COMMERCIAL AGREEMENTS: NEGOTIATION, DRAFTING, AND KEY ASPECTS

LEGAL DRAFTING

January 8, 2015

John s. Gillies Director of Practice Support Cassels Brock & Blackwell LLP

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LEGAL DRAFTING — AN OUTLINE OF ISSUES ............. 1

Introduction ........................................................................................................... 1 “Standard language” drafting ................................................................................ 1

1. Structural approach to contract drafting ..................................................... 2 2. Common components of a commercial agreement ..................................... 3 3. Use of precedent documents ........................................................................ 4 4. Commonly encountered grammatical issues ............................................... 5 5. Structure, layout, and formatting ................................................................ 6 6. Editing your agreement ............................................................................... 7 7. Resources ..................................................................................................... 8

TABLE OF CONTENTS

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L E G A L D R A F T I N G — A N O U T L I N E O F I S S U E S

I N T R OD UCT I ON

Malcolm Gladwell’s book, Outliers, reports on research that establishes that you need to have devoted at least 10,000 hours to something before attaining a level of expertise in a particular field. While it is true that you gain proficiency through practice, making the same mistake over and over simply makes you proficient in committing that error. It will take you many hours and much practice to become an expert drafter of contracts.

You cannot, however, draft in a vacuum. You must test your results by reference to other, better examples and learn from the experience. (I am dealing here with all the aspects of contract drafting other than substantive law expertise.) For many lawyers, their drafting approach begins and ends with looking at examples of well-drafted documents from other skilled draftspeople (usually colleagues or opposing counsel). While that is a necessary part of your development, I suggest that you also need to consult guides to good writing on a frequent basis.

There are several good books available to help you, as well as a large number of articles (including a good number that are available on the Internet) and a growing number of blogs relating to good legal drafting. I have provided a number of references and links at the end of this paper.1

“ S T A ND AR D LA NG UAG E ” DR A FT I NG

If you are serious about good drafting, you will need to continue reading the literature, and seeking ways to improve, throughout your career.

I am a strong proponent of “plain language” drafting. Ken Adams, an American law professor who lectures, blogs, and has several publications about legal drafting issues, suggests2

Several articles, noted below, explain why the standard language approach makes sense. These articles address many of the objections commonly raised against the practice. Rather than going over that ground, I will simply refer you to those articles.

using the term “standard language” rather than plain language, and I adopt that phrase here. (Many traditional lawyers tend to bristle at the term “plain language drafting,” so adopting a more neutral expression has obvious advantages.)

In this paper, I discuss a suggested approach to drafting, identify the main components of a commercial agreement, engage in a brief discussion of the use of precedent documents, raise the issue of grammatical mistakes, discuss a number of

1 I have provided hyperlinks to this web-based material in the body of the text and have noted the URLs in the footnotes. 2 <http://adamsdrafting.com/system/2006/11/27/plain-language-or-standard-english/>

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issues relating to the structure, layout, and formatting of commercial documents, and discuss the importance of properly editing your document. Finally, I provide an annotated list of some relevant resources.

1. Structural approach to contract drafting

I believe that there are several basic principles that you should adopt whenever you are engaged in contract drafting, as follows:

• Draft your contract so that the clients can understand it • Ensure at the outset that you have a logical structure for your agreement • Provide a title for every clause • Ensure that the title of every clause clearly communicates its substantive content • Ensure that there is only one substantive issue addressed in each clause • Create “white space” • Continually edit to eliminate all unnecessary words

I will address each of these issues in turn.

Draft your contract so that the clients can understand it. Your goal is not to impress opposing counsel, it’s to serve your client’s business needs. Make sure that your client can read and understand your agreement.

A logical structure for your agreement. It is much more difficult for you, let alone your client, to understand your agreement if it is not structured in a logical manner. There may, for example, be a large number of representations and warranties in your asset or share purchase agreement. If so, structure that article so that it starts with the standard corporate representations, then address the corporate assets, then the current liabilities, and then the contingent liabilities. Group the positive covenants together ahead of the negative covenants.

A title for every clause. Neither you nor your client will know where to find a particular clause if there’s no title. This applies even to short agreements.

