Let’s have a look at a sample preamble:

This Licensing Agreement (this “Agreement”), dated March 17, 2013 (the “Effective Date”), is made between Tasty Ale House, LLC, an Ohio limited liability company (the “Licensor”), and Give Me Beer Co., an Idaho corporation (the “Licensee” and, collectively with the Licensor, the “Parties”).

Some things to note:

1) The preamble should be a sentence. The preamble should be a grammatically correct sentence, not a sentence fragment. (There’s a verb in there.) Alternatively, you could state all of the information in somewhat of a tabular format. For example:

Agreement: License Agreement
Effective Date: March 17, 2013
Licensor: Tasty Ale House, LLC, an Ohio limited liability company
Licensee: Give Me Beer Co., an Idaho corporation

I’ve seen that approach in UK contracts, but not in US contracts. But it seems like a sensible alternate approach.

2) Include jurisdiction and entity type. When identifying the parties, I include each party’s jurisdiction of organization and entity type. By doing so, I precisely identify an entity. There could, for example, be a New York limited liability company named “Tasty Ale House, LLC” or an Idaho limited liability company named “Give Me Beer Co.”

3) Use between. There’s authority out there that says that between will do the trick when describing who is party to a contract, even if you’ve got more than two parties to that contract. So I’ve given up on distinguishing between between and among. On a related point, if I’m dealing with more than two parties but only two “sides,” I use the on the one hand…on the other hand cadence to emphasize who’s on whose side for purposes of enforcing rights (although I admittedly also specify this in the operative provisions, as well). Thus:

…between Party A and Party B, on the one hand, and Party C, on the other hand.

That’s not a hard and fast rule. It starts to break down when you’ve got more than two “sides” (e.g., a multi-member operating agreement).

Whatever you do, do NOT use by and between or by and among. The by and is just rhetoric.

4) No need for an “as of” date. The parties can elect when a contract is to be effective between them. Using as of doesn’t make the contract more or less retroactive or prospective. If there is a genuine concern about the time difference between the date on which a contract is signed and the date on which that contract is to be effective, then address the issue head on in the operative provisions. And remember: the contract should reflect the true intent of the parties. If, for example, the parties are “papering” an oral contract between them, then the contract should not claim that the oral contract came into existence before it actually did in order to gain some advantage vis-a-vis a third party. Retroactive effectiveness is fine between the parties. But don’t expect the IRS to believe that a transfer pricing agreement signed tomorrow has been in place for three years.

5) Omit descriptive relationships between the parties. To keep the preamble lean, I tend to save descriptive relationships between the parties for the recitals. For example, in the phrase

…and SubCo., a Delaware corporation and a direct and wholly owned subsidiary of the Parent,..

I would omit: and a direct and wholly owned subsidiary of the Parent.

If the relationship is important, then I’ll include in the operative provisions of the contract a representation as to that relationship.

6) Define “Parties”. I usually define the term “Parties.” This is also not a hard and fast rule. But I have encountered enough contracts for which I need to use “party” (lowercase) in the contract to mean something other than a person that is party to the contract at issue. Also, in certain instances, I might have one or more persons as a party to a contract for limited purposes. In those instances, I find it helpful to include those persons within the definition of ”Parties” (e.g., in provisions to which all persons signing the contract are bound).

7) Define “Effective Date”. I find that this is a useful term to have defined in most contracts. At a minimum, I end up using the term on the signature page:

The Parties are signing this Agreement as of the Effective Date.

It’s not as long as (and also not as potentially ambiguous as) the date of this Agreement, the date hereof, and the date first written above.

So there you have it. Nothing earth-shattering. But some food for thought the next time you start drafting a contract.

I regularly draft and negotiate LOIs. Much like an all-you-can-eat Vegas buffet, they come with their fair share of benefits and traps. Here are some observations on non-binding and binding provisions in LOIs:

1) Be clear as to non-binding nature. In the U.S., as with other jurisdictions, if an LOI is to be non-binding, then the parties must be very clear about that. Otherwise, a court could construe the LOI as a binding contract between the parties if the material terms are spelled out in sufficient detail.

