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Contract Drafting Essentials: Structuring,
Analyzing and Interpreting Business Agreements
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, JANUARY 4, 2018
Presenting a live 90-minute webinar with interactive Q&A
Brooke Ashton, Shareholder, Fetzer Simonsen Booth Jenkins, Salt Lake City
Mark Cohen, J.D., LL.M., Boulder, Colo.
Nicholas Karambelas, Founding Partner, Sfikas & Karambelas, Washington, D.C.
The audio portion of the conference may be accessed via the telephone or by using your computer's
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DRAFTING AND INTERPRETING CONTRACTS
The District of Columbia Bar
Continuing Legal Education Program
July 27, 2017
Copyright © 2017 Nicholas G. Karambelas. All Rights Reserved.
Presented By:
Nicholas G. Karambelas, Esq.Sfikas & Karambelas, LLP
1101 Pennsylvania Avenue, N.W. Suite 300Washington, D.C. 20004
Tel. (202) 756-1043FAX (240) 465-0400
E-Mail [email protected] Website: www.ngklaw.com
FACULTY
Nicholas G. Karambelas is a founding partner of Sfikas & Karambelas, LLP
and practices in Washington, D.C., Baltimore, Maryland, New York City, NY with
correspondent offices in Athens, Greece and Nicosia, Cyprus. He practices in the areas
of business entity organization, international law and business transactions, e-
commerce, securities, and franchising. He has written numerous articles on business
organization, transactional law and international law. He has authored a three-volume
treatise entitled “Limited Liability Companies: Law, Practice and Forms”, which has
been updated twice year since 1994, published by Thomson Reuters West Company
(next.westlaw.com: database:llclpf). He is writing electronic treatises on contract
drafting/interpretation, statutory interpretation and the law of international business
transactions.
Mr. Karambelas holds a B.A. from Union College, a J. D. from Fordham
University School of Law and a Master of International Affairs (M.I.A.) from Columbia
University School of Public and International Affairs. Mr. Karambelas is a member of
the Board of Directors of the American Hellenic Institute and the American Hellenic
Institute Foundation. He chairs the American Hellenic Lawyers’ Society of Greater
Washington, D.C. He is Vice Chairperson of the Board of Trustees of the American
Community Schools of Athens, Inc. (Greece).
Mr. Karambelas participated in the drafting of the revised business organization
laws of the District of Columbia. He is admitted to practice law in New York, the District
of Columbia, Maryland, the federal courts and the Supreme Court of United States. He
was elected as Secretary of the D.C. Bar and served for 2004-2005. He served on the
Publications Committee and served as Co-Chair of the Continuing Legal Education
(CLE) Committee of the D.C. Bar. He is a CLE lecturer and teaches numerous areas of
law including company law, international business transactions and commercial law to
other attorneys. Mr. Karambelas was named Attorney of the Year for 2015 by the
Hellenic Lawyers Association of New York City.
NOTE ON THE MATERIALS
1. The materials are designed only to be a reference guide to supplement thepresentation by the faculty. The materials are not an exhaustive treatment of this areaof law.
2. The materials are meant to assist attorneys to comply with the CLE mandatesof those jurisdictions which require that CLE courses must distribute printed materials.
3. The materials are not nor are they meant to be a law review article, advocacybrief, memorandum of law, opinion or research tool of any kind.
4. The cases and statutes cited in these materials are meant only to illustrate howcertain legal issues are treated by the courts. The cases and statutes are not necessarilythe most recent nor the most authoritative statement of any proposition of law.
5. Neither the District of Columbia Bar nor the faculty necessarily endorses theanalyses, authority or conclusions of any case, law review article, opinion piece ortreatise excerpts which are cited in the materials.
6. Any forms or form language in these materials are meant only to describeissues which should be considered in drafting a legal instrument. They are not meant tobe “boilerplate” or to be “cut and pasted” into a legal instrument.
TABLE OF CONTENTS
TAB 1
PURPOSE OF CONTRACT DRAFTING AND CONTRACT READING
1-1. The Written Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1-2. The Ideals of Contract Drafting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1-3. Role of the Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TAB 2
BRIEF REVIEW OF CONTRACT LAW FUNDAMENTALS
2-1. Definition of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2-2. Intent to Contract - Mutual Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2-3. Offer - Acceptance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2-4. Consideration - Promissory Estoppel - Aleatory Contracts . . . . . . . . . . . . . . . . . . . . . 4
2-5. Conditions and Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2-6. Expiration - Termination - Termination of Contracts Prior to Full Performance. . . 6
2-7. Definite Term - Indefinite Term - Perpetual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2-8. Implied Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2-9. The Statute of Frauds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TAB 3
CONTRACT ORGANIZING PRINCIPLES
3-1. Know the Subject Matter of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3-2. Organization of the Written Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. Identify Parties and Capacities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
B. “Bargained-For” Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
C. Contract Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
D. Language of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
E. Signing the Contract and Electronic Signatures . . . . . . . . . . . . . . . . . . . . . . . . 18
3-3. Agreements to Agree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
A. Letters of Expression of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. Letters of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
C. Term Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
D. Memorandum of Understanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
E. Confidentiality Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3-4. Contracts under Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3-5. Notarial Instruments - Civil Law Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3-6. Civil Law Notary in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3-7. Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
A. Neutral Case Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
B. Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
C. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
D. ADR in Retainer Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
TAB 4
PRINCIPLES OF INTERPRETING CONTRACTS
4-1. The Plain Meaning Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A. Words Given Their Ordinary Meaning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
B. Words Given Particular Meaning in Custom, Trade Usage or Course of Dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
C. Ambiguity Exception to Plain Meaning Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
D. Criticism of the Plain Meaning Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
E. The Parol Evidence Rule Distinguished from Plain Meaning Rule . . . . . . . . . 29
4-2. Language Construed Against Drafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4-3. Accord Meaning to All Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4-4. Conflicting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4-5. The Doctrine of the Last Antecedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4-6. Scrivener’s Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4-7. Relational Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
TAB 5
CONTRACT DRAFTING TECHNIQUES
5-1. Clear Writing Begins With Clear Thinking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5-2. Use of “Must”, “Shall” “May” and “Will” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5-3. Use of Active Language Rather Than Passive Language. . . . . . . . . . . . . . . . . . . . . . . 36
5-4. Use of Present Tense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5-5. Use of “And” and “Or”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5-6. Use of “Any”, “Each” and “No” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5-7. Use of Number of Days Rather Than Months or Years. . . . . . . . . . . . . . . . . . . . . . . . 37
5-8. Use of “Unless”and “As Long As” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5-9. Use of “Reasonableness” Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5-10. Use of Legal Terms of Art. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5-11. Use of the Particular and the General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
A. List of Particulars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
B. General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
C. Including But Not Limited To . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5-12. Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5-13. No “Whereas” Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5-14. Nunc Pro Tunc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5-15. No Antiquated Legalisms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5-16. Use of “Consistent with” and “Pursuant to” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5-17. Use of “Notwithstanding” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5-18. Use of “That” or “Which” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5-19. No Run On Sections or Paragraphs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5-20. Plain Language. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5-21. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5-22. Unilateral Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5-23. Use of Extend or Renew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5-24. Use of Expiration and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5-25. Use of Persistent Default Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
TAB 6ELECTRONIC CONTRACTS
6-1. Definition of an Electronic Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6-2. Determining the Time of Acceptance - “Mail Box” Rule . . . . . . . . . . . . . . . . . . . . . . 49
6-3. Terms of the Electronic Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6-4. Forming an Electronic Contract by Automated Means on a Website . . . . . . . . . . . 50
A. BrowseWrap Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
B. ClickWrap Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
C. ScrollWrap Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
D. Sign-in Wrap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
E. Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6-5. Signing the Electronic Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6-6. Duty to Read - Presumption of Knowing Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6-7. Emails as Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
6-8. Emails as Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
TAB 7
CONTRACTS SUBJECT TO SPECIFIC STATUTES
7-1. Uniform Commercial Code Article 2 - Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . 55
7-2. U.N. Convention on the International Sale of Goods (CISG). . . . . . . . . . . . . . . . . . . 55
7-3. UNIDROIT Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
7-4. Sales and Leases of Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
7-5. Business Entity Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
7-6. Uniform Computer Information Transactions Act (UCITA) . . . . . . . . . . . . . . . . . . . 60
7-7. Franchise Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
7-8. Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
TAB 8
ETHICAL CONSIDERATIONS IN NEGOTIATION AND DRAFTING
8.1 Rules of Professional Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
8-2. Dealing with an Unrepresented Party (Rule 4.3.) . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
8-3. Rendering Services to Two or More Parties (Rules 1.7, 2.2) . . . . . . . . . . . . . . . . . . . 67
8-4. Effect of Bad Advice During Pre-Retainer Discussion. . . . . . . . . . . . . . . . . . . . . . . . 67
8-5. Attorneys and Emails/Texts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
A. Transmit Privileged Information Only in Attachments . . . . . . . . . . . . . . . . . . 68
B. Firm Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
C. Separate Emails . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
D. Reply All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
E. Multiple Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
F. Subject Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
G. Unreceipted Emails. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
H. Preservation of Emails. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
I. Emails as Continuing a Legal Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
J. Attorney Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
8-6. ABA Formal Opinion 477 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
TAB 9
SMART CONTRACTS
9-1. Smart Contracts in Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
A. Smart Contracts in Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
B. Smart Contract Concept as a Traditional Concept. . . . . . . . . . . . . . . . . . . . . . . 74
9-2. The Smart Contract Must Still Be Drafted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
1
TAB 1
PURPOSE OF CONTRACT DRAFTING AND CONTRACT READING
1-1. The Written Contract
A written contract is essentially “legislation” that governs the legal relationship
between the parties to the contract. The parties are in effect “legislators” of that legal
relationship. The objective of legislative drafting is to state in writing a law that
embodies the intent and policy objective of the legislators. Similarly, the objective of
contract drafting and contract reading is to state in writing the rights and obligations
(i.e. the legal relationship) that the parties have voluntarily agreed to accept and impose
on themselves and each other. Some commentators have determined that there is a
conceptual difference between a contract and an agreement. These terms will be used
interchangeably in these materials.
As commerce is being conducted increasingly through electronic means, the
concept of the written contract has evolved. A written contract no longer means just a
piece of paper with words applied to it either manually or by print. A written contract is
also an electronic contract in which images of words appear on an electronic screen
through digital means or in an electronic database. Consequently, a contract which is in
electronic form is increasingly called a “record”.
Like other types of legal writing, contract drafting is a learned skill. This skill has
principles and techniques by which the skill is applied to real world situations. These
principles and techniques evolve as commerce and technology evolve. However, the
fundamentals underlying these principles and techniques remain constant. Whether the
written contract is on paper, displayed in digital images or are impulses in the human
2
brain, the principles and techniques of drafting contracts apply to each conceivable form
of the written contract.
1-2. The Ideals of Contract Drafting
The drafter of a contract aspires to convert into written language and articulate in
a written contract:
A. The rights and obligations of the parties,
B. Provisions for events or contingencies that are not expected to but mayoccur,
C. Provisions that avoid any undesired default provisions of any applicablelaw,
D. Remedies and means of enforcing or avoiding the rights and obligations.
1-3. Role of the Attorney
Contract drafting and contract reading require the attorney to perform the
functions of counselor, advocate, planner and negotiator. The attorney must be a
counselor by advising the client as to the law governing the subject matter of the
contract, be an advocate to predict whether and the extent to which the contract will be
enforced or avoided in the courts, be a planner to assist the client in arranging its
business or affairs in an efficient and legally proper manner and a negotiator to set forth
the legal positions of the client and conclude a legal relationship that satisfies the
objectives of the client.
3
TAB 2
BRIEF REVIEW OF CONTRACT LAW FUNDAMENTALS
2-1. Definition of a Contract
A contract is a statement of rights and obligations which are cognizable as a
matter of law and that can be enforced in a court of law. The rights and obligations are
a series of promises to act or refrain from acting usually during a specified or definable
time. Except for contracts covered by the Statute of Frauds, contracts can be either oral
or written. Contracts that are contrary to public policy are unenforceable as a matter of
law.
2-2. Intent to Contract - Mutual Assent
The law assumes that a contract is the result of a voluntary act by each party. For
a contract to be formed and enforceable, the parties must intend to contract. The intent
of the parties to contract is objectively manifested by mutual assent. This means that
the parties have reached a “meeting of the minds” and can articulate the terms and
conditions of the agreement with reasonable certainty.
2-3. Offer - Acceptance
An “offer” is a proposal to enter into a contract which is communicated to another
person in a manner that is calculated to elicit an “acceptance” leading to a legally
binding contract. An acceptance occurs when the person to whom the offer is
communicated acts in a manner which manifests acceptance of the offer.
2-4. Consideration - Promissory Estoppel - Aleatory Contracts
Generally, for a contract to be legally binding, it must be either supported by
consideration or a party to the contract must have relied to its detriment on the promise
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of the other party. The consideration doctrine is designed to enforce promises for which
there has been a “bargained for” exchange between the parties. Consideration exists
when the promisee incurs legal detriment, i.e. forego an item of value or circumscribe
one’s freedom induced by the promise of the promisor.
The doctrine of promissory estoppel enforces promises for which there has been
no “bargained for” exchange but which have induced the promisee to rely on the promise
to its legal or economic detriment.
The aleatory contract is a contract in which each party promises to perform, act
and receive value in exchange except that the exchange depends on an event the
occurrence of which is uncertain such as contracts for insurance.
2-5. Conditions and Covenants
In most contracts, obligations to perform will be conditioned on the occurrence of
an event. A condition precedent is any event other than the lapse of time that must
occur before performance is due. A condition subsequent (also referred to as an event in
discharge) is an event, the occurrence of which causes the obligation to perform to be
discharged. An express condition is a condition upon which the parties have
affirmatively agreed. An express condition can also be implied in fact from the conduct
of the parties. A constructive condition is a condition to which the parties have not
agreed but which the courts imply to assure fundamental fairness.
The courts do not favor conditions in contracts especially when the occurrence or
non-occurrence of a condition leads to a forfeiture. Wherever possible, courts will
construe a condition as a promise which creates an obligation. If the parties intend that
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a condition be imposed, the words used to create the condition must clearly be the
language of condition.
2-6. Expiration - Termination - Termination of Contracts Prior to Full
Performance
A contract expires when each party has performed its obligations under the
contract or an event occurs which is specified in the contract as an event which causes
the contract to expire. The most common such event is the lapse of a specified period of
time.
A contract terminates if, prior to the expiration of the contract, an anticipatory
breach or an actual breach occurs. An anticipatory breach occurs when a party
manifests an intent not to perform before performance is due. An actual breach occurs
when a party fails to perform when performance is due.
A contract can also be terminated by rescission. Mutual rescission occurs when
the parties agree to cancel or annul the contract and return any consideration. Unilateral
rescission occurs where one party was subjected to fraud or duress and seeks to be put
itself in the position it was in before the contract was concluded.
2-7. Definite Term - Indefinite Term - Perpetual
A contract can be for a definite term which means that neither party has any
further rights against or obligations to one another after an event designated by the
parties has occurred. The most common event is the lapse of time.
A contract can be for an indefinite term which means that the parties have not
designated an event that ends the legal relationship created by the contract. Either party
may, in its sole discretion and at any time, cause the legal relationship created by the
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contract to cease. The most common method is for one party to send a notice of
termination to the other party.
A perpetual contract has no designated event that ends the legal relationship.
Neither party has either the right or power to cause the contractual relationship to end.
Perpetual contracts are disfavored as against public policy in many jurisdictions.
2-8. Implied Covenants
All contracts contain an implied duty of good faith and fair dealing. Neither party
shall act in any way which would have the effect of destroying or injuring the right of the
other party to receive the benefits of the contract. If a party to the contract evades the
spirit of the contract, willfully renders imperfect performance, or interferes with
performance by the other party, that party may be liable for breach of the implied
covenant of good faith and fair dealing.
