Share |

Article for CLE Credit: Effective Contract Drafting

Embedded Scribd iPaper - Requires Javascript and Flash Player
ONE HOUR CLE CREDIT
EFFECTIVE CONTRACT DRAFTING: IDENTIFYING THE BUILDING BLOCKS OF CONTRACTS
BY PROF. LORI D. JOHNSON, ESQ.
Many lawyers, particularly those who do not practice transactional law on daily basis, become anxious when a client approaches them with a request to draft a contract. The skills required to mold a client’s handshake deal into a well-drafted, enforceable contract are often overlooked in legal education. The oversight can leave practitioners feeling out of their elements. However, by using a few basic building blocks and appropriate drafting techniques, any lawyer can successfully draft a basic contract. What are the Building Blocks of a Contract?
Covenants
A well-drafted contract uses a variety of legal structures to create duties and obligations between parties. These core duties and obligations have been identified as the “substantive” or “business” provisions of the contract.1 The legal structures that create these duties and obligations become the building blocks of the contract; they fall into several basic categories, including: 1. 2. 3. 4. Covenants; Conditions; Representations; and Warranties.
Covenants constitute the most important provisions of any contract. Covenants provide the means by which parties obligate themselves and others to undertake certain performances. At their core, covenants consist of a promise to act (or not to act) in a certain way in the future. The party receiving a promise of performance becomes the holder of a “right” to that particular performance.2 The party holding the right has the ability to bring an action for a breach of the covenant founded upon the opposing party’s failure to perform as required. Therefore, covenants provide the primary means by which the lawyer creates the duties the parties to a contract wish to enforce. As such, it becomes particularly important to carefully and effectively draft these provisions. While drafters may be tempted to use words such as “must” or “will” to indicate duties, the most effective way to create an obligation is to use the word “shall.”3 Despite the popular movement toward reducing the use of “legalese” in legal writing, in the context of contract drafting, “shall” remains the most effective language choice to express the concept that a party “has a duty to” undertake a certain performance.4 An example of a well-drafted covenant to perform would require that the “tenant shall pay rent on the first Thursday of every month.” Covenants can be drafted in both the positive and negative, and are typically reciprocal. For example, one party is often obligated to pay, while the other is obligated to perform. It is important not to overlook the obligations of the party making payment and to clearly provide reciprocal covenants. Additionally, covenants need not be confined to one particular section of the contract. Rather, they are often scattered throughout the contract and organized by subject matter (i.e., payment obligations, performance obligations, indemnities, etc.).
Often, new lawyers are exposed only to the results of the ineffective drafting of this type of provision, leaving them unsure how to effectively build a contract from the ground up. A clear understanding of how each of these building blocks functions within a contract is critical to successful drafting.
Conditions
Frequently, the business deal negotiated by the parties will provide for conditional obligations. Specifically, the client will request that she only be obligated to perform an obligation if a
24 Nevada Lawyer October 2013
certain set of circumstances exists. For example, a client may not wish to be obligated to close on a real estate transaction until an inspection has been performed and approved. The most effective way to provide for such conditional obligations is to draft them using an “if/then” structure.5 The use of the term “must” in drafting a condition can assist in clearly distinguishing a conditional obligation from a covenant.6 In contrast to a conditional obligation, covenants must be performed regardless of the existence of any particular circumstances. An example of an effectively drafted condition might provide that “If the property passes inspection, then the buyer must provide a deposit within 10 business days.” The drafter should remember that the condition and the related obligation go hand in hand. Although they may be included in separate sections of the contract, “every condition must include an obligation.”7 Drafters may also consider using a condition to provide parties with flexibility. For example, a contract could provide that, upon the occurrence of a certain set of circumstances, a party “may” (rather than must) undertake some action. This structure provides the parties with discretion when appropriate.
Tips for Effective Drafting
In addition to the appropriate use of contract building blocks, drafting style issues impact the effectiveness of a contract. Specifically, avoiding the use of passive voice can enhance clarity and precision in a contract. Particularly with regard to covenants, an active sentence structure helps clearly identify the party obligated to perform. For example, rather than a covenant providing “rent is to be paid on the first of every month,” a more effectively drafted covenant would read “tenant shall pay rent to the landlord on the first of every month.” In this more active sentence structure, the obligated party is clearly identified, and comes first in the provision, providing emphasis. Similarly, representations and warranties should clearly identify the party providing the information being relied upon. The use of a “plain English” style can also assist in enhancing a contract’s clarity.10 The use of active voice is one aspect of a “plain English” style. The avoidance of arcane phrases, use of short sentences and appropriate tabulation of complex or lengthy provisions are other key elements to consider. As clients are most frequently non-lawyers, lawyers should strive to draft “provisions that are clear and conspicuous to non-lawyers.”11 Doing so helps eliminate ambiguity and improves the effectiveness of each building block included in the contract.
Conclusion
Representations and Warranties
Representations and warranties provide parties to a contract the ability to verify information related to the transaction. Representations are drafted as assertions of fact as of a certain date, typically the date of the signing of the contract. For example, a representation might provide that “the property is not subject to any liens.” The party receiving the representation must justifiably rely on the information.8 The recipient party must have no knowledge that the information is false at the time the representation is made. Representations may cover a broad range of topics concerning the subject matter of the contract, but should not include any future-looking assertions. The drafting of a warranty mirrors that of a representation. Therefore, drafters typically provide that parties both “represent and warrant” the relevant information. The difference between these two building blocks is that a warranty is an assertion of truth, regardless of the knowledge of the party receiving the warranty. Thus, a breach of warranty claim is typically easier to prove than a claim for misrepresentation, as the recipient party’s knowledge of the warranty’s truth or falsity need not be proven.9 With regard to drafting representations and warranties, a lawyer should always consider their client’s role. If the client is providing the representations and warranties, the lawyer should consider limiting the information provided to the client’s actual knowledge. This protects the client from the risk of unknown or latent problems. If the client is the recipient of the representations and warranties, the lawyer should consider drafting them as broadly as possible, without qualification.
While many more pages could be written about the process of converting a client’s handshake deal into an enforceable contract, a successful transactional lawyer must clearly understand and utilize the fundamental building blocks of a contract. Any attorney can begin to draft effective transactional documents by applying these basic tips, along with appropriate organization, legal research and careful consideration of the client’s needs and concerns.
CLE QUIZ ON PAGE 26
1 Thomas R. Haggard & George W. Kuney, Legal Drafting in a Nutshell 51 (3d ed. 2007); Tina L. Stark, Drafting Contracts: How and Why Lawyers Do What They Do 41 (2007). 2 Stark, supra note 1, at 23. 3 Kenneth A. Adams, A Manual of Style for Contract Drafting, 22-25 (2004). 4 Id. 5 Stark, supra note 1, at 26. 6 Id. at 134. 7 Id. at 26. 8 Id. at 12. 9 Id. at 13. 10 George W. Kuney, The Elements of Contract Drafting 16 (2d ed. 2006). 11 Id.
PROFESSOR LORI D. JOHNSON teaches in the Lawyering Process Program at UNLV’s William S. Boyd School of Law, focusing on legal writing, research, skills and transactional drafting. Prior to joining the faculty at Boyd, Johnson practiced at Snell & Wilmer L.L.P., and Winston & Strawn, LLP, specializing in the areas of real estate, commercial finance and financial litigation. She earned her B.A. from Notre Dame and her law degree from Northwestern University School of Law.
October 2013
Nevada Lawyer
25

Published under a Creative Commons License By attribution, non-commercial
AttachmentSize
NevLawyer_Oct_2013_Effective_Contract_Drafting.pdf393.05 KB