 1875), six English judges interpreted “and/or” in the phrase “full and complete cargo of sugar, molasses and/or other lawful produce” a total of six different ways: 1) A and B and C, or A and B, or C only; 2) A and B and C, or A and B; 3) just A and B; 4) A or B or C; 5) A, or A and B, or A and C, and 6) any combination of A or B or C. SEE: Kermit L. Dunahoo, Note, Avoiding Inadvertent Syntactic Ambiguity in Legal Draftsmanship, 20 Drake L. Rev., 137, 150 (1970).
[19] Employers’ Mut. Liability. Ins. Co v. Tollefsen, 263 N.W. 376, 377 (Wis.
[20] American General. Ins. Co. v. Webster, 118 S.W. 2d 1082, 1084 (Tex. Civ. App 1938).
[21] Commercial Standard Ins. Co. v. Davis
[22] Cochrane v. Florida East Coast Ry. Co., 107 Fla.
[23] Davison v. Woolworth Company, 186 Ga.
[24] Adler v. Douglas, 339 Mo. 187, 189, 95 S.W. 2d 1179, 1180 (1936). The best case scenario for judicial review of “and/or” seems to be the position taken by the Louisiana Supreme Court: “In other words such an expression in a contract amounts to a direction to those charged with construing the contract to give it such interpretation as will best accord with the equity of the situation, and for that purpose to use either “and” or “or” and be held down to neither.” State v. Dudley, 159 La. Adler Court
[25] Note that ADAMS (at p. 201) recommends an average of 20 to 25 words. Adams ’recommendation would be warranted according to the Flesch Test of Reading Ease.
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