2-9. The Statute of Frauds
The Statute of Frauds was enacted by the English Parliament in 1677 to prevent
fraud or perjury. The Statute required that certain contracts be in writing to be
enforceable in court. It entered U.S. law during the colonial period and remained in U.S.
law after independence. Great Britain repealed the Statute of Frauds in 1954. Most
states including the area jurisdictions maintain a form of the Statute of Frauds.
Generally, a contract must be in writing and signed at least by the party to be charged if it
is:
A. A contract of an executor to perform the obligation of a decedent,
B. A contract to perform or be liable for the obligation of another person,
C. A contract in which the consideration is marriage,
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D. A contract for the sale of an interest in real property,
E. A contract that is not or cannot be performed within one year from the dateon which the contract is concluded,
F. Under the Uniform Commercial Code (UCC), a contract for the sale ofgoods for a price of $500.00 or more, and
G. Under the Uniform Computer Information Transactions Act (UCITA), acontract for the transfer of computer information requires a payment of$5,000 or more or, if the contract is a license or access contract, the agreedterm of use is for 1 year or less or the party against whom the contract isasserted can terminate the contract at will.
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TAB 3
CONTRACT DRAFTING PRINCIPLES
3-1. Know the Subject Matter of the Contract
The threshold skill in contract drafting is knowing the subject matter of the
contract. Before even drafting a word of a contract, the attorney must be satisfied that he
or she has at least a working knowledge of the subject matter of the contract. Most often,
such working knowledge can be obtained through discussions with the client. The clients
may not always see the value of “educating” their attorneys as to the subject matter of the
contract. However, it is quite difficult to write an effective contract and work out
solutions to contingencies unless the attorney is familiar with the subject matter.
3-2. Organization of the Written Contract
A. Identify Parties and Capacities
The contract must reflect on its face the identity of the parties and the capacity in
which they undertake the obligations under the contract. This is simple where the parties
are individuals. It is more complicated when the parties are business entities or
government agencies.
1. Business Entity
A business entity is formed under state law and is able to exercise rights and incur
liabilities. The inquiries are:
a. Is the business entity contracting in its own name so that it canexercise rights and incur obligations?
b. Is the business entity a parent or a subsidiary or affiliate of anotherbusiness entity?
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c. If the business entity is a subsidiary or affiliate, is it authorized tobind the parent to the contract?
d. Does the business entity have sufficient capacity to perform underthe contract or should individuals guarantee the performance of thebusiness entity?
2. Government Agency or Instrumentality
A government agency or instrumentality is formed to perform a government
function and under the authority of enabling legislation. The inquiries are:
a. Does the enabling legislation authorize the agency or instrumentalityto conclude contracts in its own name?
b. Does the legislation authorize the agency or instrumentality to sue orbe sued in its own name?
c. Does the legislation enable the agency or instrumentality to act on itsown authority?
B. “Bargained-For” Exchange
The “bargain-for” exchange is the heart of the contract. The “bargained for”
exchange contains the rights, obligations, terms and conditions that parties negotiate to
be set forth in the contract. No law mandates which items must be set forth in the
“bargained for” exchange. However, the content or scope of these items can be restricted
or defined by an applicable law or regulation. Even if there is no applicable law or
regulation, each such item must be articulated clearly and in as much detail as possible.
Other than contracts involving an interest in real property and business entity
agreements, the four basic categories of contracts are contracts for goods, contracts for
services, contracts for digital or electronic resources, and contracts of employment.
Although the categories can overlap, the items in the “bargained for” exchange for each
such category differ.
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1. Contracts for Goods
a. Description of the goods
b. Time and place for delivery, passage of title
c. Price, payment terms, method of payment and currency
d. Quantity and quality
e. Inspection rights
f. Rejection rights
g. Allocation of risk of loss
h. Non-statutory warranties
I. Renewal - Extension - Indefinite
j. Events in default and curing events in default
k. Consequences of failing to cure an event in default
l. Remedies, limitation on liability, liquidated damage
m. Holds harmless and indemnification
n. Guaranty of Performance - Payment
o. Termination - Expiration
p. Opt-in /Opt-out of uniform laws such as UCC, CISG
2. Contracts for Services
a. Description of services to be rendered - Identification of
persons
b. Fees and method of calculation, expenses
c. Time and place for performance
d. Standards of performance, professional licenses/credentials
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e. Renewal - Extension - Indefinite
f. Events in default and curing events in default
g. Consequences of failing to cure an event in default
h. Remedies, limitation on liability, liquidated damage
I. Holds harmless and indemnification
j. Guaranty of Performance - Payment
k. Confidentiality and non-disclosure
l. Non-solicitation covenants
m. Disposition of intellectual property
n. IRS - FLSA independent contractor principles
3. Contracts for Digital or Electronic Resources
a. Form of computer information, i.e. software, download
b. Method of transmission
c. Price, payment terms, method of payment and currency
d. License or transfer of title - Source Codes
e. Restrictions on use
f. Residual rights
g. Term
h. Opt-in /Opt-out of UCITA for Maryland and Virginia
I. Termination - Expiration
4. Contracts of Employment
a. Description of duties, title
b. Salary/wages, withholdings
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c. Time and method of payment
d. At-will or term
e. FLSA exempt or non-exempt; new rules effective December 1,
2016
f. Non-salary/wage benefits
g. Confidentiality and non-disclosure
h. Non compete/non solicitation covenants - social media
I. Disposition of intellectual property created by employee
j. Disposition of employer materials, access tools
k. Termination for cause or without cause
l. Telecommuting
C. Contract Governance
The contract governance provisions set forth the basic “legal ground rules” by
which the legal relationship created by the contract is to be conducted. The purpose of
these provisions is to either restate common law contract principles or avoid the legal
effect of common law contract principles. The following is a list of selected governance
provisions that should be considered for every contract but it is by no means exhaustive.
There are numerous permutations to the principles contained in each provision. If the
attorney chooses not to include one or more of the following governance provisions, the
attorney should be able to articulate a reason for not including it.
1. Independent Contractors. The A is strictly an independent contractor retainedby B.
A. The A is not, in any way, an employee, partner, joint venturer or anagent of B.
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B. The A has no power or authority bind B in any legal obligation to anyperson.
C. The A must take all reasonable measures to inform third parties thatB is not directly or indirectly liable for any act or omission by A.
2. Strict Compliance. No failure by B to exercise any right or to insist upon strict
compliance by A waives the right of B to demand exact compliance. Any waiver by B of
any particular default, is not a waiver of any other present or subsequent default by B.
3. Severability and Independent Covenants. If any provision or part of any
provision is invalid, illegal or incapable of being enforced, by reason of any rule of law,
administrative order, judicial decision or public policy, each other provision is and
remains in full force and effect. No covenant, obligation or provision is dependent upon
any other covenant, obligation or provision unless so expressed in this Agreement.
4. Governing Law. This Agreement is governed exclusively by the laws of the
District of Columbia not including the conflicts of laws principles of the District of
Columbia.
5. Full Agreement. The provisions of this Agreement constitute the full and
complete agreement between the Parties.
A. No other verbal or written agreement, in any way, varies or altersany provision of this Agreement unless each Party consents to varyor alter any provision of this Agreement in a signed writing.
B. Each Party waives the application of any exception to the Statute ofFrauds enacted by the District of Columbia which does or mayrender an oral modification effective and binding on the Parties.
6. Integration. This Agreement is intended to be an integrated writing. Any prior
oral or written agreements between the Parties are merged into this Agreement and
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extinguished. No custom, industry standard or course of dealing between the Parties in
any way varies or alters the terms and conditions of this Agreement.
7. Jointly Drafted. The parties acknowledge that both parties drafted each
provision of this Agreement.
8. Waiver of Equitable Remedies. The A waives each equitable remedy including
equitable rescission and rescission at law.
9. Arbitration. Any controversy or claim arising from incident or related in any
way to this Agreement or the breach of this Agreement shall be submitted to and resolved
by the American Arbitration Association (AAA) in accordance with its Commercial
Arbitration Rules and at its office located in the District of Columbia. The resolution of
the AAA is binding on the parties. Either party may enter any judgment or award
rendered by the AAA in any court of competent jurisdiction.
A. Each party is subject to the personal jurisdiction of the courtslocated in the District of Columbia and waives any right it has or mayhave to assert lack of personal jurisdiction in any legal proceeding.
B. Each party bears any cost imposed on that party by the AAA. Theparties share equally any cost imposed on both parties by the AAA. The arbitrator shall not order nor have the power to order a party topay or reimburse the other party for any cost including attorneys’fees incurred in under this Paragraph.
C. The arbitrator shall not award nor be empowered to award punitiveor exemplary damages.
D. The arbitrator shall not nor have the power to grant any form ofinjunctive relief.
E. The arbitrator shall award interest on a money damage award. Interest shall be calculated at _____% or the rate imposed onjudgments by the courts of or in ___________________. Interest shall begin to accrue on the date on which the breach orinjury occurred and continue to accrue on a compounded/non-
15
compounded basis until the date on which the prevailing Partyactually receives the dollar amount of the award plus accruedinterest.
10. Further Assurances. If B requests, A must sign and deliver such other
documents and take such other action which we consider necessary to cause the terms
and conditions of this Agreement to take full effect.
11. Limitation on Actions. The period within which either Party may assert a
cause of action is 365 consecutive calendar days after the date on which the fact(s)
underlying the cause of action occurred or should have been discovered. This limitation
is a limitation of repose.
12. Limitation on Damages. Neither Party shall under any circumstances be
obligated to pay to the other Party any amount that exceeds the total dollar amount of
$______________________ (or a formula such as “fees due and owing to
_________ as of the date of any award or judgment rendered by any arbitrator or court
against ________as the result of any demand or cause of action asserted by the other
Party.
13. Nature of Obligations. Each obligation of each Party benefits only the other
Party. No other person may rely on or enforce any obligation of either Party or obtain
redress for any breach of any such obligation either directly, indirectly or by subrogation.
14. Notices. Any notice due under this Agreement is received when it is delivered.
Each notice shall be delivered by email by a server which enables the Parties to verify
delivery.
15. Calculation of Time. Each time period is measured as consecutive calendar
periods.
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16. No Assignment or Delegation. Neither Party shall assign any right under this
Agreement nor delegate any duty under this Agreement unless the other Party has
consented to any such assignment or delegation in a signed writing. Any purported
assignment or delegation that violates this Paragraph is void ab initio.
17. Incorporation by Reference. Each Exhibit to this Agreement is incorporated
into and made part of this Agreement.
18. Bankruptcy. If, at any time, [a Party] seeks the protection of the U.S.
Bankruptcy Act of 1978, as amended, or any applicable state bankruptcy law and:
A. Has a receiver in equity appointed for its property requests orconsents to the appointment of a receiver, or
B. Has a trustee in reorganization appointed for its property, or
C. Files a voluntary petition for reorganization or arrangement, or
D. Files a voluntary petition in bankruptcy, or
E. Files an answer admitting bankruptcy or agreeing to areorganization or arrangement, or
F. Makes an assignment for the benefit of its creditors,
then this Agreement expires. Any payments due from the bankrupt Party to the other
Party under this Agreement are an administrative expense under 11 U.S.C. § 503. This
Paragraph does not apply if a petition is withdrawn or discharged within 45 days after
the date on which the petition is filed.
19. Authority to Execute. Each of the undersigned individuals represents and
warrants that he or she is expressly and duly authorized by his or her respective entity or
agency to execute this Agreement and to legally bind each such entity or agency as set
forth in this Agreement.
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20. Time. Time is of the essence with respect to each obligation of each party
under this Agreement.
21. Language. The English language version of this Agreement is the only
conclusive evidence of the legally binding agreement between the Parties. If this
Agreement is translated or submitted to any government or legal forum for any purpose,
only the English language version is legally binding on the Parties.
22. Receipt and Payment. Each payment must be made in a form and manner
which ____________ specifies. A payment is made only when the funds representing
the payment are deposited in the designated account and unconditionally available for
draw.
D. Official Language of the Contract
Domestic commerce is increasingly international commerce. The parties should
choose which language is the official language of the contract. It is often difficult to
determine whether there is a term in a foreign language which has the same meaning as a
term in the English language. Even if there is an equivalent term, the legal concept which
the term represents may not be exactly the same legal concept. Ethical considerations
require that the attorney be confident that the parties ascribe the same meaning to the
provisions of the contract. Otherwise, the agreement may not be supported by mutual
assent in which event the agreement is not a legally binding contract.
E. Signing the Contract and Electronic Signatures
The only persons bound to a written contract are those who signed the contract. If
the individual signing a contract is acting on behalf of another person or entity, then that
fact must be reflected in the signature lines and the authority of the individual should be
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stated. The Uniform Electronic Transactions Act (UETA) and the Electronic Signatures
in Global and National Commerce Act (E-Sign), 15 USCA §7031 enable parties to sign a
contract using means other than manual signatures.
3-3. Agreements to Agree
Drafting a contract is often a process rather than an event. Parties often seek to
determine on a progressive or incremental basis whether to enter into a binding contract.
Proper use of “agreements to agree” such as letters of expression of interest, letters of
intent, term sheets and memoranda of understanding can clarify the intent of the parties,
articulate expectations and minimize costs.
Before entering into agreements to agree, the parties must decide on the purpose
of the agreement to agree. The most common purpose is to set forth a period of time
during which the parties will negotiate exclusively with one another in an effort to agree
on a binding contract. Where the parties have already agreed on the material terms of
the contract, the agreement to agree binds each party to an ultimate contract pending
only the ministerial act of reducing the agreement to a written contract.
A. Letters of Expression of Interest
A letter of expression of interest sets forth the terms and conditions a party desires
to see in a binding contract and can serve as the basis for further discussions. A letter of
expression of interest is not a contract and is not binding on any party.
B. Letters of Intent
A letter of intent is an agreement to agree. It is generally used to obligate parties
to negotiate exclusively with one another for a specified period of time. At the end of the
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time period either the parties sign a binding contract or have no further obligation to one
another. A letter of intent typically contains the following items:
1. Description of the objective of the ultimate contract,
2. Statement of the most fundamental rights and obligations of theparties that the ultimate contract will contain,
3. Statement that the parties will negotiate exclusively in good faithwith each other for a set period of time or until a particular eventoccurs,
4. Statement that at the end of the negotiation the letter of intent willmerge into the ultimate contract or that it will expire,
5. Statement that the letter of intent itself does not create any bindingobligations, and
6. Statement that if the parties sign an ultimate contract the letter ofintent merges into the ultimate contract and is extinguished.
C. Term Sheet
A term sheet is similar to a letter of intent except that it sets forth only the basic
terms and conditions which the parties desire to see in the ultimate contract. The term
sheet is used as the basis for negotiation. It usually does not contain an exclusive
negotiating period and it is not signed. Some commentators counsel against using a
letter of letter of intent and use instead a term sheet.
D. Memorandum of Understanding
A memorandum of understanding (referred to as an MOU) is a more detailed
letter of intent. An MOU is generally used in connection with substantial transactions,
such as mergers, acquisitions or large real estate sales, that require time consuming and
expensive due diligence. The MOU sets forth the material terms of the transaction and
leaves for the ultimate contract only those issues that arise as a result of the due diligence
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process. Often, in substantial transactions, the letter of intent leads to an MOU which
then leads to the ultimate contract.
E. Confidentiality Agreements
Confidentiality agreements usually accompany agreements to agree or even
precede agreements to agree. The purpose is to restrict the use of information which the
parties exchange during negotiations. A confidentiality agreement specifies the
categories of information to be exchanged, that the information is proprietary, the
limitations on how the information is used, the measures which the parties must take to
protect the information and the remedies a party has against a party who breaches the
agreement. Confidentiality agreement can be quite elaborate. However, they are rarely
enforced in court unless a breach is part of a broader cause of action.
