Weagree eBook, General Contract Drafting Principles 1

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GENERAL CONTRACT DRAFTING PRINCIPLES

Brief guidelines, suggestions and best practices

to improve your style and effectiveness

Each contract drafter should write a contract with only a few principal drafting principles in mind.

Furthermore, a contract drafter who works in a multinational context should have a general

understanding of the characteristics of different national legal systems and be aware of significant

differences between legal cultures.

A contract should be drafted in plain English, meaning that the language used is clear and as simple

as reasonably possible. A drafter must be accurate. The contract should be consistent with regard to

style, structure, terminology and level of detail. A drafter may use vague terms but should be

conscious of how and when to use them, and should avoid ambiguities. This paragraph will elaborate

on these drafting qualities.

1.1 Plain English: simple and clear

Use „plain English‟ when drafting contracts: a businessman should be able to understand what it says.

The involvement of a legal counsel should be necessary only to give an impartial view, oversee the

legal consequences, to clarify that certain phrases are normal or to confirm that indeed they reflect the

parties‟ intentions. The legal aspects of a contract should be limited to what is being expressed, not

how it is expressed. (No tricks!) Old fashioned contractual language, which is not plain English

(anymore) will make a contract harder to read. It will also not serve the interests of the parties.

Plain English. What is plain language, especially plain legal language? It is ordinary „adult English‟,

used in day-to-day context. It is language stripped of archaic „legalese‟ or the latest business jargon

and vocabulary, supported by a proper layout and typography of the text. As regards spelling, a

multinational company may prefer British English (or another) to U.S., Canadian or Australian English

but in either case, language should be used consistently.

Don’t. Nevertheless, do not use:

Purchaser should not…

…owe Seller…

…it‟s…

…ain‟t…

…won‟t…

…can‟t…

…for obvious reasons (?)

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General contract drafting principles



No archaisms. There is no need to include archaisms such as WITNESSETH or oddities such as the

use of both words and numerals to express numbers (words may be useful because a number is easy

to misprint, but equally risky is updating figures whilst forgetting the corresponding words; words to

ascertain that 30 days are “(thirty)” days and not “13” is ridiculous).

(a) Short sentences

Everyone knows that short sentences are much easier to read than longer ones. Contracts are

amongst the least readable texts one can imagine. Apart from the abstract language, the typical

reason for this is the use of lengthy sentences. Therefore, be concise and to the point and address

only those matters that must be elaborated on to avoid surprises or confusion, or those matters which

have relevance in litigated disputes.

Some organisations have a rule that no sentence should exceed 17 words and that no word should

exceed five syllables. This may be excessively prescriptive but it imposes an excellent discipline. It

certainly requires the drafter to express ideas one at a time. A true dragon is the following sentence:

Exclusivity. The Seller covenants and agrees that for a period of ninety (90) days after the date

first written above (the Effective Date) or such shorter period as set forth below (as the case

may be, the Exclusivity Period), none of the Seller, its affiliates or subsidiaries will, and they

will cause their respective shareholders, directors, officers, managers, employees, agents,

advisors or representatives not to, directly or indirectly, solicit offers for, encourage, negotiate,

discuss, or enter into any agreement, understanding or commitment regarding, a possible direct

or indirect sale, merger, combination, consolidation, joint venture, partnership, recapitalisation,

restructuring, refinancing or other disposition of all or any material part of the Company or its

subsidiaries or any of the Company's or its subsidiaries' assets or issued or unissued capital

stock (a Company Sale) with any party other than Purchaser or provide any information to any

party other than Purchaser regarding the Company in that connection; provided that, (i) for the

time period commencing on the Effective Date and ending at 11:59 p.m. Central European Time

on 7 July 2007 (the Bid Confirmation Date), the Parties shall work together in good faith and

use commercially reasonable efforts to facilitate due diligence by Purchaser and their advisors

to confirm, based on the information made available to Purchaser or their advisors prior to the

Bid Confirmation Date, the intent of Purchaser to implement the Transaction pursuant to the

terms of this Heads of Agreement and if Purchaser does not deliver notice to Seller of such

intent by 11:59 p.m. Central European Time on (or otherwise prior to) the Bid Confirmation Date