2) Some provisions are meant to be binding. There are often portions of an LOI that the parties want to be binding, such as provisions concerning confidentiality, exclusivity, and an obligation to pay a deposit that is subject to forfeiture. There is also often a provision of the LOI specifying which provisions of the LOI are binding and which are not.

3) Use will for non-binding concepts. To further distinguish between those provisions of an LOI that are to be non-binding statements of intent and those that are to be binding obligations, I use will to convey non-binding intentions and shall to convey obligations. As I mentioned in a prior post, I take this approach in contracts generally: will = futurity; shall = obligation. Reminder: never use shall for rhetorical emphasis, as in: This agreement shall constitute the complete agreement between the parties.

4) Duty to negotiate in good faith. Note that, if an LOI contains a binding obligation to negotiate in good faith toward the execution of definitive documents, then the non-binding terms of the LOI could have implications on that binding provision. For example, the terms of the non-binding provisions might have some “bite” in the context of a court trying to determine whether one party breached a binding obligation to negotiate in good faith. So, if there’s a binding obligation to negotiate in good faith in an LOI, don’t be too quick to run roughshod over the content and phrasing of the non-binding provisions (especially if a good faith deposit has been placed in escrow).

5) Binding boilerplate. Other binding aspects of an LOI often include your typical “boilerplate” provisions: choice of law, submission to jurisdiction and venue, rules on interpretation of the LOI, etc. These provisions become increasingly important as soon as there is one non-boilerplate provision in the LOI that is binding; at that point, your analysis with respect to the applicability of contract boilerplate (putting aside the “optics” of the LOI) should be no different than with respect to a contract containing only binding provisions.

6) Psychological impact of non-binding provisions. Finally, the non-binding terms of an LOI of course serve as a basis against which to negotiate the terms of definitive deal documents. A party faces a psychological uphill battle if that party seeks to introduce terms that conflict with non-binding provisions in an LOI. And this psychological impact should not be underestimated; in fact, it might as a practical matter be of greater importance than the enforceability of a provision in the LOI. I ventured into contract psychology in this post and suspect that there will be more to come in this area.

The moral of the story is that “non-binding” LOIs must be treated with care. Stay tuned for more on the topic.

A Guide to Contract Interpretation

The guide includes a brief introduction on our philosophy regarding contract interpretation, a flow chart that illustrates the typical contract-interpretation process, and an outline of excerpts from recent opinions rendered by New York and Delaware courts (which form the basis for the contract-interpretation principles that we set forth in the guide).

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

February 6, 2013, 12 p.m. EST – 1:30 p.m. EST
American Bar Association (Webinar)
Intermediate Concepts in Drafting Contracts

February 11, 2013, 6 p.m. EST – 9 p.m. EST
New York City Bar Association (NYC – Live at the NYC Bar Association)
Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

March 19, 2013, 9 a.m. EST – 12:15 p.m. EST
Practising Law Institute (NYC – Live at PLI)
Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider

June 10, 2013, 9 a.m. EST – 4:30 p.m. EST
New York State Bar Association (Long Island, NY – Live at the Melville Marriott)
Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

June 12, 2013, 6 p.m. EST – 9 p.m.  EST
New York City Bar Association (NYC – Live at the NYC Bar Association)
Intermediate Concepts in Drafting Contracts

June 14, 2013, 9 a.m. EST – 4:30 p.m. EST
New York State Bar Association (NYC – Live at the New Yorker Hotel)
Nuts & Bolts of Contract Drafting: Basic to Advanced Topics

To this end, I’ve been thinking a good deal over the last year or so about how litigators view contracts, which is often different from the way in which transactional attorneys view contracts. Transactional attorneys focus on the ex ante: what is necessary to get the deal done and to ensure that the parties understand what they are saying and what they must do under a contract. A litigator is called upon in the context of a dispute (or potential dispute) and almost reflexively searches for the boilerplate and interpretive provisions of a contract. As transactional attorneys, we’d do well to now and again put on (or discover…) our “litigator’s cap” when drafting contracts.

Herb’s a hybrid transactional attorney-litigator, so he offers a unique perspective on contract drafting, interpretation, and analysis. For example, consider some practical advice that transactional attorneys all too often don’t consider “before the fact”:

In the context of a dispute, a judge often has a very limited amount of time to assess whether arguments surrounding the interpretation of a contract provision are meritorious enough to warrant granting or denying summary judgment.