3-4. Contracts under Seal
From the 14th Century until the 19th Century most non-mercantile contracts were
contracts under seal. A contract under seal was valid and enforceable as long as the
contract was in writing, a seal was attached to the writing and the writing was delivered
to the party to be charged. If these three pre-requisites were satisfied, issues such as
meeting of minds and consideration were not relevant to whether the contract was valid
and enforceable. The seal usually took the form of a signet ring impressed on the
contract with wax.
In most jurisdictions, the concept of a contract under seal has been eliminated.
The common law pre-requisites for a valid and enforceable contract must be satisfied
whether or not a purported contract is a contract under seal. However, the contract
under seal does survive for the purpose of statutes of limitations. The statute of
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limitations for an action on a simple contract, i.e. a contract not under seal is three years
in the District of Columbia, D.C. Code § 12-301(7). If the signatures on a contract are
followed by “(SEAL)” or preceded by a form of the phrase “______hereby sets unto this
[agreement] his signature and seal”, then the contract is a contract under seal whether or
not the parties intended that the contract be a contract under seal. The statute of
limitations for an action on a contract under seal is 12 years not three years, D.C. Code §
12-301(6); Burgess v. Square 3324 Hampshire Gardens Apartments, Inc., 691 A.2d 1153
(D.C. App. 1997). Neither the 3-year nor the 12-year statute of limitations applies to a
contract which is subject to the Uniform Commercial Code.
3-5. Notarial Instruments - Civil Law Systems
A notary in civil law systems –“notario” in Spanish speaking countries, “notaire”
in French speaking countries, “symvouleographos” in Greece– performs a very different
function than does a notary public in the United States. The civil law notary is an
attorney who has undergone special training. The civil law notary performs the
following:
A. Drafts legal documents such as wills, contracts, deeds,
B. Authenticates legal instruments, and
C. Serves as a public repository of legal instruments.
It is the first two functions that distinguishes the civil law notary from a U.S.
notary public. The civil law notary is expressly authorized by law to represent the
transaction, draft the relevant legal instruments and to authenticate legal documents. In
drafting the legal instrument, the notary must make sure that the legal instrument
accurately represents the intent of the parties, that the parties understand the legal
22
nature and effect of the instrument and that the legal instrument complies with
applicable law. In litigation, a contract that has been authenticated by a notary is
conclusively deemed genuine, legally binding and an accurate recital of the agreement. If
a party seeks to challenge a contract that has been notarized on the grounds of mistake,
fraud, lack of consideration, lack of meeting of the minds, that party must bring a special
proceeding. Such proceedings are very rare and, if asserted, usually allege that the notary
abused his or her office. If an authenticated legal instrument is ultimately found not to
represent the intent of the parties or that it fails to comply with applicable law, the civil
law notary is liable for the value of transaction represented by the legal instrument.
The notary is required to maintain the original of any document that he or she
notarizes. The original maintained by the notary is conclusive written evidence of the
contents of any such document. The notary does not represent any party but rather
represents the transaction.
The office of notary is a public office. The notary is an attorney who takes special
law studies and takes a special notarial examination. The number of notaries is limited.
In some countries, the office is still hereditary under certain circumstances. A notary can
practice only within a designated geographical area. A notary is subject to special civil
and criminal liability for abuse or misuse of the office.
3-6. Civil Law Notary in the United States
Each of Florida, Alabama, Louisiana and Puerto Rico has enacted a law which
enables civil law notaries, See Fla. Stat. § § 118.10, 118.12 (2002); Ala. Code § 36-20-50
et seq. and LACC Art. 1833 et seq. The function of the civil law notary under these laws is
essentially the same as the function of civil law notaries in civil law countries. Legal
23
instruments that are authenticated by a civil law notary are presumed correct.
Authentication reduces litigation. Also, legal instruments authenticated by civil law
notaries in Florida, Alabama, Louisiana and Puerto Rico are accepted increasingly by civil
law countries. This simplifies international business transactions, probate and family
matters which involve these states and civil law countries. The National Association of
Civil Law Notaries (NACLN) has proposed a model civil law notary act for adoption in
U.S. jurisdictions.
3-7. Dispute Resolution
Non judicial dispute resolution is rapidly increasing. Court dockets are jammed
and litigation takes more time. Alternate dispute resolution (ADR) is the trend. It takes
less time, parties have control over the scheduling and parties can choose decision
makers who have expertise in the subject matter of the dispute. However, ADR is not
necessarily cheaper than court and no attorney should ever counsel that a client should
agree to ADR because it is cheaper.
The ADR methods are:
A. Neutral Case Evaluation.
The parties argue their cases to a neutral case evaluator who has expertise in the
matter in question. The neutral case evaluator advises the parties on the relative merits
of their cases. The parties can considers this advice in deciding whether to proceed to
litigation or settle. The neutral case evaluator does not attempt to settle the case.
B. Mediation.
The purpose of mediation is to settle the case. The parties inform the mediator as
to their respective positions but do not usually argue their cases to the mediator. The
24
mediator acts as a “go between” and the parties communicate their settlement proposals
through the mediator. No decision, if any, by the mediator is binding on the parties.
Under rules of the D.C. Superior Court, parties to a civil action must submit the case to
mediation after discovery but before trial.
C. Arbitration
An arbitration is conducted in a manner similar to a trial. The parties present
evidence cross examine witnesses, file motions and make legal arguments. The parties
choose the arbitrator in their agreement. Organizations, like the American Arbitration
Association (AAA), maintains a panel of arbitrators and have rules of procedure. The
parties pay a filing fee which a sliding scale depending on the amount in controversy and
the fees for the arbitrators. The parties agree as to whether the decision of the arbitrator
is binding or non binding. There is no appeal from an arbitral decision unless the rules of
the arbitrators allow for an appeal. The AAA does allow appeals under certain
circumstances.
There is a policy controversy as to whether pre-dispute arbitration provisions in
certain agreements should be enforceable. The Arbitration Fairness Act has been
introduced in every Congress since 2002 but neither chamber has ever passed it. It
would prohibit pre-dispute arbitration agreements in employment, consumer, franchise
and civil rights agreements. Later versions of the Act would also prohibit pre-dispute
arbitration agreements in student loan and nursing home agreements.
D. ADR in Retainer Agreements
It is becoming increasingly common for attorneys to include arbitration provisions
in their retainer agreements. The ABA Rules of Professional Conduct, which most states
25
have adopted with few reservations, do not prohibit arbitration between attorneys and
clients so that they are enforceable as a matter of ethics. The key inquiry is whether a
client is a “consumer” under local law. If so, then any local law which prohibits pre-
dispute arbitration provisions in consumer contracts renders arbitration provisions in
retainer letters unenforceable. Some arbitration providers like the American Arbitration
Association (AAA) will not accept certain consumer transactions even if the parties have
designated the AAA as the arbitration provider and even if the local law does not prohibit
arbitration in consumer transactions. Also, some professional liability carriers prohibit
arbitration provisions.
An arbitration provision in a retainer agreement should:
A. Be prominent, even in capital black letters,
B. Designate the arbitration forum and state that the chosen forum can, in itssole discretion, refuse to arbitrate,
C. State that any dispute between the parties must be submitted to arbitrationor state which categories of disputes are subject to arbitration i.e. only feedisputes but not disputes grounded in professional liability,
D. State the consequences of binding arbitration i.e. no appeal to courts exceptfor an arbitrary or capricious award,
E. State that arbitration is not necessarily less expensive than litigation incourt, and
F. State that the client should be represented by counsel in any arbitration.
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TAB 4
PRINCIPLES OF INTERPRETING CONTRACTS
4-1. The Plain Meaning Rule
The fundamental objective of effective contract drafting is to avoid the need to
interpret the contract. The contract should be drafted with sufficient precision so that
the intent of the parties with respect to the terms and conditions is apparent from the
language of the provisions of the contract. This objective is reflected in the primary rule
of contract interpretation, the “Plain Meaning Rule”.
The Plain Meaning Rule holds that, in the absence of an ambiguity in the words of
a contract, the words a valid written contract speak for themselves. The parties are
bound by the words without resort to any evidence extrinsic to the written contract,
Tillery v. D.C. Board of Contract Appeals, 912 A.2d 1169 (D.C. App. 2006); Hart v.
Vermont Inv. Ltd. Partnership, 667 A.2d 578 (D.C.App.1995).
A. The meaning of the plain language of the contract is determined notaccording to what a party thought the language meant but rather accordingto what a reasonable person in the position of a party would have thoughtthe language meant, Psarommatis v. English Holdings I, LLC, 944 A.2d472 (D.C. App. 2008).
B. The reasonable person is presumed to know all of the circumstancessurrounding the making of the contract and bound by the usages of termsthat the parties know or have reason to know, 1836 S Street Tenants Assoc.v. Estate of B. Battle, 965 A.2d 832 (DC App. 2009); Rastall v. CSXTransportation, Inc., 697 A.2d 46 (D.C.App.1997).
C. The Plain Meaning Rule applies even though the parties nevercontemplated that the language of a contract would lead to a particularresult, Sierra Club et al. v. Dominion Cove Point LNG LP, 86 A. 3d 82 (Md.App. 2014).
27
A. Words Given Their Ordinary Meaning
The ordinary definition of a term should be given weight in ascertaining the
meaning of a term, Obelisk Corp. v. Riggs Bank, 668 A.2d 847 (D.C.App.1995). A term
or provision will be accorded a meaning that is consistent with the contract as a whole,
Segar v. Mukasey, 508 F.2d 16 (CADC, 2007).
B. Words Given Particular Meaning in Custom, Trade Usage or Course of Dealing
Words that have particular meaning in the context of the custom, trade usage or
course of dealing of the contractual relationship, will be accorded that particular meaning
even if it differs from the ordinary meaning, Restatement, 2d §§ 219-223.
C. Ambiguity Exception to Plain Meaning Rule
If an ambiguity is found to exist in the language, then extrinsic evidence may be
introduced to determine the intent of the parties, Tillery v. D.C. Board of Contract
Appeals, supra. Extrinsic evidence can be in the form of oral testimony about the
negotiations, the states of mind of the parties, custom and trade usage in the particular
industry or course of dealing between the parties. A contract provision is ambiguous if it
is reasonably susceptible to different constructions. It is not ambiguous simply because
the parties disagree as to the meaning, Segar v. Mukasey, supra.; Washington
Properties, Inc. v. Chin, Inc., 760 A.2d 546 (D.C. App. 2000). Whether or not a term is
ambiguous is a question of law to be resolved by the court and not by a trier of fact, Gryce
v. Lavine, 675 A.2d 67 (D.C.App.1996).
Under the traditional application of the ambiguity exception (Williston/Holmes),
where the meaning of the term is “plain” either in ordinary usage or in a particularized
usage, then no ambiguity exists and extrinsic evidence of the meaning of a term is not
28
admissible. Under the modern trend (Corbin/Restatement), if a term is “reasonably
susceptible” to the meaning asserted by a party, then extrinsic evidence of the meaning of
the term is admissible.
D. Criticism of the Plain Meaning Rule
The Plain Meaning Rule has been criticized by many commentators. They have
remarked that, because there are inherent linguistic limits on how precise a word can be,
it is both unconstructive and unfair to rely exclusively on the written document to
determine the intent of the parties. Moreover, determining whether or not an ambiguity
exists is so subjective as to be almost arbitrary. Any competent evidence that is
reasonably calculated to elucidate the intent of the parties should be considered. Despite
the criticism, the Plain Meaning Rule is followed in most jurisdictions. Therefore,
attorneys must draft contracts not only to avoid ambiguities that are inherent in language
but also to avoid ambiguities that may be found by the courts. This is an extremely
difficult endeavor because, as one court has pointed out, contract interpretation is largely
an individualized process so that if the same contractual language from prior cases
significantly differs from the contract being interpreted, prior cases cannot control,
Rivers & Bryan, Inc. v. HBE Corp., 628 A.2d 631 (D.C.App.1993). The principle of stare
decisis is limited.
E. The Parol Evidence Rule Distinguished from the Plain Meaning Rule
The Plain Meaning Rule is not to be confused with the Parol Evidence Rule. The
Parol Evidence Rule holds that where a written contract contains an integration clause
stating that it is the final and full expression of the agreement between the parties or a
fact finder finds that the written contract is the final and full expression of the agreement
29
between the parties, no prior oral or written agreement or negotiation or custom/usage
can be admitted into evidence in a legal proceeding that adds or removes any term or
provision from an integrated written contract.
The Parol Evidence Rule is a substantive rule of contract law or a rule of evidence
but not a rule of interpretation. The Parol Evidence Rule is used to determine the
content of the contract i.e. which terms and provisions are to be included in the contract.
The Plain Meaning Rule is used to determine the meaning or legal effect of the terms and
provisions of the contract, see generally Calamari and Perillo Hornbook on Contracts §
3.16 (5th ed. 2003).
4-2. Language Construed Against Drafter
In choosing among the various reasonable meanings of a term, the preferred
meaning will be the one that operates against the interest of the party that supplied the
disputed words or from which the disputed language derives (referred to as the rule of
contra proferentum) at least where the parties are in equal bargaining positions.
4-3. Accord Meaning to All Terms
Parties are assumed to intend legal and practical consequences when they enter
into a contract. Where two interpretations of a term are possible in a contract and one
such interpretation would render the term or the contract without legal or practical
effect, the interpretation that accords legal or practical effect to the term or contract
prevails. Restatement 2d §203(a).
4-4. Conflicting Terms
Where two terms conflict with one another, the more specific term will be deemed
an exception to the more general term, Restatement 2d § 203(d). Where part of the
30
contract is handwritten or typewritten and part of the contract is printed and the
handwritten or typewritten parts conflict with the printed part, the handwritten or
typewritten parts will control, Ibid.
4-5. The Doctrine of Last Antecedent
A limiting clause in a provision applies to the words or phrases immediately before
the limiting clause and not to the words or phrases that are physically remote from the
limiting clause. The doctrine opposed to the doctrine of the last antecedent is the
doctrine of the series qualifier. According this doctrine, a straight forward or clearly
intended parallel construction that includes all of the words in a series, a limiting clause
applies to all of the words in the series.
Most of the cases on in which the doctrine of the last antecedent is involved are the
interpretation of statutes rather than contracts. It is especially important to the drafter
of statutes because the doctrine can cause a statute to be applied in a manner which is
antithetical to the intent of the drafter. Nevertheless, the doctrine applies to contracts as
well. A contract is, in effect, a statute though limited with respect to the affected persons
and the subject matter. But, like a statute, a contract sets forth the rights, obligations
and terms of compliance for the affected persons.
Illustration 1
The tenant shall pay the rent, real estate taxes, electric bills and water charges on thefirst day of the month.
Doctrine implicated: The tenant is required to pay only the water charges on the firstday of the month.
31
Redraft:
On the first day of the month, the tenant shall pay the dollar amount of eachof the rent, real estate taxes, electric bills and water charges.
Doctrine not implicated.
Illustration 2
The tenant shall not host a party or engage in any other activity which damages thepremises.
Doctrine implicated: The tenant can host a party as long as it does not damage thepremises.
Redraft
The tenant shall neither host a party nor act in any way that damages thepremises.
Doctrine not implicated.
Illustration 3
The doctor shall diagnose, medicate and treat each symptom using the highestprofessional standards.
Doctrine not implicated: The clear intent is that the doctor uses the highest professionalstandards for “diagnose” and “medicate” and not just for “treat”.
Case
Perkins v. District of Columbia Board of Zoning Adjustment, 813 A. 2d 206 (DC App.2002).