The title must communicate its substantive content. You can then use the Table of Contents of your document as a content checklist.

Create “white space.” Instead of dense paragraphs, break up the component parts. If you have subparagraphs, use paragraph indentations. Readability studies show that this makes the reader’s job much easier.

Eliminate all unnecessary words. Not just legalese, strike any unnecessary words. So, in your sale agreement, it’s just “sell,” not “sell, transfer, and assign.”

Once you have taken these basic but absolutely critical steps, you can then dig deeper into the drafting process.

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2. Common components of a commercial agreement

Title of the agreement. Avoid simply using the title “Agreement” for your document. The primary audience for your document is not opposing counsel but rather your client. You should make it as easy as possible for your client to understand the document that you are preparing. A clear, understandable title for each is the first step. Choose a title that describes the essence of the subject matter that the document addresses (such as, “Asset Purchase Agreement”). Similarly, it is not necessary to have an overly complex title.

Identify the parties on the first page of the agreement. It is unnecessary to add the term “hereinafter” (or “hereinafter referred to as”) when defining the parties.

In addition, some agreements (particularly American ones) will use the parties’ names without using the definite article “the” (such as “Vendor,” “Purchaser,” etc.). The agreement will, however, read more easily, particularly for non-lawyers, when you use the definite article.3 Also, there is no need to specify defined terms, and in particular parties’ names, in full caps (for example, “the VENDOR,” etc.). 4

Date of the agreement. The date indicated may or may not be the date that the agreement is signed. If the parties had earlier come to an understanding on the main points of their deal, it is possible, but not necessary, to state that this agreement is dated “as of” the earlier date. It is important to think through the implications of the date chosen in light of the provisions of the agreement, particularly any that refer to "the date of this agreement." (See the discussion below as to the importance of determining the last day for sending a notice of renewal of an agreement.)

As a general rule, there is no need to ever use full caps in your agreement.

Recitals. The Recitals section is only necessary if it serves a purpose (or may later serve a purpose) in explaining the nature of the deal by providing factual background to the transaction or relationship of the parties.

For example, in a straight-forward asset purchase agreement, there is no need to state, that “the Vendor has agreed to sell, and the Purchaser has agreed to purchase, the Assets,” since that information does not add anything to what is obvious from the text of the agreement itself. However, since a court may use recitals to construe substantive provisions, if you do include recitals, consider the wording carefully. In more complex transactions, recitals are particularly useful to people who did not take part in the contract negotiations, and who therefore may be unaware of certain subtleties, but might subsequently need to review the agreement.

The numbering of the recital paragraphs should be “A,” “B,” “C,” etc., so as not to create any confusion with the numbering of the agreement sections.

3 <http://adamsdrafting.com/system/index.php?p=488> 4 See this blog posting on why it is not necessary to define the term “Parties” <http://adamsdrafting.com/system/2007/05/28/parties-as-a-defined-term/>.

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Avoid using the “WHEREAS,” “AND WHEREAS,” etc., formulation for Recitals, as this is archaic.

Definitions. If a term is used only once in the agreement, don’t include it as a definition. If the agreement uses it more than once, however, you should probably define it.

It is important that all defined terms (other than the ones already defined on the first page of an agreement, such as “Vendor,” “Purchaser,” etc.) be set out in the Definitions section. Note, however, that you can occasionally define some terms more easily within the text of the agreement itself. In that case, ensure that the Definitions section includes a definition that refers the reader to that section (for example, “Purchased Assets” has the meaning given to that term in section 4.02(a)).

Given, however, that readers tend to go to the Definitions section when they wish to review the language of a defined term, it is preferable to have as many terms as possible defined there rather than having them “buried” in the text of the agreement.

Consider whether, for especially long agreements, you wish to have the Definitions section attached as a schedule.

3. Use of precedent documents

As a knowledge management professional, I am a strong proponent of the use of precedent agreements. These agreements, provided that they are regularly reviewed and updated in light of jurisprudential and other developments, can be a very valuable tool. The primary disadvantage of precedent agreements, however, is the unthinking use of every clause found in these documents. Two examples may serve to highlight the issue.