Given this reality, as Herb recommends, use plain English and consider breaking out key provisions—such as the various events and circumstances that constitute “Events of Default” under a contract—into separately itemized sub-paragraphs, rather than lumping them into a single (and long) paragraph. By doing this, you can clearly (and quickly) direct a judge to the “right result.”

Breaking sentences down into component parts is consistent with my style of drafting and my philosophy that drafting is like object-oriented computer programming. It makes a contract easier to read for both the parties to the contract and for the judge. But the implication is broader:

The formatting of a provision can influence the outcome of a dispute.

Read that sentence again. Putting aside certain statutory and case-law doctrine, from a purely intellectual standpoint, the formatting of unambiguous text in a contract between sophisticated parties represented by counsel shouldn’t matter. Whether I write text in bold or italics, in Times New Roman or in Century Gothic, or using a long paragraph or separately enumerated clauses (again, assuming no ambiguity): the substance of what’s being conveyed doesn’t vary.

Yet, as a matter of psychology, it might make all the difference in the world. And, in addition to influencing judges, it might also influence the parties’ actions before there is even a dispute. See, for example, my prior blog post Why NDA’s Matter and my query whether the key provision in non-disclosure agreements prohibiting the non-disclosure and non-use of confidential information should appear in bold font. This pre-dispute effect on behavior is perhaps a more-important consequence of formatting in contracts and one for which you won’t find statistics in case law.

Let’s take this reasoning a step further: if formatting and its psychological effects on the contract reader make a difference in the context of analyzing a contract after the fact, then formatting can be manipulated before the fact for good or for evil. For example, one party could “stuff” a one-sentence provision in contract boilerplate that could, as a substantive matter and unbeknownst to the other party, largely eviscerate the import of a 20-page article in that contract.

I must admit that all of this is very troubling to me from an intellectual standpoint. Yet, at the same time, it is very exciting. In fact, I’m establishing a new category of blog posts as a result: Contract Psychology. Stay tuned for more…

I should mention that none of these are earth-shattering changes to contracts. Many just cut down on “text real estate” and stuffiness. Still, by implementing these on a regular basis in your contracts, you’ll take several steps closer toward more-streamlined contract drafting.

Here goes:

1) I will not write WITNESSETH. Really? Is this needed at the top of a contract? If we did not witnesseth the contract, would it still be valid? I’ll take that gamble. All this word does is convey to your contract reader that, to a certain extent, you copied and pasted from another contract blindly, at least in some respects. By the way, this goes for those lofty variants W I T N E S S E T H (i.e., with one space between each letter) and W I T N E S S E T H. (I’ll allow an exception to this resolution if you put your Witnesseth in Ye Olde English font.)

2) I will not write WHEREAS in the recitals. This is another example of a relic of times past. No need for WHEREAS, let alone in ALL CAPS. A bullet point or letter (as an outline) will do. Using a letter is sometimes worthwhile if you need to “point” back to a particular recital. (For example: “Business” has the meaning set forth in recital B.).

3) I will not write NOW, THEREFORE in the lead-in. My general rule is that, since contract drafting is like a rulebook or computer code, there’s no need to explain in the operative provisions why the parties are doing what they are doing. I extend this general rule to the lead-in, though I’m not entirely adverse to the therefore concept in the lead-in. If you do want to include a therefore, just do away with the ALL CAPS NOW, THEREFORE variant and be brief. The Parties therefore hereby agree as follows: will do.

4) I will also shorten the lead-in generally. Here’s a typical long-winded lead-in:

NOW, THEREFORE, in consideration of the foregoing premises [huh?] and of the obligations, covenants, agreements, representations, and warranties herein, and for other good and valuable consideration, the receipt and sufficiency which the parties hereby acknowledge, the parties hereby agree as follows:

My fingers are now cramped from typing and I need to take a break…..

Ok, I’m back. There’s no need to recite all of that baloney unless you’re drafting by candlelight with a quill. The Parties hereby agree as follows: is fine. (As I note above, for now, I am ok if there’s a therefore included in the lead-in.)