Statute states that a particular zoning regulation allows “Light Manufacturing,Processing, Fabricating & Warehousing of Steel Products....”. A waste treatmenttransfer station was proposed. The proponents averred this station did“Processing”. The opposers countered that the statute permitted only the“Processing “ of “Steel Products”. The court applied the doctrine of the lastantecedent. It ruled that the term “Processing” was too remote from the term“Steel Products” so that “Processing” was not limited to the processing of only“Steel Products”.
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4-6. Scrivener’s Error
A contract can be reformed where there has been an error in reducing the intent of
the parties to writing (referred to as scrivener's error) or mutual mistake of the parties as
long as the intent of the parties is the same before the contract is reduced to writing. A
scrivener's error, like a mutual mistake, occurs when the intent of the parties is identical
at the time of the transaction but the written contract does not express that intent
because of the error, see generally 27 Williston on Contracts §70:93 (4th ed.). The
equitable remedy of reformation is the appropriate remedy for scrivener’s error or
mutual mistake.
4-7. Relational Contracts
A relational contract is a contract in which the social or commercial context as well
as the relationship of the parties are as significant to interpreting the contract as are the
terms of the contract itself. Relational contracts have existed for as long as there has
been commercial activity. However, within the past 20 years, relational contracts have
been endowed with a scholarly conceptual framework, (See 94 Northwestern U Law Rev
Symposium on Relational Contract Theory, Spring 2000). The primary characteristics
of a relational contract are:
A. Extended Duration Rather Than “Spot” or Short Term
B. Open Terms and Reserved Discretion
C. Agreed Governance Mechanisms
D. Benefits and Burdens Shares Rather Than Allocated
E. Transaction Specific Investments
F. Overarching Relationship External to Contract
33
The types of contracts that generally have the characteristics of a relational
contract are franchise agreements, employment agreements and long term supply
contracts.
34
TAB 5
CONTRACT DRAFTING TECHNIQUES
5-1. Clear Writing Begins With Clear Thinking
Clear and precise writing begins with clear and precise thinking. There are no
drafting techniques that will make clear in a contract a concept that is unclear in the
mind of the attorney. Knowledge of the subject matter of the contract, an understanding
of the objectives of the parties and an analysis of the practical and logical consequences
of each contract provision is essential to a clearly written and precise contract.
Once the thinking is clear and precise, the words used must be clear and precise.
As Justice Felix Frankfurter once said: “Exactness in the use of words is the basis of all
serious thinking. You will get nowhere without it. Words are clumsy tools, and it is very
easy to cut one’s fingers with them, and they need the closest attention in handling; but
they are the only tools we have, and imagination itself cannot work without them. You
must master the use of them, or you will wander forever guessing at the mercy of mere
impulse and unrecognized assumptions and arbitrary associations, carried away with
every wind of doctrine.”1
5-2. Use of “Must”, “Shall” “May” and “Will”
A. “Must” is the most powerful words because it is unambiguous. It is an
imperative and causes a legal obligation to be imposed or undertaken. Use “Must” rather
than “Shall”, “May” or “Will” whenever a provision is meant to impose an affirmative
obligation on a person.
1 The Record, Association of the Bar of the City of New York, 1947, p.29
35
B. “Shall” is another powerful word for imposing a legal obligation. But it has
certain ambiguities. It can be used to confer a right, predictive, a promise, or an intent to
perform an act or omission.
C. “May” is permissive or discretionary in character. Use it only when a provision
is meant to confer a choice or discretion to act or to omit to act.
D. “Will” is predictive in character. Some commentators opine that “will” imposes
an obligation and should be used instead of “Shall”.
E. Never use “Should”. While it can mean “Must”, it can also mean “It Would Be
Desirable”, See Ashlodge Ltd. v. Victoria Sales Corp., 163 F.3d 681 (2d.Cir.1998).
5-3. Use Active Language Not Passive Language
Wherever possible use active language rather than passive language. The active
voice is more precise and avoids some of the vagaries inherent in the passive voice.
A. Do Not Write: “The rent shall be paid on the first day of each month.”
Write: “The tenant shall pay the rent on the first day of each month.”
B. Do Not Write: “The failure of Tenant to pay the rent on the first day of each
month shall not be an uncurable event in default.”
Write: “The Tenant may cure an event in default caused by its failure to pay
the rent when due.”
5-4. Use the Present Tense
Even though a contract may refer to or describe an event that will happen in the
future or at least some time after the contract is signed, write the contract language in the
present tense. A contract is a “living” document in the sense that once it is executed, it
presently and continuously governs the parties and has no present or future.
36
A. Do Not Write: “If a Party should [or shall] die...............”
B. Write: “If a Party dies.........”
5-5. Use of “And” and “Or”
Never use “and” and “or” interchangeably. Items connected by “and” will be
treated the same or in the conjunctive. Items connected by “or” will be treated
alternatively or in the disjunctive. Never use “and/or”. It is the ultimate ambiguity.
5-6. Use of “Any” , “Each” and “No”
A. If an obligation is to be imposed, use “Each”: “Each Party shall pay its
assessment on May 1.”
B. If discretion, a power or privilege is to be accorded, use “Any”: “Any Party may
pay its assessment on May 1.”
C. If an obligation to refrain from acting is to be imposed or a discretion, power or
privilege is being limited or eliminated, use “No”: “No Party shall pay its assessment after
May 1.”
5-7. Use Number of Days Rather Than Months or Years
Use number of days to measure time rather than calendar periods such as weeks,
months or years. Note that “3 months” and “90 days” are not the same time periods.
Also, always specify whether the days are calendar days or business days.
5-8. Use of “Unless”and “As Long As”
Conditions, whether precedent or subsequent, must always be clearly drafted to
reflect that they are conditions and not promises. The courts will construe a condition
that is also a promise to be only a promise and not a condition. The connectors “Unless”
or “As Long As” are language of condition. Use them when the parties intend to create a
37
condition to performance or discharge rather than a promise to perform. Never use
“provided that”. The connector “provided” is inherently ambiguous. Depending on the
context, it can be construed as either language of condition or as a promise.
“The Contractor shall pay Subcontractor when Client pays Contractor.”
Compare to: “The Contractor shall pay Subcontractor only as long as Client has
paid Contractor.” or “Contractor is not obligated to pay
Subcontractor unless Client has paid Contractor.”
The courts will imply a constructive condition to assure fairness particularly where
the occurrence of an express condition is within the control of one party. For example, if
the parties to a real property sales contract have agreed that the performance of the buyer
is conditioned on the buyer securing financing for the purchase, the courts will imply a
constructive condition that the buyer must actively seek financing.
5-9. Use of “Reasonableness” Clause
Do not use a “reasonableness” clause to describe the manner in which an
obligation must be performed. An exception is where the consent or approval of a party
is required before a benefit can flow to or a power can be exercised by the other party.
The most common instance is in leases that require the approval of the landlord before
the lease can be assigned or the premises sub-leased.
“The Tenant shall not assign the leasehold under this Lease or sub-lease the
leasehold unless Tenant has obtained the consent of the landlord.” Compare to: “The
Tenant shall not assign the leasehold under this Lease or sub-lease the leasehold unless
Tenant has obtained the consent of the landlord, which consent shall not be
unreasonably withheld, delayed or conditioned.”
38
5-10. Use of Legal Terms of Art
A legal term of art is a term that is imprecise in its ordinary usage but which has
acquired a particular meaning over years of usage so that it is at least intuitively
understood by attorneys and judges. These terms include “promptly”, “commercially
reasonable” and “best efforts”. They should be used only when necessary to effect a
compromise on language in a “non-deal breaking” provision in a contract. The attorney
should explain these terms to the client.
One of the most abused legal terms of art is “material”. It is most commonly used
in connection with determining the type of an event in default which causes the contract
to terminate or expire, relieves the aggrieved party from further performance or triggers
a liquidated damages clause. The term “material” does not have an accepted and uniform
legal definition. Do not write general materiality provisions such as “....The term of this
contract shall terminate if either party breaches a material provision of this contract.”
Instead, list those events in default which the parties agree are material.
5-11. Use of the Particular and the General
A. List of Particulars
A list of particulars is treated as exhaustive and excludes any item not listed in the
list of particulars even if an unlisted item is similar to the items in the list, (referred to as
the doctrine of expressio unius est exclusio alterius i.e. the expression of one thing is the
exclusion of another).
“The importer shall deliver a country of origin certificate for oranges, lemons andlimes.”
No item which is not listed requires a certificate.
39
B. General Description
A general description which follows a series of particular items includes only those
items of the same type or class as the particular items, (referred to as the doctrine of
ejusdem generis i.e. of the same kind).
“The importer shall deliver a country of origin certificate for oranges, lemons, limeand any other fruits which he imports.”
Items which are fruits such as apples, grapes and strawberries requirecertificates. Consider tomatoes.
C. Including but Not Limited To
Consider inserting the clause “including but not limited to”.
“The importer shall deliver a country of origin certificate for all fruits includingbut not limited to oranges, lemons and lime.”
5-12. Time
Contracts often contain a “time is of the essence” clause. This clause means that to
the extent that particular times for performance are specified in the contract, any failure
to strictly comply with any such specified time is breaches the contract. The clause
negates the common law defense of substantial compliance. The clause is most common
in real estate sales contracts and leases.
5-13. No “Whereas” Clauses
“Whereas” clauses are neither binding nor enforceable. Do not use them. If the
parties desire to recount the intent of the parties or the transactional facts upon which
the contract is based, write them in an article in the body of the contract or in a Warrants
and Representations provision.
40
5-14. Nunc Pro Tunc
Translated from the Latin, the term means “now for then”. The principle
underlying the term is that a legal effect can be made retroactive to a date prior to the
date of a current legal instrument. Parties can agree that, even though they execute a
contract today, the rights and obligations under the contract took effect on a date before
today. Backdating of legal documents must be done only with the agreement of each
affected party and not for deceptive or fraudulent purposes.
5-15. No Antiquated Legalisms
Do not use antiquated legalisms such as “herein”,“hereof”, “thereof”, “witnessth”,
“in witness whereof”, “heretofore”or “wherefore”. They are imprecise and serve no
contract drafting purpose.
5-16. Use of “Consistent with” and “Pursuant to”
If a party agrees to act “consistent with” a particular contract provision, practice or
statute then that party is not subject to that contract provision, practice or statute but
must simply act in the same or a parallel manner. If a party agrees to act “pursuant to” a
particular contract provision, practice or statute then that party is subject to or governed
by that contract provision, practice or statute.
5-17. Use of “Notwithstanding”
The term “notwithstanding” means “despite” or “in spite of”. It is used to carve
out an exception or limitation from the legal force or binding effect of another provision
of a contract. Depending on how it is used “notwithstanding” can be ambiguous and
imprecise, i.e., “notwithstanding anything to the contrary in this contract” or
41
“notwithstanding any provision of this contract”. Rather than using “notwithstanding”,
state the exception or limitation. “Section A shall not apply to Section B”.
5-18. Use of “That” or “Which”
The words “that” and “which” are often used interchangeably. However, each
word has a different effect depending on the relative clause which it modifies. “That” is
restrictive because it distinguishes one item from the universe of items. “Which” simply
adds descriptive information about the item that it modifies. Set off a “which” clause with
a comma.
A. “The property that is to be sold is located in the District of Columbia.”
B. “The property, which is commercial property, is located in the District of
Columbia.”
5-19. No Run on Sections or Paragraphs
Break down long provisions into sub-sections. This makes the contract easier to
read and avoids suspicion that some unforeseen obligation or term is buried in the
lengthy provision:
ARTICLE XIVASSIGNMENT AND TRANSFER
You must not assign any benefit, transfer any right nor attempt to assign anybenefit or transfer any right which arises from or is incident to the Franchise unless youcomply with this Article. You must inform us in writing of your desire to make anassignment or transfer or your desire to accept an offer from a third party. You must offerto assign or transfer to us before making any offer to a third party or accepting any offerfrom a third party. If you receive a bona fide offer from a third party, you must deliverthe terms of the offer to us. No later than 30 consecutive calendar days after the date onwhich we receive either of the offers set forth in Paragraph 19.2, we shall either accept orreject any such offer or make a counteroffer.If, at the end of the 30 day period, we do not accept the offer, then you may assign ortransfer the Franchise to a third party, as long as the third party signs our FranchiseAgreement which is in the Franchise Disclosure Document for the year in which the
42
assignment or transfer is made, a sworn closing and estoppel certificate and any othercontract or document which we require if the third party is a corporation, then all officersand shareholders must execute the affidavit on behalf of the corporation and not asindividuals, or if the third party is a partnership then all partners must execute theaffidavit, or if the third party is a limited liability company then all members andmanagers must execute the affidavit on behalf of the limited liability company and not asindividuals. The third party demonstrates at least the same level of businessqualifications, credit rating and moral character which you possess. If the third party is acorporation then the shareholder(s) who will substantially operate and participate in thebusiness must so demonstrate, or if the third party is a partnership then the partner(s)who will substantially operate and participate in the business must so demonstrate, or ifthe third party is a limited liability company then the member who will substantiallyoperate and participate in the business must so demonstrate, and any document of sale,interest or stock certificate must state prominently on its face that any assignment ortransfer is subject to the terms of this Agreement and you have paid each of yourpayment obligations and performed each of your other obligations under this Agreement,and you pay to us a transfer fee equal to the dollar amount of the Initial Franchise Feecharged by us for new Franchises at the time the assignment or transfer occurs, and youand other persons affiliated with you sign a sworn affidavit in which you affirm to bebound by Article XVI, and if the third party is a corporation, then all officers andshareholders must execute the affidavit, or if the third party is a partnership, then allpartners must execute the affidavit, or if the third party is a limited liability company,then all members and managers must execute the affidavit, and we approve the thirdparty in a signed writing which approval shall not be unreasonably withheld or delayed.
Compare to:
ARTICLE XIVASSIGNMENT AND TRANSFER
19.1. No Assignment or Transfer. You must not assign any benefit, transfer any
right nor attempt to assign any benefit or transfer any right which arises from or is
incident to the Franchise unless you comply with this Article.
19.2. Procedure. You must inform us in writing of your desire to make an
assignment or transfer or your desire to accept an offer from a third party.
A. You must offer to assign or transfer to us before making any offer toa third party or accepting any offer from a third party.
B. If you receive a bona fide offer from a third party, you must deliverthe terms of the offer to us.
43
19.3. First Refusal by Us. No later than 30 consecutive calendar days after the
date on which we receive either of the offers set forth in Paragraph 19.2, we shall either
accept or reject any such offer or make a counteroffer.
19.4. Assignment to Third Party. If, at the end of the 30 day period, we do not
accept the offer, then you may assign or transfer the Franchise to a third party, as long as:
A. The third party signs our Franchise Agreement which is in theFranchise Disclosure Document for the year in which the assignmentor transfer is made, a sworn closing and estoppel certificate and anyother contract or document which we require:
1. If the third party is a corporation, then all officers andshareholders must execute the affidavit on behalf ofthe corporation and not as individuals, or
2. If the third party is a partnership then all partnersmust execute the affidavit, or
3. If the third party is a limited liability company then allmembers and managers must execute the affidavit onbehalf of the limited liability company and not asindividuals.
B. The third party demonstrates at least the same level of businessqualifications, credit rating and moral character which you possess.