(such notice, a Bid Confirmation), then Seller shall have the right to terminate the Exclusivity

Period effective as of (but not prior to) the Bid Confirmation Date by providing written notice to

Purchaser by no later than 5:00 p.m. Central European Time on (but not prior to) the day

following the Bid Confirmation Date; and (ii) if Purchaser delivers the Bid Confirmation or if such

termination notice set forth in the preceding clause (i) is not given, the Seller shall have the right

to terminate the Exclusivity Period effective as of (but not prior to) 11:59 p.m. Central European

Time on the sixtieth (60th) day following the Effective Date by delivering written notice of such

termination to Purchaser by no later than 5:00 p.m. Central European Time on (but not prior to)

the sixty-first (61st) day following the Effective Date.

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Techniques to simplify such sentences are to think first and to conceptualise: does it really increase

„certainty‟ if you draft the long lists of persons, actions or matters?! A list also has drawbacks such as

encouraging creativity towards the grey areas of the listed matters; concepts are more likely to capture

any failing manifestations; a list of concepts lacks conceptuality. The above sentence can be

shortened easily by a better use of definitions, by separating out the condition (i.e. the second half), by

defining:

the exhaustive (?) list of related persons (i.e. “their respective shareholders, directors, officers,

managers, employees, agents, advisors or representatives”);

several or all (?) of their prohibited actions (i.e. “not to, directly or indirectly, solicit offers for,

encourage, negotiate, discuss, or enter into any agreement, understanding or commitment”);

and

all (?) the possible transaction structures (i.e. “a possible direct or indirect sale, merger,

combination, consolidation, joint venture, partnership, recapitalization, restructuring, refinancing

or other disposition of all or any material part of the Company or its subsidiaries or any of the

Company's or its subsidiaries' assets or issued or unissued capital stock”).

In other words, a quasi-exhaustive list could be reduced into concise wording addressing the relevant

concept rather than its manifestations.

Uncertainty can be taken out if abstract references are made concrete. A reference to time (e.g. “5:00

p.m. Central European Time on (but not prior to) the sixty-first (61st) day following the Effective Date”)

can replaced by the actual date and time.

Another technique to increase legibility is to separate out the exceptions, qualifications or conditions.

Often, the visual subdivision in separate (indented) subparagraphs increases readability. Sentences

should be short-cut if they pile up clauses that could well stand on their own or if exceptions,

qualifications or conditions can be separated and moved to a separate sentence.

(b) Keep subject and verb together – left-right principle

SVO. Sentences in the English language fairly strictly follow an order of subject-verb-object (SVO).

Texts are easier understood if the actor (the subject) and the determination of his action (the verb) are

close together at the beginning of the sentence. A document becomes harder to read when you create

unnecessary gaps between the subject and the verb. The Dutch and Germans have the patience for

that. If the sentence also contains an object, this would be best positioned early on in the sentence but

always after the subject and the verb. Sometimes, this should be achieved by turning the intervening

words into a separate sentence or by moving them to the beginning or end of the sentence. An

example:

The Seller hereby sells and transfers the boat.

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Here the seller is the subject (S), sell is the verb (V) and boat is the object (O). This very simply

example can be contrasted with the following:

The Seller hereby sells and transfers, subject to purchaser providing x, y and z indemnities, the

boat.

In this example, readability improves if the boat is moved to the beginning or, probably even better, the

indemnities can be moved to the next sentence or even a separate article headed Indemnities.

Order concepts. Sometimes, the object of an obligation consists of several concepts. If you prefer not

to split the sentence, it is a good idea to structure the object of the obligation so that the reader will

catch all the concepts at once and is able to remember each. In line with this, use a natural sequence

in which the concepts are commonly experienced. An example of a messy sequence:

…to use, sell, have sold, manufacture, have manufactured, modify, have modified, distribute

and have distributed the Licenced Product.