As a first example, take a document that states on the covering page that it is dated “as of June 25, 2014.” Just above the signature blocks, however, it states that the agreement is dated June 30, 2014. Assume as well that there are three parties to the agreement, with a date noted to the left of each signature, and that there are three different dates noted there, ranging from June 30 to July 10, 2014. Assume further that the agreement provides that one party has a right to renew the agreement on the fifth anniversary, by providing notice to the others “not less than 30 days before the anniversary date of this agreement.” What is the latest date on which that party can provide notice: May 25, 2019? May 30, 2019? June 10, 2019?

As a second example, assume that the contract provides a standard assignment clause. A standard boilerplate clause will probably provide that the agreement cannot be assigned without the prior written consent of the other party. This may, however, potentially give one party leverage in excess of that party’s actual bargaining position if the other party subsequently needs to assign the contract (for example to an affiliate). If you are acting for the latter party, you will need to think through the implications of these “standard” clauses.

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You must, therefore, examine each clause in a precedent agreement in light of all of your client’s needs as well as the circumstances that might arise over the anticipated life of your agreement. The precedent is not simply there for “cut and paste” purposes.

4. Commonly encountered grammatical issues

A number of grammatical issues commonly arise when drafting legal documents. You should of course use proper grammar in all your documents. (You will never impress a client if you are making common grammatical mistakes; clients expect us to get these sorts of things right.) I often see mistakes in the use of “among” rather than “between” for agreements involving three or more parties, the proper use of “its” and “it’s,” and the distinction between “that” and “which.” I will address those three issues briefly.

Use of “Between” to identify an agreement involving three or more parties. “Between” is the correct term at the top of the first page of your agreement, even when there are three or more parties to the agreement. It is a popular misconception that “Among” must be used when there are more than two parties.

As to the proper use of “between” versus “among,” Fowler’s Modern English Usage (2nd ed.) notes that the Oxford English Dictionary gives a warning against the superstition that between can be used only of the relationship between two things, and that if there are more, among is the right preposition. “In all senses, between had been, from its earliest appearance, extended to more than two … It is still the only word available to express the relation of a thing to many surrounding things severally and individually; among expresses a relation to them collectively and vaguely.”

“That” and “which.” The word “which” is used, set off by commas, for a clause that describes or particularizes the immediately preceding noun or phrase. The word “that” is used to enable the user to identify a particular type or occurrence of the immediately preceding noun or phrase.

For example, one would say “The patents that are the subject of this proceeding …” (Implicit here is that that there are other patents that are directly or indirectly referred to.)

On the other hand, one would say, “The patents, which have been issued in Canada but not in the U.S., were …” since one is adding information about particular patents.

Another example would be the phrase, “The bill that received Royal Assent today …” That sentence, by implication, distinguishes that bill from one that, for example received Royal Assent yesterday. If the focus is on the bill itself, one is simply adding information with the subordinate clause if one writes, “The bill, which received Royal Assent today, resulted from all-party negotiation.” In this case, there is no actual or implied comparison to any other bill.

A clause that is introduced by commas and set off by “which” can be removed from the sentence, in which case the sentence will still make grammatical and logical sense. The same cannot be said for a clause that is (properly) introduced by “that.”

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“Its” and “it’s.” The term “its” is the third person pronoun that corresponds to the person pronouns “his” and “hers.” It would, for example, be used in a phrase such as “the corporation and its shareholders.” The term “it’s” is a contraction of the words “it is.” It is unlikely that you would use it in legal drafting (although see this blog posting about the use of contractions in legal drafting5

5. Structure, layout, and formatting

).

While the substance of your text is, of course, extremely important, issues of presentation of your text can significantly affect readability. Since one of your primary goals in contract drafting is to ensure as positive an experience as possible for your reader, issues of readability will be important to you.

Font. You should choose a font that is easy to read. Serif fonts, the most common of which is Times New Roman, are generally the most common fonts for printed material, while sans serif fonts, such as Arial or Calibri (the latter of which is Microsoft’s default font in Office 2007 and 2010) are more common for on-line text.6

There is, however, a trend towards using sans serif fonts generally, even for printed material. There seems to be a perception, at least among the more technologically adept, that serif fonts are old fashioned. The most common default choice for a sans serif font is Arial, but since it does not please all users, and you would do well to strike out from the crowd and seek out other, more pleasing sans serif fonts.