5) To refer to an obligation, I will use the word obligation. This seems to me to be the most logical choice when referring to obligations. By doing this consistently you can do away with agreement (at least when referring to a discrete obligation, rather than a contract as a whole), the ever-biblical covenant, and the morbid undertaking. And don’t ever use shall be obligated to (which really means has/have a duty to be obligated to).

6) I will use shall to convey obligations (and prohibitions); I will not use shall otherwise. See my prior post, The Contract Drafter Shall Not Use Shall (Except to Convey Obligations), for my thoughts on this one.

7) I will not use for the avoidance of doubt. If you need to include these words, it means that there’s some doubt about the sentence that precedes them. Resist this urge and instead just remove the doubt in the prior sentence.

8) I will not use unless the context otherwise requires. This begs the question: when does the context otherwise require? This phrase is a time bomb in waiting because, if it needs to be invoked in a given instance, then there’s a decent likelihood of reasonable disagreement as to whether invoking it in that instance is proper. So avoid taking this drafting shortcut.

9) I will reference dates in an ordinary manner. Reference dates as you would customarily say them orally: January 14, 2013 rather than the 14th of January, 2013. (You could also follow the date reference with A.D. to avoid any possible interpretation that the contract is meant to be seriously retroactive.) The caveat on this is that it is somewhat of a US-centric rule. I often come across non-US contracts in which it is customary to express dates in the [day] of [month], [year] format.

10) I will remove the following miscellaneous provisions from my contracts:

a) The singular refers to the plural, and vice-versa. As a general rule, I do not like provisions that provide a safety net for bad drafting. With respect to this provision, I do not want singular and plural references to be read interchangeably. For example, suppose that there is more than one “Seller” in my contract and I have the following provision:

If a Seller breaches Section 3.2, then that Seller shall pay the Buyer $3,000,000.

I’m not sure how to read that sentence if the terms “Seller” and “Sellers” can be used interchangeably. Oh, I guess I could solve that quickly by using as the context requires and then call it a day and go have a beer. But it’s better to just say what you mean, and mean what you say.

b) Attachments are incorporated herein by reference. There’s no need to incorporate an attachment by reference. Simply referring to the attachment will suffice and, in fact, is more appropriate since you can pinpoint the purpose for which you are referring to that attachment. And chances are, you don’t want to incorporate the terms of an attachment by reference. For example, suppose that a license agreement is attached as Exhibit A to your merger agreement. You don’t want incorporate the grant of the license or any of the other terms of the license agreement into your merger agreement. Rather, you probably want to indicate something like: At the Closing, each of the Buyer and the Seller shall sign and deliver to each other a license agreement in the form attached as Exhibit A.

c) Any reference to a gender is a reference to the masculine, the feminine, and the neuter. This resolution is similar to resolution #10(a). Just get it correct. Refer to the proper pronoun. In fact, when I draft contracts, I try to do away with all pronouns. I do this because, often times, it is unclear to which noun a given pronoun “points” and personal style should be irrelevant.

There you have it. If anyone else out there in contract-drafting land has further tips, please send them along.

And stay tuned for more in 2013!

The registration fee is normally around $300. However, I know that, for many non-law-firm attorneys, CLE credit is hard to come by. So for those of you who are in-house attorneys, I am handing out—on a first-come first-serve basis—the 10 complimentary passes to the webinar that Strafford has generously given me.

If you’re an in-house attorney, here’s what you need to do to snag yourself a free pass: just be one of the first 10 in-house attorneys to email me (vmartorana@reedsmith.com) or to give me a call/voice message (212-549-0418) with a contract-drafting question that you have. Be sure to leave your name, email, and phone number and I’ll get back to you with my thoughts on your question (or perhaps I’ll address it in a follow-up blog post). I’ll also confirm whether you’ve got yourself a free CLE pass to the webinar and will provide instructions for listening in.

Enjoy!

When you wish upon an option…

Here’s one of my favorites (read: I can’t stand this):

If the Holder desires to exercise the Put Option, then the Holder shall notify the Grantor that the Holder is exercising the Put Option.