1. If the third party is a corporation then theshareholder(s) who will substantially operate andparticipate in the business must so demonstrate, or
2. If the third party is a partnership then the partner(s)who will substantially operate and participate in thebusiness must so demonstrate, or
3. If the third party is a limited liability company then themember who will substantially operate and participatein the business must so demonstrate, and
C. Any document of sale, interest or stock certificate must stateprominently on its face that any assignment or transfer is subject tothe terms of this Agreement and the Twin Donut System, and
44
D. You have paid each of your payment obligations and performed eachof your other obligations under this Agreement, and
E. You pay to us a transfer fee equal to the dollar amount of the InitialFranchise Fee charged by us for new Franchises at the time theassignment or transfer occurs, and
F. You and other persons affiliated with you sign a sworn affidavit inwhich you affirm to be bound by Article XVI, and
1. If the third party is a corporation, then all officers andshareholders must execute the affidavit, or
2. If the third party is a partnership, then all partnersmust execute the affidavit, or
3. If the third party is a limited liability company, then allmembers and managers must execute the affidavit, and
G. We approve the third party in a signed writing which approval shallnot be unreasonably withheld or delayed.
5-20. Plain Language
Contracts should also be written in plain language. The rules of the Security and
Exchange Commission (SEC) and the Federal Trade Commission (FTC) require that legal
instruments which are made available to the public must be written in plain language.
The SEC has issued a 106 page publication which sets forth guidance on plain language,
see SEC Plain Language Guidelines.
5-21. Definitions
An effective means of avoiding ambiguity is to define terms in a definitions section
in the contract. The courts will almost always apply the contract definition to a term
rather than the ordinary definition. If a term is not defined in the contract, dictionary
definitions are persuasive but not conclusive evidence of the ordinary meaning of a term.
Note that there are different dictionaries each of which may define the same term in a
45
broader or narrower sense. When asserting a dictionary definition, do not rely solely on
one definition in one dictionary but rather provide the definition contained in other
dictionaries or explain why one dictionary is more persuasive than other dictionaries.
5-22. Unilateral Mistake
The courts will not reform a provision of a contract where one party claims that
there is a mistake in a provision. The mistake can be a substantive in that a provision
does not reflect the actual agreement or a provision has a typographical error. The courts
will only reform a unilateral mistake if the mistake is the result of fraudulent conduct by
the other party.
5-23. Use of Extend or Renew
Extending a contract and renewing a contract have different legal effects. They are
not interchangeable. To extend a contract means only that the term is made longer than
the original but all provisions of the contract remain in full force and effect. To renew a
contract means that neither party is bound by the provisions of the contract. All
provisions can be re-negotiated if the parties desire a legal relationship after the term of
the contract expires or terminates.
The parties can agree that the term of a contract or that a contract renews without
any act of either party, referred to as “automatic clauses” or “evergreen clauses”.
Consumer contracts generally contain these clauses much to the surprise of the
consumer. Commercial contracts should never contain these clauses.
46
5-24. Use of Expiration and Termination
A contract expires when each party has performed its obligations under the
contract or an event occurs which is specified in the contract as an event which causes the
contract to expire.
A contract terminates if, prior to the expiration of the contract, an anticipatory
breach or an actual breach occurs. An anticipatory breach occurs when a party manifests
an intent not to perform before performance is due. An actual breach occurs when a
party fails to perform when performance is due.
5-25. Use of Persistent Default Provision
Consider a situation where a party defaults over and over again but cures the
default each time. Referred to as persistent default, this situation may demonstrate a
lack of good faith or negligence. A persistent default provision enables the aggrieved
party to terminate the contract and seek damages. Persistent default provisions are most
common in leases or other relational contracts. Usually, the provision sets a number of
defaults within a set period of time constitutes a breach of the contract.
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TAB 6
ELECTRONIC CONTRACTS
6-1. Definition of an Electronic Contract
An electronic contract is an agreement which the parties form using a means of
communication other than either instant live presence or the postal service. The term
“electronic contract” refers to how a contract is formed and not the subject matter of the
contract. The subject matter of an electronic contract can be anything. It is an electronic
contract because the parties use successive communications through electronic means to
communicate offers and acceptance and not instant live communications. Contracts
formed through email, telex, social media or a website are electronic contracts.
The traditional contract principles of offer, mutual assent and acceptance apply to
electronic contracts. There must be an offer and acceptance through which the parties
manifest a “meeting of the minds”. A contract is formed when the offeror communicates
an offer to the offeree and the offeree communicates an acceptance to the offeror. The
legal issue is to determine the time at which the offeree communicates its acceptance to
the offeror. The contract is formed when the offeree communicates its acceptance.
Where the parties are in live instant communication, the issue of the time of
acceptance does not arise. There is no lapse of time between the communication of the
offer and the communication of the acceptance. By contrast, the parties to an electronic
contract are in successive communication through a third party so that there is a lapse of
time between the communication of the offer and the communication of the acceptance.
Determining the time at which the offeree manifests acceptance of the offer determines
48
when and whether the electronic contract is formed. For an in-depth discussion of online
contracting issues, see Berkson v. Gogo LLC, 97 F. Supp. 359 (E.D. N.Y. 2015).
6-2. Determining the Time of Acceptance - “Mail Box” Rule
Traditionally, the only form of successive communications was through the postal
service. Time of acceptance was determined under the “mail box rule. Under the
“mailbox rule” rule, unless the parties otherwise agree, the offeree accepts the offer when
the writing evidencing the acceptance is placed in the postal service. The contract is
formed when the offeree mails the acceptance and not when the offeror receives the
acceptance, Mactier's Adm'rs v. Frith, 6 Wend. 103, 154-57 (N.Y. 1830). If the offeror
changed the terms or contracted with someone else after the offeree had mailed the
acceptance, the offeror breaches the contract.
Adapting this rule to electronic contracting, unless the parties otherwise agree, the
contract is formed when the offeree places the acceptance with the third party
responsible for transmitting the communication. With emails, the contract is formed
when the offeree presses the “send” button.
The Uniform Computer Information Transactions Act (UCITA) repeals the
“mailbox” rule for transactions involving the exchange of computer information. Unless
the parties otherwise agree, a contract is formed when the offeror receives the
acceptance. Only Maryland and Virginia have enacted UCITA.
6-3. Terms of the Electronic Contract
No matter how limited it is in scope and time, the parties should conclude an
integrated contract in a single instrument. However, parties often set forth terms in an
exchange of a series of written communications, now usually in emails. This is
49
particularly common where the parties have a long commercial relationship, the deal
must be made quickly or where they are in substantially equal bargaining positions. As
they do with any other exchange of a series of communications, the courts will determine
whether the communications contain actual terms, whether the parties have manifested
an agreement to the terms, whether the parties intended that the terms by binding or
whether the terms were only counteroffers.
6-4. Forming an Electronic Contract by Automated Means on a Website
A contract can be formed between the owner/operator of a website and the user of
a website. The parties never communicate, either instant live or successive, but they still
form a contract. The legal issue is not the timing of an acceptance but rather whether
there has been a “meeting of the minds” between the parties. The traditional rules for
determining whether there has been a “meeting of the minds” as well as adhesion and
unconscionability are to automated electronic contracts. The four types of automated
electronic contracts are browsewrap, clickwrap, scrollwrap and sign-in wrap. Each of
these types are methods by which the user manifests its assent to the contract offered by
the website.
A. BrowseWrap Contracts
The user assents to the terms of the contract simply by using the functions of the
website. The written terms and conditions of the contract must be accessible to the user
on the website. But the user need not perform an act which manifests actual assent.
Passive browsing of the website does not create a binding contract. However, where the
user uses the functions available on the website, a contract is formed, Ticketmaster LLC
v. RMG Technologies Inc., 507 F Supp. 2d 1096 (C.D. Cal. 2007).
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B. ClickWrap Contracts
These contracts are used by websites which sell goods, computer information or
services through the website. The user must click a button entitled “I agree” to purchase
from the website and the terms of the contract must be accessible to the user. However,
the user may click the button without seeing the terms of the contract if the user so
chooses, A.V. v. iParadigms, LLC, 544 F. Supp. 2d 473 (E.D. Va. 2008).
C. ScrollWrap Contracts
To use the website the user must access the terms, scroll through them and click “I
agree” after scrolling through them. Until the user has scrolled through the terms and
clicks on “I agree”, the user cannot use the website.
D. Sign-in Wrap
The user signs in or logs onto a website. The terms of use are accessible but not
displayed and the user to click on an “I agree” button. The assent of the user is inferred
from the fact that the user signed in or logged on.
E. Modification
Some websites contain language which states that “we can modify these terms and
conditions at any time”. Courts have generally applied traditional contract principles to
modifications. A contract can be modified as long as the offeree has proper notice of the
proposed modification, the offeree assents to the modification and the modification must
be supported by consideration or promissory estoppel. Applying these principles to
websites, the modification must appear and be placed prominently on the website and
the user must have the opportunity to accept or reject the modification. Rejection can be
manifested by including a mechanism which prevents a user from continuing on the
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website unless the user clicks an accept button. The effective language would state: “We
can modify these terms after providing notice to you. If you disagree with the terms do
not continue to use the website.”
6-5. Signing the Electronic Contract
All states and the federal government have enacted statutes which set forth a set of
rules by which electronic signatures and electronic records in any type of transaction are
recognized as binding legal acts and binding legal documents. An electronic signature
means an electronic sound, symbol, or process attached to or logically associated with a
record and executed or adopted by a person with the intent to sign the record. Certain
legal documents such as wills, court orders and certain consumer notices cannot be
signed by electronic signatures and must be manually signed.
The Uniform Electronic Transactions Act (UETA) has been enacted by most states
including the District of Columbia, Maryland, and Virginia. It sets forth rules by which
electronic signatures and electronic records in any type of transaction are as binding as
manual signatures. An electronic signature is an electronic sound, symbol, or process
attached to or logically associated with a record and executed or adopted by a person with
the intent to sign the record.
The Electronic Signatures in Global and National Commerce Act (E-Sign) is a
federal law by which electronic signatures and electronic contracts used in interstate
commerce are legal. E-Sign does not pre-empt or limit any law that requires that a
particular contract or signature be in a hard copy or manual form. Signatures on certain
legal documents such as wills, court orders and certain consumer notices are exempt
from E-Sign so that signatures on these documents must be manual.
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State law may alter or limit E-Sign as long as the state law is the UETA or another
law that specifically sets forth rules which make electronic signatures valid. This raises
some significant and complicated state pre-emption issues partly because UETA both
overlaps with E-Sign and is more comprehensive than E-Sign. Also, even though UETA
and E-Sign have certain issues in common, they each deal with those issues in a different
manner. The policy objectives of UETA and E-Sign are limited. They only provide a
generic legal definition of an electronic signature and mandate that an electronic
signature has the same legal effect as a manual signature. Neither statute is nor is
intended to be a general contract law.
6-6. Duty to Read - Presumption of Knowing Assent
There is a common law principle that, as long as a party knows that it is signing a
contract, the party is presumed to know and understand the contents of the contract.
The party to be charged affixes its signature to the same document which contains the
provisions of the contract. This principle has rarely been an issue for so long as contracts
have been in the form of a written document. The principle of knowing assent has been
adapted to electronic contracts. As long as the party to be charged knows that it incurs
legal obligations when it clicks on the “I agree” button, the party is presumed to know the
contents of the electronic contract.
However, unlike written contracts, the “signature” of a party to an electronic
contract is not affixed to the contract itself. The party usually must click on another link
to see the provisions of the contract. Consequently, there is an issue as to whether the
common law principle of knowing assent can apply to electronic contracts. The courts
have not resolved this issue. Some commentators take the position that unless the
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contract is available at the same time at which the person clicks the “I agree” button there
cannot be knowing assent. Other commentators opine that the inconvenience of clicking
on the link to the contract is so minimal that a person who clicks on the “I agree” button
should be presumed to have read the contract and know the contents of the electronic
contract.
6-7. Emails as Contracts
An exchange of emails can form a binding contract even if the parties do not sign
an ultimate contract. If the content of the emails clearly establishes an offer and an
acceptance. No one should form a contract in any manner other than a writing which
sets forth the terms and conditions of the contract. Negotiations are often conducted
through emails. The initial email should state that the emails are for negotiations only
and no email is an offer and no email is an acceptance until a final written contract which
contains the agreed terms is signed by the parties.
6-8. Emails as Notice
The issue in using emails as notice is whether and when the email is received.
Under federal common law, there is an old rebuttable presumption that a letter inside of
a properly addressed envelope has been received by the addressee, Rosenthal v. Walker,
111 U.S. 185 (1884). This principle has not been explicitly applied to emails. Like any
other form of communication, there are technological circumstances under which an
email which is sent in good faith is not received by the person to whom it is directed. The
courts and, preferably, legislatures will have to resolve this issue.
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TAB 7
CONTRACTS SUBJECT TO SPECIFIC STATUTES
7-1. Uniform Commercial Code Article 2 - Sale of Goods
The Uniform Commercial Code (UCC) is a set of uniform rules that have been
enacted, with various differences, by almost all states and the District of Columbia. It
consists of nine Articles. Article 1 contains the general provisions that apply to all
transactions covered by the UCC. Article 2 governs the sale of goods, Article 2A governs
leases of goods, Article 3 governs commercial paper, Article 4 governs bank deposits and
collections, Article 5 governs letters of credit, Article 6 governs bulk transfers, Article 7
governs warehouse receipts, bills of lading and other documents of title, Article 8 governs
investment securities and Article 9 governs secured transactions. The purpose of the
UCC is to codify the law of contracts and business practices in areas governed by the nine
Articles.
Article 2 which governs the sale of goods between merchants. It substantially
changes many common law principles of contracts. Parties can opt out of Article 2 but it
must be done affirmatively. The practitioner should be familiar with Article 2 in drafting
a contract for the sale of goods. Article 2 does not govern contracts for labor, services or
the sale of land.
7-2. U.N. Convention on the International Sale of Goods (CISG)
The CISG is similar in concept and structure to UCC Article 2. It is a default
statute for transactions that involve the international sale of goods. CISG was drafted by
the United Nations Commission on International Trade Law (UNCITRAL). The mandate
of the UNCITRAL is to harmonize and unify international trade law in an effort to
55
reduce legal obstacles to international trade and promote the orderly development of new
legal concepts to further assist in the growth of international trade. The United States
ratified CISG as of December, 1986 and CISG took effect in the United States on January
1, 1988. As of June 1, 2014, 83 nations have signed and ratified CISG. In drafting a sale
of goods contract between a U.S. party and a party with its place of business in another
signatory country, the practitioner must be familiar with the provisions of the CISG.
The CISG contains principles of interpretation and definitions of the CISG that are
meant to guide the application of CISG, (Article 7-13). There are rules concerning intent
and knowledge. Articles 8 and 11 essentially negate the parol evidence rule, (See MCC-
Marble Ceramic Center, Inc. v. Cermica Nuova D’Agostino S.P.A, 144 F.3d 1384 (11th
Cir.1998). An agreement need not be in writing to be enforceable, (Article 11).
The CISG applies where:
A. the contract is for the sale of goods, and
B. the parties have places of business that are in different countries,and if a party has multiple places of business the place that has theclosest relationship to the contract and its performance willdetermine this requirement.
C. those countries are signatories to CISG (referred to as ContractingStates), and
D. the parties do not by agreement exclude the contract from CISG.
The CISG does not apply to sales:
A. of goods bought for personal or household use,
B. by auction,
C. by execution or by application of law,
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D. of stocks, negotiable instruments, investment securities and otherintangibles,
E. of ships and aircraft,
F. of electricity,
G. where the preponderant obligation of the supplier is to provide services.
7-3. UNIDROIT Principles
The UNIDROIT Principles of Commercial Contracts (referred to as the
UNIDROIT Principles) are promulgated by the International Institute for Unification of
Private Law which is an independent inter-governmental organization based in Rome,
Italy. Its purpose is to examine ways of harmonizing and coordinating the private
domestic law of member states and prepare uniform private laws. The Institute serves as
a group of uniform law commissioners similar to NCCUSL. Formed in 1926, the Institute
has promulgated uniform laws on international leasing, international wills and
international franchising.
The UNIDROIT Principles codify the contract law to be applied in international
business transactions. They draw from both civil law legal concepts and common law
legal concepts. In form and purpose they are similar to the Restatement of Contracts.