Point size. Generally speaking, most texts, whether intended to be printed or read on-screen, should be in 11 point size. Footnotes, if you use them, are generally in 10 point size.7

Avoid underlining.

8

5 <http://writingclearandsimple.com/2006/01/04/contractions-and-how-not-to-abuse-em/>

There is no need to underline any text in a document. This practice is a throwback to the days of typewriters, where underlining was the only

6 Following is an example of the sentence above in 10 point Times New Roman:

Serif fonts, the most common of which is Times New Roman, are generally the most common fonts for printed material, while sans serif fonts, such as Arial or Calibri (the latter of which is Microsoft’s default font in Office 2007 and 2010) is more common for on-line text.

Now, the same text in 10 point Gill Sans MT:

Serif fonts, the most common of which is Times New Roman, are generally the most common fonts for printed material, while sans serif fonts, such as Arial or Calibri (the latter of which is Microsoft’s default font in Office 2007 and 2010) is more common for on-line text.

I have prepared this paper using a serif font (Georgia) for the body of this text and a sans serif font (Gill Sans MT) for the headings, as it is common for printed material to be presented in that manner. 7 The term “font” refers to the graphical design used in typesetting (such as Times New Roman, Arial, etc.), whereas “point size” refers to the relative size of that text. Thirty-six point size text is (for example) much bigger than ten point text, which is what is used in these footnotes. Never use the phrase “font size,” as that term is meaningless.

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manner of adding emphasis. (One often sees headings in agreement in bold and underlined. Bolded text is sufficient.) Text that you see underlined (including case and statute names) should instead be italicized.

One space between sentences. Like underlining, the practice of maintaining two spaces between sentences is a throwback to the days of typewriters. All the modern style guides recommend a single space. (See this article on Slate about the practice.9

Left-justified text. Fully-justified text (also known as block text) can only be done properly (i.e., in a manner that is pleasing to the eye) when typeset by a professional (in other words, a printing shop). Word processing software, on the other hand, does not properly present fully justified text, which means that the resulting text is much more difficult to read (particularly if the author persists in putting two spaces between sentences!). Left-justified text (also known as ragged right) is easier to read. (The text of this paper is left-justified.)

)

Statute names. Statute names should appear in italics (for example, the Personal Property Security Act (Ontario)).

Rendering numbers. When numbers are used in your text, use letters for numbers up to nine and Arabic numerals for numbers ten and above (in other words, “one” to “nine”, then “10,” “11,” “12,” etc.), unless used at the beginning of a sentence.10

6. Editing your agreement

An unspoken assumption, up to this point, is that you will be examining your agreement, each time you prepare a new draft, to avoid the pitfalls and ensure its best presentation. In other words, you will need to be constantly editing your document.

Most large publishing houses (at least until recently) would have on staff both substantive editors and copy editors. The publishing house will ensure that their authors’ work is subjected to expert review by both these professionals. Very few lawyers, however, have the luxury of being able to refer their written work to the review of professional editors. We are left, therefore, to do this work ourselves.

It is important to keep in mind that substantive and copy editing are two different activities. In the context of your agreement, substantive editing involves ensuring that your drafting accomplishes the legal tasks that it is supposed to accomplish (for example, that title to the purchased goods is indeed conveyed to the purchaser, who acquires good title, or that the earn-out clause clearly and unambiguously defines how payments will be calculated and when they will be made). The copy editing function involves reviewing the agreement for typos, grammatical errors, inconsistent use of language, etc.

8 See this blog posting on the topic of underlining <http://typographyforlawyers.com/underlining.html>. 9 < http://www.slate.com/id/2281146/ > 10 See this blog posting for more on using words or numerals to express numbers <http://adamsdrafting.com/system/2008/11/23/more-on-words-and-numerals/>.

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In my experience, most lawyers try to engage in these two editing tasks at the same time when reviewing their documents. I consider that to be a mistake. You need to devote ample time to editing your document, and you need to make at least two passes through it each time, the first time wearing your hat as a substantive editor, the second time as a copy editor. Devoting insufficient time to editing your document, or trying to engage in both editing activities at the same time, will not enable you to present the best possible document to your client.