Ugh. So if I’m the Holder and I wake up one morning with the desire to exercise the Put Option, then BAM! Suddenly, I have an obligation to notify the Grantor of that desire and to exercise the Put Option. That’s not really what was intended, at least I hope not. But that’s what the text seemingly requires. As a more practical problem, suppose that the Holder informally conveys to the Grantor orally or in an email that the Holder would like to exercise the Put Option in the next month. Could the Grantor claim that the Holder is thereby obligated to do so, pointing to the utterance or email as evidence of the Holder’s “desire”?

So please don’t base your option trigger (or any conditional clause, for that matter) on the existence or absence of “wishing,” “desiring,” “wanting,” “sorta-feels-like,” or any other kind of wishy-washy feeling.

Thank you for letting me mail a letter!

Ah, here’s another classic method for drafting an option:

The Holder is permitted to give notice to the Grantor that the Holder is exercising the Put Option.

When I see this phrasing, I say to myself: “Thanks so much for affording me the privilege of mailing you a letter or calling you on the phone!” Last time I checked, this kind of communication is not prohibited (and I would bet that most contracts don’t prohibit it). This phrasing is symptomatic of a larger problem, namely, purporting to “allow” a party to do something that the party isn’t otherwise prohibited from doing. (More to come on that topic in future posts.) Rather, it is often merely a pretext for the sentence that usually follows:

If the Holder so notifies the Grantor, then the Grantor shall…

Avoid this temptation. Don’t try to grant an option by purporting to allow a party to give a notice exercising that option.

Go with an “If…, then…” formulation

The way that I tend to draft options is with an “if…, then…” formulation. If the Holder gives a notice in accordance with certain requirements, then the Grantor is obligated to take certain actions. This phrasing can make for a long conditional sentence, but, to my mind, it most accurately accomplishes what is intended. To help shorten things up, you can use some defined terms. For example:

If the Holder provides a Put Notice [defined, e.g., by reference to an attached form of notice] to the Holder prior to the Put Exercise Deadline, then the Grantor shall purchase the Holder’s shares in accordance with this Section 4.1.

Click here for my prior post on conditional clauses generally.

As an alternative to this approach, if there is a complicated set of mechanics surrounding the exercise or implementation of the option, I’ll sometimes need to go with this:

The Grantor hereby grants to the Holder an option (the “Put Option”) to require that the Grantor purchase the Holder’s shares in accordance with this Section 4.1. In order to validly exercise the Put Option, the Holder must…

This is a little more stilted, but better does the trick than the basing the option trigger upon a feeling or “allowing” the option holder to provide a notice.

And now, if you’ll permit me to do so, I desire to put an end to this post and move on to other contract-drafting matters…

Nonetheless, let’s have a closer look at the usefulness of NDAs.

Why NDAs might be seen as frivolous

There are a few reasons why the value of NDAs might be called into question.

1) Some folks just don’t do NDAs. There are a decent chunk of financial investors and VC investors that, as a policy matter, simply will not sign NDAs, at least with respect to the disclosure of preliminary information. If you’ve got the leverage in a deal, you can do that.

2) Often breached unintentionally. I have been involved in many-a-transaction in which I or someone on the deal raises his or her head and says, “Hey: is there an NDA in place that prevents us/them from disclosing that information?” More often than not, any such disclosure just ends up not bubbling up to the surface, is ignored by the disclosing party, or becomes moot upon the consummation of the transaction (at least in the context of M&A transactions).

3) No substitute for good judgment. Paula is spot on that an NDA is no substitute for good judgment. If you’re nervous about sharing information, under the protection of an NDA or otherwise, consider not doing so.

But here’s why NDAs matter…

All of that being said, NDAs—like all contracts—do matter. Here’s why:

1) The impact of disclosure restrictions on the disclosing party.The decision whether or not to enter into an NDA and to thereafter disclose information under the protection of that NDA might in fact depend upon the existence of another NDA by which the disclosing party is already bound. For example, it is not uncommon for an NDA to permit disclosure of confidential information so long as that disclosure is being made pursuant to a written contract containing non-disclosure and non-use provisions that are substantially as (or no less) stringent than those included in that NDA.