The UNIDROIT Principles differ from CISG as follows:
A. The CISG applies on to for the sale of goods. The UNIDROITPrinciples apply to any type of commercial contract includingpersonal service.
B. The CISG is a treaty between and among nations. The UNIDROITPrinciples are a model act which parties can negotiate and choose togovern their contract. Questions such as conflicts of law, whetherthe CISG is enacted as domestic law and the enforceability of CISGin the domestic courts of non-signatory countries do not arise.
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C. Since the UNIDROIT Principles are a model act rather than a treaty,they are more practical because they more closely reflectinternational business practices rather the political and diplomaticcompromises that are necessary to conclude a treaty.
7-4. Sales and Leases of Real Property
Contracts for the sale of real property are most often governed by form
agreements and by the custom and usage of the particular jurisdiction. In some
jurisdictions including Maryland certain form agreements are mandated by statute.
Leases, particularly residential leases, are generally governed by the landlord-
tenant laws of the applicable jurisdiction. Issues such as holding-over, dispossess
actions, conditional limitations, warrants of habitability, notice periods are governed by
statute.
7-5. Business Entity Agreements
The shareholder agreement of a corporation, the operating agreement of a limited
liability company, the governing instrument of a statutory trust and the partnership
agreement of a general or limited partnership are contracts. The purpose of each
agreement is to set forth the legal relationship between and among the owners of each
entity and the rules by which the entity will be managed and governed. The corporations,
limited liability company, statutory trust and partnership statutes contain default
provisions. The default provisions of each such statute govern the internal affairs of each
such entity as long as the owners have not manifested an agreement on any issue covered
by a default statute. The drafter must know the default provisions of the applicable entity
statute so that the agreement reflects the intentions of the parties and that does not
merely default to the entity statute. The District of Columbia has enacted legislation
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which represents the first effort since 1870 to fundamentally and comprehensively
reform and revise the entity statutes of the District. The District of Columbia Official
Code Title 29 (Business Organizations) Enactment Act of 2010, (D.C. Law 18-378)
replaces Title 29 of the D.C. Code. The new Title 29 adopts the concept of a unified
business entity code. All of the substantive entity statutes are placed in Title 29 with a set
of definitions, formation, administrative and transactional provisions which apply to all
of the entities. This concept is referred to as the “hub and spoke” system. Although the
new Title 29 does not change the fundamental concepts of entity law, it adds new
definitions, new default provisions and new entities. The new Title 29 took effect on
January 1, 2012. The chapters of new Title 29 are as follows:
A. Chapter 1 - General Provisions: Formation, Name, Registered Agent,Foreign Entities and applies to all entities.
B. Chapter 2 - Entity Transactions: Model Entity Transactions Act(META)
C. Chapter 3 - Business Corporations: ABA Model BusinessCorporation Act (MBCA)
D. Chapter 4 - Nonprofit Corporations: ABA Model NonprofitCorporations Act (MNCA)
E. Chapter 5 - Professional Corporations: Current law.
F. Chapter 6 - General Partnerships: Revised Uniform Partnership Act(RUPA); Current law.
G. Chapter 7 - Limited Partnerships: Revised Uniform LimitedPartnership Act (RULPA)
H. Chapter 8 - Limited Liability Companies: Revised Uniform LimitedLiability Company Act (RULLCA)
I. Chapter 9 - General Cooperative Associations: Current law.
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J. Chapter 10 - Limited Cooperative Associations: Uniform LimitedCooperative Association Act (ULCAA)
K. Chapter 11 - Unincorporated Nonprofit Associations: RevisedUniform Nonprofit Associations Act (RUNAA)
L. Chapter 12 - Statutory Trust Entities: Uniform Statutory Trust EntityAct (USTEA)
M. Chapter 13 - Benefit Corporations
7-6. Uniform Computer Information Transactions Act (UCITA)
The Uniform Computer Information Transactions Act (referred to as UCITA) is a
model act drafted by the National Conference of Commissioners on Uniform State Laws
(referred to as NCCUSL). It was originally being drafted as Article 2B to the Uniform
Commercial Code (UCC) until the drafters determined that due to the subject matter, it
could not be integrated into the framework of Articles 2 and 2A. Article 2B was renamed
UCITA and approved by NCCUSL and recommended to the states for approval on July
29, 1999. UCITA is meant to set forth a uniform system of concepts and default rules for
transactions in computer information in the same way that Article 2 of the UCC provides
such a system for sales of goods.
As of October 1, 2016, only Virginia (Va. Code Ann. § 59.1 - 501.1 [Trade &
Commerce]) and Maryland (Md. Code Commercial Law §22-101) have enacted UCITA.
Neither the District of Columbia nor Delaware has enacted UCITA. Consequently, any
contract governed by Virginia or Maryland law which is a transaction in “computer
information”, as that term is broadly defined in UCITA, is enforceable under UCITA. The
practitioner must either “opt out” of UCITA or read and understand the provisions of
UCITA.
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UCITA is a highly controversial measure. Reportedly, attorneys general in 24
states oppose enactment of UCITA primarily due to concerns about adequate consumer
protections. As a measure of its controversy, several states not only refuse to enact
UCITA but also prohibit a party from enforcing any contract under UCITA against any
citizen or business in those states.
UCITA is a contract law that provides an integrated set of primarily default rules
that will govern a transaction subject to the UCITA when the parties to the transaction
have not manifested an agreement. It is not meant to be nor does it function as a
regulatory scheme. UCITA governs an agreement and the performance of that agreement
to create, modify, transfer or license computer information or informational rights where
the computer information or informational rights are the subject matter of the bargained
for exchange. The agreement contemplated under this definition is broader than just the
contract between the parties and encompasses the entire bargain between the parties
whether manifested in the contract or implied in their course of dealing or by custom in
the industry. UCITA does not govern electronic communications that form a contract
where the subject matter of the contract is not computer information, i.e., e-mails about
the sales of goods, electronic airline tickets.
While adopting many of the principles of UCC Article 2, the drafters of UCITA
recognized that a fundamental difference exists between the transactions that are subject
to UCC Article 2 and the transactions that are subject to UCITA. UCC Article 2
contemplates transactions in which tangible goods are delivered by seller to buyer and
legal title to those goods passes from seller to buyer. UCITA contemplates transactions
in which a license or the right to use information is granted by the owner of the
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information to the user and legal title to the information does not commonly pass but
rather the parties remain in a continuing legal and commercial relationship. The parties
may opt out of UCITA but must expressly do so. Like UCC Article 2, UCITA contains
provisions on contract formation, warranties, consumer protections and enforcement.
7-7. Franchise Agreements
Franchises are regulated at both the federal and state levels. There are generally
two types of regulatory schemes: one, disclosure and registration and, two, disclosure,
no registration but mandated termination/renewal provisions. The Federal Trade
Commission (FTC) Franchise Rule regulates the offer and sale of franchises, 16 C.F.R.
Part 436. It requires that certain material terms of the Franchise be disclosed but does
not mandate that the franchise agreement contain any particular terms.
Fourteen states require that a franchisor doing business in the state or offering
franchises in the state must register the disclosure document with the attorney general.
The rest of the states require that a disclosure document be provided under the FTC
Franchise Rule but need not be registered. Most of them set forth rules by which a
franchise can be terminated or renewed. They generally require that the franchisee
receive reasonable notice of termination and the cause for the termination. The term
“cause” is defined as failure to renew at least 60 days prior to expiration, failure to
substantially comply with the terms of the franchise agreement, lack of good faith in
performing under the franchise agreement and voluntarily abandoning the franchise.
The franchisee must also be afforded a reasonable opportunity to cure.
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7-8. Government Contracts
Contracts between private entities and government at the federal, state and local
levels are highly regulated. Depending on the government agency, government contracts
are subject to regulations on, bidding, pricing, sub-contracting, termination for
convenience, ethics, manner of performance, time for performance, dispute resolution,
renewal and extension. The content of significant provisions of a government contract
are usually already set by regulation. The role of counsel is often explaining to the client
the legal effect of government contract provisions rather than actually negotiating
drafting such provisions.
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TAB 8
ETHICAL CONSIDERATIONS IN NEGOTIATION AND DRAFTING
8.1 Rules of Professional Conduct
Attorneys must have a thorough knowledge of the ethical rules and ethical
considerations that govern the formation of legal relationships. These rules and
considerations are implicated whenever an attorney drafts a contract or forms an entity.
Rules of ethics for attorneys go back to ancient times. Although the office of attorney did
not exist in Ancient Athens, a male citizen could designate another male citizen to speak
for him. He was called a “logographos”. The most famous logographos from that era is
Demosthenes. In Ancient Rome, the office of attorney did exist, one of the most famous
Roman attorneys being Cicero. Rules of conduct for attorneys developed parallel to the
development of the office of attorney.
The primary source of rules of ethics is the Model Code of Professional
Responsibility recommended for adoption by the American Bar Association (ABA). The
ABA Model Code has been widely accepted by the states. However, states have enacted
amendments so that attorneys must consult the ABA Model Code as enacted in each
state. In D.C., the authority for admitting, supervising and disbarring attorneys is vested
in the D.C. Court of Appeals. The D.C. Court of Appeals has issued the D.C. Bar Rules
which created the D.C. Bar and which govern the operation of the D.C. Bar. Rules for
admission and disbarment are contained in the D.C. Bar Rules. The D.C. Bar Rules
create a Board of Governors of the D.C. Bar and a Board of Professional Responsibility.
The Board of Governors (referred to as BOG) administers the D.C. Bar. The Board of
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Professional Responsibility enforces those D.C. Bar Rules which govern the conduct of
attorneys through a Bar Counsel.
The Rules of Professional Conduct (referred to as the Rules) are an appendix to
the D.C. Bar Rules. If an attorney fails to comply with the Rules, the Board of
Professional Responsibility may use that failure as a basis for invoking the disciplinary
process. The disciplinary process is set forth at Rule XI of the D.C. Bar Rules. The Legal
Ethics Committee of the D.C. Bar was created by the BOG to render periodic advisory
opinions on the Rules of Professional Conduct. The Committee does not render opinions
in particular cases. Although the opinions of the Committee are advisory, attorneys
should consider them to be binding.
The Rules in their present form took effect on February 1, 2007. The Rules are
essentially rules of reason and should be interpreted with reference to the purpose of
legal representation and counseling and the applicable law. Some rules are mandatory
and are identified by the connector "shall" or "must". Mandatory rules impose a present
and continuing obligation on an attorney. Failure to comply invokes the disciplinary
process. Many rules are permissive or suggestive and are identified by the connector
"may". These rules are discretionary and do not impose an obligation. Failure to comply
does not invoke the disciplinary process. Each Rule is followed by a Comment. The
Comment is a narrative explanation of the nature, substance and applicability of the Rule
to which each such Comment is attached. The Comments are meant to be guides but
only the rule itself is binding and not the Comment to the rule.
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8-2. Dealing with an Unrepresented Party (Rule 4.3.)
The ethical considerations raised by negotiating and drafting a contract are simple
as long as each party is represented by an attorney. The ethical considerations become
more complicated where a party is not represented by an attorney. Rule 4.3 prohibits the
attorney from giving legal advice to the unrepresented party and from stating or implying
that the attorney is disinterested in the transaction. The attorney should express in
writing that the unrepresented party should seek independent legal advice and that the
attorney represents only the interests of his or her client in the transaction. If the
unrepresented party insists on concluding the contract without independent legal advice,
the attorney should include a provision in the contract governance section that reflects
the facts that the attorney drafted the contract, that in the course of the negotiations and
drafting he or she represented only his or her client, that the attorney advised the
unrepresented party to seek independent legal advice and that the unrepresented party
chose not to seek such advice.
8-3. Rendering Services to Two or More Parties (Rule 1.7)
The ethical considerations are most complicated where two or more
unrepresented parties request the attorney to draft a contract. This is essentially the role
that the civil law notary performs. The attorney is not per se prohibited from rendering
that service. However, avoid this situation if at all possible. Rule 1.7 governs the issue of
rendering services to two or more persons. The attorney must advise the parties that:
A. He or she does not represent any one party,
B. The attorney client privilege and duties of confidentiality do not apply asbetween or among the parties,
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C. Each party is entitled to and will receive equal and full disclosure ofall legal advice and opinions, and
D. If the attorney reasonably foresees a conflict or the possibility of aconflict between or among the patties, the attorney will have torepresent one particular party (or group of parties) or possibly ceaserendering any services.
8-4. Effect of Bad Advice During Pre-Retainer Discussion
Even though the client has not retained the attorney, legal advice that an attorney
renders during pre-retainer discussions which is incompetent can be the basis for
professional malpractice, Steele v. Allen, 2009 WL 399992 (Colo.App. 2009). The court
relied on the following:
When a person discusses with a lawyer the possibility of their forming aclient-lawyer relationship for a matter and no such relationship ensues, thelawyer must…use reasonable care to the extent the lawyer provides theperson legal services, Restatement 2nd Law Governing Lawyers Sec.15(2000).
The client has a claim for professional malpractice if the client can establish that
the client:
A. Was consulting an attorney,
B. Received legal advice during the initial discussion, and
C. That the attorney rendered the legal advice expecting that the clientwould rely on it.
8-5 Attorney Emails/Texts and Websites
In the early 1990s, a law firm manager confidently predicted that attorneys will
not use emails because how emails would be treated for privilege, liability and discovery
purposes is and always would be uncertain. He was wrong about attorneys using emails.
But he was right about the uncertainty as to the use of emails. In the nearly 30-odd years
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during which attorneys have been using emails, rules and case law about the treatment of
emails either do not exist or, if they do, they are pedestrian, inconsistent and even
contradictory. There have been attempts to develop protocols for the treatment of emails
but none has been successful.
Nevertheless, there are some common sense guidelines for the use of emails. The
fundamental concept is that an email is a written record of an oral statement. Unlike the
substance of an oral conversation, the substance of an email is within the control of
persons other than the sender/receiver and can last forever. Never use an email for idle
conversation or stream of consciousness.
A. Transmit Privileged Information Only in Attachments.
Treat an email as if it is an envelope. Do not put information which would
ordinarily be privileged in the body of the email any more than the attorney would write
privileged information on the outside of an envelope. Communicate any privileged
information in a memorandum as an attachment. Put the name of the client in a
salutation in the email so that it is clear to whom the attachment is directed. Do not
simply rely on the email address.
As a technical matter, the server can read the body of an email without any
affirmative act. However, the server must perform an affirmative act, however limited, to
read an attachment. This is similar to sending a memorandum through the postal
service. If the memorandum is in an envelope, it is privileged. If the postal service opens
the envelope without permission, the memorandum is still privileged. The act of opening
the attachment is arguably similar to the act of the postal service opening the envelope.
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B. Firm Information.
Place the firm contact information including email address at the bottom of the
email just as the sender would place a return address on an envelop.
C. Separate Emails.
Never cc another the client of another attorney on any email. This is unethical.
Never cc any one else on an email to your client.
D. “Reply All”.
Do not automatically reply to all persons on an email. Determine which the
persons to which you must or should reply and the reason for replying to that person(s).
E. Multiple Questions.
If an email contains more than one inquiry, respond separately to each inquiry
and not a blanket answer.
F. Subject Lines
Insert the same subject line as would be inserted in a letter rather than just a brief
description.
G. Unreceipted Emails.
If the attorney has been informed to expect an email and the attorney does not
receive it, make a record. Send an email which states that the email has not been
received.
H. Preservation of Emails.
Rules of court require that an attorney or a party must preserve emails as well as
other electronic information which is or may be evidence. If emails are deleted or not
retrievable, the attorney or party must demonstrate the steps taken to preserve the
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emails and the steps taken to retrieve the emails. The person who must produce the
emails or electronic information must show why the emails cannot be retrieved.