7. Resources

Books

There are three books that you should consider acquiring if you are serious about legal drafting issues.

For Canadian drafting purposes, you should have handy a copy of both Behind and Beyond the Boilerplate: Drafting Commercial Agreements (2nd ed.), Cynthia L. Elderkin and Juila S. Shin Doi, Thomson/Carswell, 2005, and William Estey’s Legal Opinions in Commercial Transactions (2nd ed., 1997). While the latter addresses issues relating to legal opinions, it also addresses a number of the substantive issues that affect the language used in your agreements.

A Manual of Style for Contract Drafting (3rd ed.), American Bar Association, 2013, is by Professor Ken Adams, who teaches legal drafting at the University of Pennsylvania Law School. His book addresses a wide range of legal drafting issues. Although it is an American text, much of the advice in the book is equally applicable here (subject to the usual caveat that you will have to ensure that you can distinguish what is not applicable).

You might also wish to refer to The Red Book: A Manual on Legal Style (2nd ed.), Thomson/West, 2006, by Bryan A. Garner. This text, while American, primarily addresses “nuts and bolts” issues of contract drafting, such as grammar and presentation, rather than substantive issues. It can, therefore, be a valuable resource for a Canadian lawyer.

Resources available on the Internet

There are a number of resources available on the Web that you may find useful.

Articles and similar resources

I wrote a review of Dr Atul Gawande’s book The Checklist Manifesto on Slaw in February 2010, entitled The Checklist Manifesto and the Smarter Lawyer.11

11 <http://www.slaw.ca/2010/02/24/the-checklist-manifesto-and-the-smarter-lawyer>

While there are no examples from the legal profession in the book, I think that you will nonetheless find it very stimulating.

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Robert Eagleson, Drafting matters – letters of advice, Clarity, No. 58 (November 2007), pp. 23-27.12

the full issue list

Clarity is an on-line publication devoted to plain language drafting issues in the legal context. (It has not published a new issue since May 2008.) You may wish to review .13

I highly commend this article, since it presents a compelling argument as to the proper presentation of opinion letters. Most legal drafting commentaries address the issue of contract drafting. This article recommends that the conclusions of your opinion letter appear at the outset, not at the end, of your letter.

For a list of legalistic words to avoid, with suggestions of terms to use in their place, see Professor Joseph Kimble’s Plain Words (Part 1)14 Plain Words (Part 2) and 15

Professor Kimble has also itemized his guidelines in a relatively brief article entitled

. In the 1960s, Joseph Kimble became the leading American proponent of standard language drafting. He has in fact written a book on the topic (Lifting the Fog of Legalese: Essays on Plain Language). I make it a point to read any article by Professor Kimble that I come upon.

The Elements of Plain Language.16

The State Bar of Michigan Law Journal has published a number of articles by Joseph Kimble. Regrettably, most of them are not available on the Internet. You will, however, find its

Plain Language Chronological Index of Columns17

Three other articles available online are also well worth investigating. The first is

to be a useful resource of those and other articles.

The Best Test of a New Lawyer's Writing,18

A Modest Wish List of Legal Writing

from the State Bar of Michigan Law Journal, July 2001. This article is a particularly useful article on how one would test new lawyers’ writing, and includes a section on how to test yourself.

,19

See as well

State Bar of Michigan Law Journal, November 2000, is also well worth your time to read.

Answering the Critics of Plain Language,20

12 <http://www.clarity-international.net/journals/58.pdf>

The Scribes Journal of Legal Writing, Vol. 52 (1994-95), pp. 51-85. This article deals with common objections to plain language drafting and answers each of them. If you are still unconvinced about the reasons for adopting standard language drafting, this is a good place to start.

13 <http://www.clarity-international.net/journals/default.htm> 14 <http://www.michbar.org/journal/pdf/pdf4article315.pdf> 15 <http://www.michbar.org/journal/pdf/pdf4article323.pdf> 16 <http://www.plainlanguage.gov/whatisPL/definitions/Kimble.cfm> 17 <http://www.michbar.org/generalinfo/plainenglish/columns.cfm> 18 <http://www.michbar.org/journal/article.cfm?articleid=297&volumeID=80> 19 <http://www.plainlanguagenetwork.org/kimble/modest.htm> 20 <http://www.plainlanguagenetwork.org/kimble/critics.htm>

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A checklist that can help you review the substantive issues in your document is contained in an article entitled Reviewing and Revising Draft Transactional Documents (A Checklist)21

Dave Sanjeep’s article,

by Louis M. Brown.