2) Enforceability. Also, the NDA might actually be enforceable! If the receiving party discloses or uses confidential information in contravention of the NDA, then the disclosing party might in fact be able to obtain an injunction to at least stop the leak at its source. Or the disclosing party might be able to obtain damages. But many will argue (often with merit) that the damage has already been done and any remedy under the NDA will be insufficient.

3) An NDA is better than your ability to enforce it in court. So what the disclosing party really wants to do is prevent the disclosure or use of confidential information in the first place. Does an NDA accomplish that (or at least increase the chances that a recipient will not disclose or use information) more effectively than a hearty handshake? I think that it does. This is because an NDA, like all contracts, has value beyond a party’s ability to enforce it in court. In my contract-drafting presentations, I claim that, in the context of your contract counterparty deciding whether or not to breach a provision of a contract, that contract is as good as:

• your counterparty’s perception that you will seek to and successfully enforce it in court; plus
• your counterparty’s assessment of any damage to its reputation should you seek to and successfully enforce it in court; plus
• any sense of moral obligation that your counterparty might have in performing its obligations under the contract.

Even in the big bad world of business, don’t discount this last point; there is no doubt a psychological component to entering into a written NDA. Studies have shown that people are more likely to adhere to beliefs and positions that they articulate in the written word than the spoken word (and certainly more so than if those beliefs or positions are kept sheltered in their minds).

In fact, in the next NDA that I draft, I’m thinking of emphasizing in bold font the sentence containing the core obligation:

The Receiving Party shall not directly or indirectly disclose and shall not directly or indirectly use any Confidential Information.

I would bet that, after coming face-to-face with the emphasized version of that sentence, the Receiving Party would at least have second thoughts about disclosing Confidential Information, even if it knew that the chances of it incurring damages or getting caught would be relatively low.

And so, with that being said:

If you’ve made it to the end of this post, shoot me an email (even a one-liner) with your thoughts!

That’s a broad question and one that requires some thought and explanation. (You didn’t expect me to provide a straightforward answer, did you?)

Specific Cases

Ambiguities in contracts of course can matter in any given instance, and they can matter a whole lot. For instance, have a read through United Rentals Inc. v Ram Holdings, Inc., in which ambiguities in a merger agreement resulted in a litigation in which the court held that Cerberus was entitled to walk away from the deal after paying a $100 reverse break-up fee, rather than consummate its merger with United Rentals.

Courts regularly address issues of contract interpretation on a more mundane scale. I receive a daily feed of such court opinions.

So quality contract drafting therefore matters at least in some instances, which is a very unsatisfactory answer to our question.

But How Often Does It Matter?

Ah, now this is the more relevant question for most practitioners like me who also trumpet the virtues of quality contract drafting. In theory, the words on the page always matter. Much like computer code, if the drafter uses the wrong choice of words to express a given concept in a contract, then that concept might not “compile” when it comes time to interpret the provision of the contract that articulates that concept.

However, unlike computer code, bad concept “compiling” doesn’t always cause the contract or applicable provision to “crash.” In fact, more often than not (80% of the time?), the parties to a contract and their respective counsel can “get by” with suboptimal language when expressing a given concept.

Contract Interpretation Issues: Empirical “Dark Matter”

This leads to another question: What does it mean to “get by” with suboptimal language in a contract? As I mentioned above, courts regularly address issues of contract interpretation. But I would guess that, like the known matter in our universe, these issues comprise the minority of contract-interpretation issues. After practicing for more than a decade, my experience tells me that there is far more contract interpretation “dark matter” out there, the magnitude of which is difficult to assess because it is hidden from the general public. These obscure, but potentially significant, contract-interpretation issues manifest themselves in a number of ways, such as:

• disputes addressed through arbitration or mediation;
• disputes addressed through renegotiation of contract terms;
• disputes that are resolved more informally (e.g., through phone calls and emails); and
• disputes that are avoided because a party to a contract feels that the costs of raising an issue with a provision in that contract outweigh the benefits.

So Does Quality Contract Drafting Matter?

Yes. Although the costs of shoddy contract drafting don’t always manifest themselves, they can—and with dire consequences. More generally, having a rigorous approach to contract drafting and a desire to constantly improve contract drafting will gradually reduce costs over time by reducing costs associated with uncertainty, contract compliance, and contract dispute resolution.