I. Emails as Continuing the Legal Relationship
Even if a legal relationship has ended, an exchange of emails can unintentionally
continue or even revive the legal relationship. An exchange of emails between a doctor
and a patient can constitute continuous care for the purpose of determining when the
statute of limitations begins to run.
J. Attorney Websites
Attorney websites are rapidly replacing the print brochure. There are few rules
which apply only to websites. The fundamental difference between websites and
brochures is that brochures are not readily available to the general public. The primary
guidance on websites drawn from the rules on attorney advertising to the general public,
particularly accuracy and currentness.
The website should accurately reflect the areas of practice, the geographical places
of practice and the backgrounds of the attorneys and staff, particularly the bars to which
the attorneys are admitted. If the firm has non-attorney professional members, their
backgrounds should prominently state that they are not attorneys and the non-legal
services which they perform for clients. Except for articles and newsletters which the
firm has vetted or which have been published, the website should not contain affirmative
legal advice.
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8-6 ABA Formal Opinion 477
The American Bar Association issued the aforementioned opinion in May 2017. In
form, it covers the electronic protection and the confidentiality of client information.
However, as a practical matter, it addresses the competence of attorneys with respect to
technology. Attorneys must be sufficiently knowledgeable about existing means and
methods for protecting electronic information, such as encryption. The opinion does not
specify when an attorney must employ protection measures. But it does require
attorneys to conduct a fact based inquiry as to whether and which measures are
necessary. No matter how untutored in these issues an attorney would like to remain,
the days of the Luddite attorney are over.
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TAB 9
SMART CONTRACTS
9-1. Smart Contracts in Perspective
A. Smart Contracts in Concept
Commentators are informing attorneys that smart contracts are the next
fundamental development in the performance and enforcement of contracts. Smart
contracts are also called “conditional contracts”, “conditional transactions” and even
“artificial intelligence programs”. Whatever the name, a smart contract is unlike a
traditional contract in that a smart contract is self executing and self enforcing.
The terms of the contract are coded and entered into a computer program. The
terms will have specified the conditions to payment such as the time for payment,
amount of payment and method for payment, in effect, the mechanism for payment.
Once the mechanism for payment is programmed, none of the parties nor anyone else
can change any element of the mechanism for any reason unless there is a contingency
for non payment which has already been programmed. If the contract makes no
contingency for force majeure so that no such contingency is coded and programmed
and a force majeure occurs, the program causes payment to be made without regard to
the force majeure.
No party must actually perform any obligation because the obligations of each
party are already programmed into the smart contract. An event which constitutes a
breach is already programmed into the smart contract. The means for enforcing the
smart contract and the remedy for the breach are also already programmed into the
72
smart contract. Consequently, the smart contract is more efficient than traditional
contracts because:
1. No party incurs any cost or expends any time to perform under thesmart contract,
2. No party incurs any costs or expends any time to enforce the smartcontract, and
3. The third party intermediary such as a bank is eliminated.
Some commentators have raised the issue of whether a smart contract is even a contract
under common law. Arizona has enacted legislation which recognizes smart contracts as
enforceable common law contracts.
B. Smart Contract Concept as a Traditional Concept
The smart contract is simply another method for implementing the oldest and
most fundamental principle of contracts: confidence in performance. A contract and the
law of contracts are useless if they do not give each party confidence that the other
party(ies) will perform. The level of confidence necessary depends on the scope and
complexity of the subject matter of the contract.
Buying a book at a bookstore is a contract but it requires a minimal level of
confidence. The buyer has inspected the book, is satisfied, the price is set, the buyer
pays the price and the bookstore releases or delivers the book to the buyer. Because the
exchange of performances is immediate, there is no need for confidence in performance.
However, with a contract for the sale of commodities of a stated quality in which the
seller and the buyer are distant from one another and the commodities must be
transported, confidence in performance is essential and complicated to achieve.
73
There is a method in use which anticipates smart contracts but is centuries old. It
is the paymaster method.
1. The parties conclude a contract.
2. The buyer deposits the purchase funds with a neutral person calledthe paymaster.
3. The paymaster verifies the terms of the contract. The contract setsforth the condition(s) precedent to payment.
4. The paymaster strictly follows those conditions without regard towhatever post-execution events occur.
The paymaster is just like the computer. The terms of the contract will be implemented
without regard to any act of any person.
9-2. The Smart Contract Must Still be Drafted
Much of the commentary on smart contracts ignores the essential first step in the
process - drafting the terms and conditions to be coded and programmed. No matter
how sophisticated the code or how high technology the computer, an attorney must draft
the terms and conditions which go into the smart contract. In fact, because the smart
contract will execute and enforce only the terms and conditions which are coded into the
program, the drafting must be even more considered and more precise than for a
traditional contract. At least one commentator has recognized this issue. The
commentator states that the agreement will probably have to be drafted “without
legalese” and in plain English.
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1
How to Draft a Bad Contract ™
Copyright 2015, 2016 by Mark Cohen
“Simply brilliant.” – Steven Pinker, Professor of Psychology, Harvard University
You may distribute this article freely provided you make no changes and give the author.
Mark Cohen, J.D., LL.M.
www.cohenslaw.com
Plain English Consulting
Mark’s Blog
Start Early. Work Hard. Finish. ®
______________________________________________________________________________
Introduction
Many experts have written on how to draft a good contract.1 To my knowledge, no legal scholar
has approached the issue from the opposite end by explaining how to draft a bad contract. I do so now.
Why should lawyers draft bad contracts? Self-interest. A good contract clearly sets forth the
rights and duties of the parties, defines key terms, addresses all issues that might arise, contains no
ambiguities or inconsistencies, and employs plain English so non-lawyers can easily understand it. In
short, a good contract reduces the risk of misunderstandings and costly (but profitable) litigation. Good
contracts also mean clients need not rely so heavily on lawyers to explain them. Good contracts mean less
work for lawyers.
The techniques a lawyer may use to draft a bad contract are limited only by the lawyer’s
creativity. Still, in my 33 years of practice, I have found a number of proven methods to draft a bad
contract, and this article summarizes them. This will not be the final word on the subject; I hope only to
inspire further academic discussion.
How to Draft a Bad Contract
1. Omit the caption or title. A bad contract has no caption at the top of the first page telling the reader
what the document is. If you must use a caption, use one that offers little information such as
"Agreement" or "Contract." Do not, for example, use "Horse Purchase Contract" because that would
reveal exactly what the document is.
2. Include a formal introduction. A bad contract begins with a verbose, formal introduction. Why?
Because that’s how they did it in England 400 years ago. Here is sample bad introduction you may use:
This Agreement (hereinafter "Agreement") is made and entered into this ____ day of
___________, 20___, by and between John Jones of Denver, Colorado (hereinafter "Seller") and
1 See, e.g., Adams, A Manual of Style for Contract Drafting (ABA Publishing, 2013); Burnham, Drafting and Analyzing Contracts: A Guide to
the Practical Application of the Principles of Contract Law (LexisNexis,® 2003); Feldman and Nimmer, Drafting Effective Contracts: A
Practitioner’s Guide (Aspen Publishers, 1995).
2
Suzy Smith of Durango, Colorado (hereinafter "Buyer") for the purchase of Seller’s fifty percent
(50%) interest in the horse known as "Silver."
Do NOT use straightforward language like this:
This is an Agreement ("Agreement") between John Jones ("Jones") and Suzy Smith ("Smith") for
the purchase of Jones’s 50% interest in the horse known as "Silver."
3. Use verbose recitals rather than short summaries. Historically, contracts included recitals to clarify
intent, add to consideration, and/or bolster the importance of conditions in the contract.2 A bad contract
should include recitals that accomplish none of these goals and that include the word "WHEREAS" and
the phrase "NOW, THEREFORE." Example:
WHEREAS, Jones and Smith each own a fifty percent (50%) ownership interest in the horse
known as "Silver";
WHEREAS, Smith desires to purchase Jones’s fifty percent (50%) ownership interest in said
horse;
WHEREAS, Jones is willing to sell his fifty percent (50%) ownership interest in "Silver" to Smith
on the terms set forth herein; and,
WHEREAS, Smith is willing to purchase Jones’s fifty percent (50%) ownership interest in "Silver"
on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good
and valuable consideration, in hand paid, the receipt and adequacy of which is hereby
acknowledged, the parties hereto mutually agree as follows:
Always use the "WHEREAS / NOW, THEREFORE" format for recitals. Do NOT replace the recitals
with a concise summary such as this:
Background
Jones and Smith purchased a horse for $50,000 on January 1, 2012. They each paid $25,000 of the
purchase price and agreed they would each own a 50% interest in the horse. Differences arose
between Jones and Smith concerning the horse. Jones and Smith have agreed to resolve their
differences on the terms set forth in this Agreement.
You can also increase the badness of a contract by including definitions or substantive provisions in the
recitals. By including substantive provisions in the recitals, you create an opportunity to later research and
brief the issue of whether the recitals are part of the enforceable agreement.3
4. Use WITNESSETH. Use "WITNESSETH" to separate the introduction from the contractual terms.4
Why? Because that’s how they did it in England 400 years ago. I recommend using a bold font,
centering it, inserting a space between each letter, and underscoring each letter like this:
2 Jacobson, "A Checklist for Drafting Good Contracts," 5 J. of the Ass’n of Legal Writing Directors 79-117 (Fall 2008). 3 See, e.g., McKinnon v. Baker, 370 N.W.2d 492 (Neb. 1985) (Recitals are "generally background statements and do not ordinarily form any part
of the real agreement.").
3
W I T N E S S E T H
If you want, consider using the Olde English Text font for this:
5. Don’t define key terms. A bad contract avoids defining technical words or terms of art altogether or
defines them in a way that prevents all parties from sharing a common understanding of them. If you must
include definitions, you may still draft a bad contract by:
Using ambiguous words in your definitions (for example, a "ton" could mean 2,000 pounds or a
long ton of 2,200 pounds).
Defining terms not used in the contract.
Using the defined term in the definition (for example, you may define a "writing" to mean "any
writing").
Defining more terms than necessary.
Employing inconsistent definitions.
Defining terms only after they have already appeared in the contract.
Including substantive provisions of the agreement in the definitions.
Sprinkling your definitions throughout the contract rather than including them all in alphabetical
order in a single section of the contract.
6. Omit the consideration. An agreement not supported by consideration is invalid and unenforceable.5
A truly bad contract omits any mention of consideration. If you must include language concerning
consideration, be vague by writing something like "for good and valuable consideration, the receipt of
which is hereby acknowledged." Do NOT mention issues such as price, quantity, quality, time of
performance, or time of payment.
7. Use inconsistent terminology. To draft a bad contract, you should use multiple terms to refer to the
same thing. For example, if the contract defines "Agreement" to mean "this Agreement," you should
sometimes use "Contract" or "this document" rather than "Agreement." This will reduce your contract’s
readability and may even create confusion, thus improving the badness of your contract.
8. Omit or use misleading headings. Headings allow a reader to quickly see what each paragraph is
about. A truly bad contract has no headings. A bad contract makes the reader peruse the entire document
to find what they are looking for. If you must use headings, consider using headings that do not accurately
reflect the issue addressed in that paragraph. For instance, you might use "Attorney Fees" as a heading but
include a waiver of jury trial in that paragraph. This may create confusion about whether the jury waiver
is enforceable.6
9. Include unrelated items in the same paragraph. This is one of my favorite methods of drafting a bad
contract. For example, in a paragraph stating that neither party may assign its interest in the contract,
4 Some prefer to insert WITNESSETH between the introduction and recitals. Others suggest it is more appropriate after the recitals.
5 Ireland v. Jacobs, 163 P.2d 203 (Colo. 1945). 6 See, Haynes v. Farmers Inc. Exchange, 89 P.3d 381, 385 (Cal. 2004) (Court did not enforce a provision limiting coverage contained in a section
with the heading "Other Insurance").
4
include a provision that requires an award of attorney fees to the prevailing party in any litigation. Do
NOT create a separate paragraph with its own heading of "Attorney Fees" to address the issue of fees.
10. Do not number the paragraphs or pages. Numbered paragraphs and pages make it easier for people
to find and discuss specific portions of the contract. That’s bad. It is more fun (and more profitable) to
spend ten additional minutes in court while the judge and opposing counsel search the document for the
relevant provision. Sometimes you can help by saying something like, "I am looking at the sixth
paragraph up from the bottom on the seventeenth page, about midway through the paragraph, right after
the semicolon." Then sit back and relax while everyone struggles to find page 17 because you didn’t
number the pages. If you must number your paragraphs and pages, consider using the archaic Roman
numeral system. You will impress others with your knowledge of the numeric system used in ancient
Rome. (Be sure to use only whole numbers in your contract because the Roman system contains no way
to calculate fractions or to represent the concept of zero).
11. Do not specify the date, time, and place of performance. Remember, the goal of a bad contract is to
confuse so disputes arise and lawyers make money.
Wrong: Jones will deliver the horse to Smith at 574 Ridge Road, Durango, Colorado, by 5:00 p.m.
on August 1, 2015, at Jones’s expense.
Right: Jones will deliver the horse to Smith.
12. Do not address attorney fees. In Colorado, the general rule is that a court will not award attorney
fees unless authorized by statute, rule, or a provision in the relevant document.7 This is why good
contracts include an attorney fees provision. A bad contract does not. Remember, even without an
attorney fees provision, you can always seek attorney fees if the opposing party’s position lacked
substantial justification8 or violates C.R.C.P. 11. Because opposing counsel’s position always lacks
substantial justification and violates Rule 11, an attorney fees provision is unnecessary.
13. Do not address venue. A bad contract fails to specify the venue for any litigation arising out of the
contract. A good contract will contain something like this:
The exclusive venue for any litigation arising out of this Agreement will be in Boulder County,
Colorado.
I do not understand why some lawyers do this. If you practice in Boulder and the opposing party resides
in Durango, isn’t it better to let the opposing party file suit in La Plata County? You can bill a lot of hours
for driving to Durango and back.9 And Durango is really beautiful. Maybe you could get in some skiing
or swing by the Telluride Jazz Festival.
14. Do not include a waiver of jury trial. Be honest. One reason many of us chose law school is that we
grew up watching Perry Mason trap witnesses on cross-examination. And there is nothing juries like more
than being forced to listen to two profitable businesses fight over money. Jurors especially love hearing
7 Waters v. District Court, 935 P.2d 981, 990 (Colo. 1997). 8 See, CRS § 13-17-102. 9 Mapquest estimates six hours and thirty-two minutes each way under ideal conditions if traveling via Highway 160. Thirteen hours at my
hourly rate of $265 per hour is $3,445. That’s $3,445 for driving through some of the most scenic country in the United States while listening to
great rock ’n’ roll.
5
expert testimony from accountants and economists. Jurors enjoy math—that’s why so many are actuaries
and statisticians. Another reason not to waive trial by jury is that it takes more time to prepare for a jury
trial, and more time means larger fees.
15. Do not include a merger clause. A merger clause (or “integration clause”) provides that the contract
represents the complete and final agreement of the parties and that all prior discussions are merged into
the contract. Good contracts include a merger clause to prevent parties from later alleging there were
other promises or representations not included in the written contract. A bad contract includes no merger
clause. This leaves the door open for disputes about promises or representations allegedly made that are
not in the written contract. You should be able to bill at least one hour for refreshing your memory of the
Parol Evidence Rule and another hour for preparing a brief explaining that the rule does not apply
because the contract was not an integrated contract.10
If you include a merger clause, draft one that includes lots of legalese to impress your client, the other
party’s lawyer, and any judge or jurors who may ultimately read it. Here is a sample merger clause you
may use:
This Agreement, along with any exhibits, appendices, addenda, schedules, and amendments hereto,
encompasses the entire agreement of the parties, and supersedes all previous understandings and
agreements between the parties, whether oral or written. The parties hereby acknowledge and
represent, by affixing their hands and seals hereto, that said parties have not relied on any
representation, assertion, guarantee, warranty, collateral contract or other assurance, except those
set out in this Agreement, made by or on behalf of any other party or any other person or entity
whatsoever, prior to the execution of this Agreement. The parties hereby waive all rights and
remedies, at law or in equity, arising or which may arise as the result of a party’s reliance on such
representation, assertion, guarantee, warranty, collateral contract or other assurance, provided that
nothing herein contained shall be construed as a restriction or limitation of said party’s right to
remedies associated with the gross negligence, willful misconduct or fraud of any person or party
taking place prior to, or contemporaneously with, the execution of this Agreement.