Plain Language in Law,22

Wayne Schiess, who also has a legal drafting blog, has written an article that specifically targets transactional lawyers. (A certain number of plain language articles will speak about drafting generally, which is what makes this one valuable.) It’s entitled

LLRX.com, November 18, 2002, contains a very detailed bibliography of texts and web content. If you are looking to read more, this is good place to start. (Note, however, that it is already almost ten years out of date. Regrettably, I have not found a comparable article that has been published more recently.)

What Transactional Drafters Should Know About Plain English,23

Blogs

39 Texas Journal of Business Law Vol. 39, No. 515 (2004).

If you don’t yet have an RSS feedreader (also referred to as an aggregator) to follow your various blogs, I recommend that you choose one. (If you need guidance, you may wish to read this posting24, which has a short analysis of and links to a number of different feedreaders.)25

You will find a feedreader invaluable in that all of the blogs that you subscribe to are available by way of RSS feeds. (If you need a background on RSS feeds, check out

this explanation26

I would, however, offer two words of advice. First, there are more good blogs out in the blogosphere than you will have time to read, so choose a few that you particularly like and let the others ones go. Second, there are no legal drafting blogs written by Canadians that I am aware of; all the ones noted below are by American authors. The case law they examine is generally American, as are the governing laws of the cases discussed. You must, therefore, be careful when “translating” any comments made there into a Canadian context. Having said that, however, you will find that many of the drafting issues addressed do not usually involve substantive issues. It is more a question of how best to present or formulate substantive issues to avoid ambiguity.

on Wikipedia.) That means that the site will feed recent postings to your reader, so you will only need to go to one centralized spot for all of blogs that you follow.

21 In 66 The Practical Lawyer (1990) 63. 22 <http://www.llrx.com/features/plainlanguage.htm> 23 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1323451> 24 <http://blogspace.com/rss/readers> 25 I use Google Reader as my feed reader. I had tried to set up Yahoo Pipes, since others who used said that it was a very good tool for narrowing down blog content, but I was not able to set it up to work properly, and after having invested about an hour of my time, I gave up. 26 <http://en.wikipedia.org/wiki/RSS_(file_format)>

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The following, therefore, is a list of what are, in my view, the three most valuable legal drafting blogs.

One very useful blog is by Ken Adams at Adams Drafting.27

Wayne Schiess at

(Professor Adams is also the author of the Manual of Style for Contract Drafting noted above.) If you have a drafting issue, you should check his blog. His comments are almost always insightful. The focus tends to be on commercial law issues. You will also want to see the comments that are posted to some of his entries, as they are usually thoughtful comments from active practitioners. Professor Adams also presents seminars on legal drafting periodically, which are well worth attending.

LegalWriting.net,28

If you are interested in exploring any of these issues, there is an academic article entitled

who is the author of article noted above, directs the legal writing program at the University of Texas School of Law. He is also the author of an article noted above. This blog is more of a technical nature, but is worth keeping your eye on.

A Preliminary Exploration of the Elements of Expert Performance in Legal Writing, written by my former colleague Erika Abner of the University of Toronto and Shelley Kiersted of Osgoode Hall Law School.29

this review

They have engaged in initial research into the elements of expert performance in legal writing. For an overview of this 46-page article, see by Simon Fodden.30

Finally, although not focused on legal writing, you should of course keep abreast of postings on

Slaw.31

Slaw is the pre-eminent Canadian legal blog, with many different writers on a broad range of topics, including drafting issues from time to time.

27 <http://adamsdrafting.com/system/> 28 <http://blog.legalwriting.net/> 29 < http://www.journallegalwritinginstitute.org/archives/2010/363.pdf> 30 <http://www.slaw.ca/2010/11/22/more-on-legal-writing/> 31 <http://www.slaw.ca/>