Do NOT use a simple, concise merger clause such as this:
This Agreement sets forth the complete agreement of the parties. There are no promises or
representations other than those set forth in this Agreement.
The first merger clause contains 174 words. The second contains 24 words. Simple arithmetic proves the
former is 142 words better than the latter.
16. Do not address modification. Litigation sometimes arises when a party claims the parties orally
modified their agreement after signing the contract. A good contract provides that any modifications must
be in a writing signed by all parties. A bad contract contains no such provision, thus leaving the door open
to expensive litigation revolving around statements and behaviors of the parties after they signed the
contract.
10 See, Tripp v. Cotter Corp., 701 P.2d 124 (Colo.App. 1985) ("In the absence of allegations of fraud, accident, or mistake in the formation of the
contract, parol evidence may not be admitted to add to, subtract from, vary, contradict, change, or modify an unambiguous integrated contract.")
(emphasis added).
6
17. Do not address dispute resolution. A good contract specifies the method the parties will use to
resolve disputes, such as mediation, arbitration, or litigation. A bad contract does not. If you must address
this issue, draft a clause that is vague and leaves many unanswered questions. Here is a sample you may
use:
In any dispute arising out of this Agreement, the parties will submit to mediation.
Do NOT use a clause such as this that addresses all potential issues:
In any dispute arising out of this Agreement, the parties will participate in mediation before filing
suit. The mediator will be Jane Johnson of XYZ Mediation, Inc., and the mediation will be held in
Boulder, Colorado. The mediation may not last longer than eight hours unless both parties consent.
The parties will each pay half of the costs of mediation. Any party may initiate mediation by
sending a written demand for mediation to the other party. If the other party does not respond
within fourteen days or fails to participate in any scheduled mediation, the party sending the
demand may seek an order compelling mediation, and in that event the party that did not respond
to the demand or participate in the scheduled mediation shall pay the attorney fees and costs
incurred by the party seeking an order to compel mediation.
18. Include a cockamamie scheme to select an arbitrator or a mediator. For example, rather than
agreeing on the mediator or arbitrator ahead of time and identifying him or her in the contract, try
something like this:
In any dispute arising out of this Agreement, the parties agree that they will select an arbitrator by
the following method: Each party shall designate its choice to serve as the arbitrator by serving
written notice of that party’s choice on the other party. If the parties do not agree on the arbitrator,
the two arbitrators selected by the parties shall then designate a person to serve as the arbitrator.
This is an excellent way to improve the badness of your contract. First, it assumes the arbitrators the
parties select will be willing to meet and designate selection of an arbitrator without charge. Second, it
assumes the two arbitrators will be able to agree on who will serve as the arbitrator, but fails to address
what will happen if they cannot agree.
19. Include inconsistent provisions. This is one of my favorites. To make your bad contract even worse,
include terms that are or may be inconsistent. For instance, include an arbitration clause such as this:
In any dispute arising out of this Agreement, the parties agree they will participate in binding
arbitration to resolve the dispute. The arbitrator will be Don Davis of Davis Arbitration, and the
hearing will be held in Boulder, Colorado. The parties will each initially pay half of the costs of
arbitration, but the arbitrator shall order the party that does not prevail to reimburse the prevailing
party for those costs. The arbitrator shall also award attorney fees and other costs to the prevailing
party.
Then, in the next paragraph, include something like this:
In any dispute arising out of this Agreement, the parties agree that the exclusive venue for any
litigation shall be in the District Court of Boulder County, Colorado.
You can see the beauty of this. The parties are now confused about whether they must arbitrate or are free
to file suit.
7
20. Do not specify which jurisdiction’s laws will govern. Many contracts involve parties living or
operating in different jurisdictions or that operate in several jurisdictions. In drafting a bad contract, it is
important not to address which jurisdiction’s laws will govern. This will provide an opportunity to
research and brief the doctrine of lex loci contractus, which holds that when a contract is silent on what
law will govern, the governing law will be that of the jurisdiction where the contract was made. This has
two benefits. First, you get to use Latin. Second, if the parties reside in different jurisdictions and signed
the contract in their respective jurisdictions, you can research and brief the issue of where the contract
was made.
21. Make it difficult to distinguish the parties. Suppose one party is ABC, Inc., and it owns ABC
Transportation, Inc. and ABC Credit, Inc., both of which the contract mentions. By simply referring to
"ABC" throughout the contract, you can create confusion as to which entity is a party to the contract or
whether all three are. A variation on this is to confuse an entity with its individual owner. For instance,
you might sometimes refer to a party as "Acme, LLC," but at other times refer to it as "Johnson" (owner
of the LLC).
22. Cut and paste from the Internet. I did a Google search for "sample contract for sale of goods," and
got 40.8 million results. Law practice today can be so hectic that we sometimes take shortcuts. We find a
template we like and use it over and over. One way I see lawyers creating bad contracts is by copying
provisions from the Internet. Here’s one I see a lot:
In any dispute arising out of this Agreement, the parties will submit to binding Arbitration using
the rules of the American Arbitration Association (AAA).
This makes your contract more bad for several reasons. First, it does not specify that the parties must use
the AAA; it states only that they must use the AAA’s rules. Second, it does not specify which AAA rules
will apply; the AAA has many sets of rules for various types of disputes. Third, the lawyer using this
language may not realize that the AAA’s rules can be just as complex as the rules of procedure the lawyer
hoped to avoid by including an arbitration provision in the first place. Finally, the lawyer using this
provision may be unfamiliar with the AAA’s fee structure. In disputes involving small businesses or
small amounts of money, it may not make sense to use the AAA.
23. Don’t include a non-assignment provision. Generally, nothing prevents a party from assigning its
interest in a contract to some other person or entity. A bad contract recognizes that your client really
doesn’t care that much about who it does business with and will therefore omit a non-assignment clause.
If your client’s local supplier assigns its interest in a contract to a supplier in North Korea, why should
your client care? It’s easy to get admitted to practice in North Korea. If you must include a non-
assignment clause, leave a little wiggle room by not specifying that any consent to an assignment must be
in writing. Here’s an example:
No party may assign its interest in this Agreement without the consent of the other party.
24. Be redundant. If a provision is good enough to include in a contract, it is good enough to include
more than once. One way to do this is to insert an attorney fees clause into each paragraph that might
result in litigation if a party fails to comply with the obligations set forth in that paragraph. For example,
you could include an attorney fees clause in the confidentiality provision, in the non-compete provision,
or in the provision regarding nonpayment and late payment. This will make your contract longer, thereby
impressing your client, counsel for the opposing party, and any judge that may ultimately read it. A longer
8
contract will make your client think it is getting more for its money.11 Do NOT use one simple provision
such as this:
In any litigation arising out of this Agreement, the prevailing party shall be entitled to its actual
attorney fees, expenses, and costs.
25. Be vague about what constitutes effective notice. Many contracts contain provisions that require a
party to give written notice to the other party concerning certain matters. A bad contract must be vague
about when written notice is effective. Here is a vague notice provision you may use:
Wherever this Agreement requires a party to give written notice to the other, the party
giving notice shall send the notice to the other party by certified mail, return receipt
requested.
Do you see the beauty of this? Is the notice effective when sent or when it is received? Is it effective if
the recipient does not claim the certified letter and sign the receipt? What address should the party giving
notice send the notice to?
26. Use a small font. You want your contract to be thorough, but you worry that some may find a lengthy
document intimidating. The solution? Use a smaller font. The standard in the legal profession is to use a
12-point font, but you could sure cut down on the number of pages by using a 6-point font. This will
improve the badness of your contract by making it far more difficult for people to read. It may also later
give you the chance to research and brief the issue of whether using a small font may render a provision
unenforceable under the doctrine of procedural unconscionability.12
27. Use legalese.13 You slogged through three years of law school, possibly incurring a great deal of debt
in the process, and throughout that time you read volumes of decisions written by men long since dead
concerning disputes arising out of documents written by men long since dead governing transactions long
since forgotten. What was the point of that if you can’t employ their writing style? A detailed explanation
of how to use legalese to draft bad contracts is beyond this article’s scope, but here are a few tips on how
to make your contract more bad by using legalese:
a. Use long sentences. Example:
No person has been or is authorized to give any information whatsoever or make any
representations whatsoever other than those contained in or incorporated by reference in this
document, and, if given or made, such information or representation must not be relied upon as
having been authorized. (47 words)
Do NOT use something like this:
11 Think about it from the client’s perspective. If you charge $1,000 for a 5,000-word contract, the client pays only twenty cents per word. If your
charge $1,000 for a 2,500-word contract, the client pays a whopping forty cents per word!
12 See, D.R. Horton, Inc., v. Green, 96 P.3d 1159 (Nev. 2004) (Arbitration clause not enforceable where it was in an extremely small font). 13 Some examples in this section are taken from A Plain English Handbook (U.S. Securities and Exchange Commission, 1998),
www.sec.gov/pdf/handbook.pdf.
9
You should rely only on the information contained in this document. We have not authorized
anyone to provide you different information. (21 words)
b. Use passive voice. In the active voice, the subject of the sentence performs the action. In the passive
voice, the subject is acted upon. The active voice requires fewer words and tracks how people think, and
you should therefore avoid it.
Passive: This contract may be terminated at any time by either party on thirty day’s written notice
to the other party. (20 words)
Active: Either party may terminate this contract on thirty day’s written notice to the other party.
(15 words)
c. Don’t use personal pronouns. Personal pronouns speak to the reader and help avoid abstractions. We
can’t have that in a bad contract.
Without personal pronouns:
Unless otherwise inconsistent with this Agreement or not possible, INSPECTOR agrees to perform
the inspection in accordance with the current Standards of Practice of the International Association
of Certified Home Inspectors ("InterNACHI") posted at www.nachi.org/sop.htm. Although
INSPECTOR agrees to follow InterNACHI’s Standards of Practice, CLIENT understands that
these standards contain limitations, exceptions, and exclusions.
With personal pronouns:
Unless otherwise noted in this Agreement or not possible, we will perform the inspection in
accordance with the current Standards of Practice of the International Association of Certified
Home Inspectors ("InterNACHI") posted at www.nachi.org/sop.htm. You understand that these
standards contain limitations.
d. Use superfluous words. Never use one word when several will do. More words mean longer contracts,
and longer contracts justify higher fees. Long contracts also impress other lawyers. Be honest. When
another lawyer sends you a fifty-page residential lease, you feel kind of bad that your standard residential
lease is only nine pages. Is it possible you left out forty-one pages of important legal provisions that
would better protect your client? That woman must be a really good lawyer.
Here are some examples of simple words that can be replaced with superfluous words:
Simple Superfluous
If In the event that
Although Despite the fact that
Because Owing to the fact that
You can also use a thesaurus to find synonyms to increase your word count. Some of my favorite
examples are:
rest, residue, and remainder
10
remise, release, sell, and quit claim
due and payable
indemnify and hold harmless
sell, convey, assign, transfer, and deliver.
e. Use unnecessary, legalistic words. "Aforementioned" and "hereinafter" are always good, but you
should also strive to incorporate as much Latin as possible in drafting a bad contract. I took four years of
high school Latin and all I remember is Quantum marmota monax si marmota esset lignum possit?14
Fortunately, the Internet offers abundant resources to help you discover Latin phrases to incorporate into
your contracts.15
If you can’t work Latin into a contract, at least try to get a few foreign phrases in. Force majeure is a
good one. The parties are more likely to understand that than "extraordinary events" or "circumstances
beyond the parties’ control."
28. Signatures. Now that you have prepared the baddest contract ever, the parties must sign it to indicate
they agree to its terms. A bad contract must include a formal signature section to make sure the parties
know that the forty-seven-page monstrosity they are signing (with W I T N E S S E T H emblazoned
across the first page) is an important legal document rather than a less important communication like a
note to little Wendy’s teacher explaining that her bunny ate her homework. I recommend something like
this:
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the
day and year first above written.
This is particularly bad when there is no date and year above the signatures. Also, I like the reference to
the use of seals because few people or organizations use seals these days.16
Do NOT do this:
________________________
John Jones (Date)
________________________
Suzy Smith (Date)
Conclusion
Good contracts pose a serious threat to the legal profession. Fortunately, most students emerge
from law school with a basic understanding of how to draft a bad contract. After all, they’ve been reading
legalese for three years and are petrified that if they omit a word, litigation will result. However, after
years of practice and litigating disputes arising out of poorly drafted documents, some lawyers forget that
the profession’s fate depends on a steady supply of poorly drafted documents. They begin to advocate for
plain English. Soon passive voice starts to annoy them. Then "Sell, convey, assign, transfer, and deliver"
becomes simply "sell." At that point, it’s all over. A good managing partner will stage an intervention and
14 How much wood could a woodchuck chuck if a woodchuck could chuck wood? 15 An excellent resource is Wikipedia’s "List of legal Latin terms," https://en.wikipedia.org/wiki/List_of_Latin_legal_terms 16 Also, the word “seal” is ambiguous. I would admire any lawyer willing to argue that because a party failed to attach a six hundred pound
marine mammal to a contract in spite of the clear reference to a seal, the contract is invalid.
11
insist that the lawyer enter an appropriate twelve-step program. Sometimes you’ve got to be cruel to be
kind.17 While treatment can cure good drafting, the best approach is to prevent the problem in the first
place. Law schools and the bar must do more to educate lawyers on how to draft bad contracts. We owe it
to the profession.
About the Author
Mark Cohen has 33 years of experience as a lawyer. He earned a B.A.in Economics at Whitman College and earned his law degree at the University of Colorado in Boulder. He earned an LL.M. Agricultural and Food
Law from the University of Arkansas, where he also taught advanced legal writing. His diverse legal career
includes service as an Air Force JAG, a Special Assistant U.S. Attorney, a prosecutor, a municipal judge for
Boulder, six years on the Advisory Board of The Colorado Lawyer (including one as chairperson), and service on
the Executive Board of the Colorado Municipal League.
Mark wrote six articles in the Am.Jur. Proof of Facts series, including the seminal article on piercing
the corporate veil.18 He has written numerous articles and book reviews for The Colorado Lawyer. In 2004, he
won 2nd prize in the SEAK National Legal Fiction Writing Competition. He wrote two mysteries published by
Time Warner, and his first mystery, The Fractal Murders, became a Book Sense ® mystery pick and was a finalist
for the Colorado Book of the Year. His non-legal articles have appeared in magazines such as Inside Kung
Fu, Camping & RV, and Modern Dad. He is a member of the Institute of General Semantics and the Mystery
Writers of America. He writes a regular column for the Nederland Mountain-Ear.
Mark’s practice focuses on drafting and reviewing legal documents including contracts, corporate
documents, real estate documents, employment documents, intellectual property documents, motions,
pleadings, and briefs. He also litigates cases arising out of poorly drafted documents. He enjoys helping
businesses and other lawyers improve their legal and non-legal documents by translating them from
Legalese into plain English. Learn more at Plain English Consulting.
Mark holds a black belt in karate and serves on the board of directors of Dart, Inc., a Boulder non-
profit that offers training in personal safety, violence prevention, and appropriate dating relationships.
17 Nick Lowe, "Cruel to Be Kind," Labor of Lust (Columbia Records, 1979). 18 45 POF3d 1