Obviously, a product is not first used, then sold, then manufactured etc. Few people can reproduce

this. Conversely, many people are able to reproduce even a long sequence if it is logical. Furthermore,

bring together the items that relate to each other:

Force Majeure means [acts of God such as earthquake, flood, storm or lightning, fire],

[accident, explosion, sabotage, war, terrorism, riot, civil disturbance, epidemic]…

Left-right principle. You will make reading easier if you formulate the sentence such that it reads

from a known or familiar context into the main message. In many languages, the unguided reader will

read to the end of a sentence in an (unspoken) ascending or descending tone:

At the end of the sentence, where the tone reaches the peak (or bottom), the reader unconsciously

„seeks‟ the most important information. This is called the left-right principle and may help the writer

structure a text and each sentence.

The left-right principle applies to structuring sentences, to structuring a paragraph or section and to

structuring your entire contract and even the set of transaction documents. The principle implies that

simple matters are addressed first and complications later on in the sentence, paragraph or contract3.

3 Joseph M. Williams, Style – Lessons in clarity and grace, Pearson Longman 2007 (9th ed.), 92 ff. Barbara Minto,

The pyramid principle – Logic in writing and thinking, Prentice Hall/FT, 2009 (3rd ed.).

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If the most important information is halfway through the sentence (instead of at the end), the reader

may miss the importance of it or even the entire point. Contract clauses should adopt the left-right

principle by limiting and structuring the information in the sentences of a section. For example:

A is followed by B and C. B implies D. C causes E. D and E support the conclusion F.

The left-right principle somewhat discords with how people think: a normal person starts with the main

point and then deals with the exceptions and limitations. You would make the reader comfortable by

first driving your point home. The left-right principle on the other hand, suggests using familiar

concepts and a known context first and then work towards the key point. A technique to redress this

discordance is to limit the scope of a sentence to introducing only one or two „new things‟ per

sentence.

Signalling sentence. It also helps to start a paragraph with a signalling sentence addressing the main

topic or conclusion and then „restart‟ the paragraph. The topical paragraph structure could therefore

become:

A leads to F. A is followed by B and C. B implies D. C causes E. D and E support the conclusion

F.

The signalling (or topical) sentence may well be used to convey a basic, but often forgotten,

statement. For example, a research agreement or a joint development agreement normally supports a

project plan or statement of work, where those latter documents are the essence of the relationship; in

particular if one party is required to propose a project setup, it makes sense to start the article dealing

with the contents of the project plan or „SoW‟ with:

Service Provider shall work out all details of each Development Project in a Statement of Work.

Each Statement of Work proposed by Service Provider to Customer shall set forth…

The left right-right principle, as well as using a signalling sentence, also discords with how people

perceive other people‟s communications: an audience tends to visualise. This would mean that a

message is better received if you start with an example and continue with the substance. If you want

to prevent a reader visualising his or her own example, start with the right one yourself. Then

elaborate on that example to make your point. For example:

The Parties shall use best efforts to have the Conditions satisfied as soon as practicable. In

particular, Purchaser shall, in respect of the Condition in Article 2.1(c): (a) make appropriate

filings…; and (b) propose all such remedies as…

In this example, the first sentence states the main principle. This makes reading the subsequent

sentence easier. It would be understood as an elaboration on the principle of best efforts. Note,

however, that if you replace in particular by the word furthermore (or in addition), the second sentence

converts into a firm obligation standing on its own (!)

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(c) Use the active tense, personalize sentences

and avoid nominalisation

Active tense. Another golden rule for writing texts, equally valuable in drafting contracts, is to use the

active tense instead of the passive. Often, the active voice results in a sentence that is less wordy and

more direct.

When using the passive tense, there is the potential danger that it is unclear which party is obliged to

perform. To solve this, the drafter should insert additional words like by Seller. A technique to prevent

ambiguities is to realise that each provision should mention the debtor of the obligation. In most cases,

this will almost automatically turn the sentence into the active tense in which the debtor of an

obligation is also the (grammatical) subject of the sentence.

Note, however, that mentioning an actor is sometimes irrelevant for the purpose of a provision. This

may apply to conditions and to limitations or qualifications in a subordinate clause:

If any proceedings or investigations have been commenced that obstructs or may result in a

prohibition of, or interference with, the Transaction…

Rephrasing this example into the active tense requires that an actor is introduced, which is without

merit.

Nominalisation. Nouns are more tiresome to read than verbs. „Active sentences‟ tend to build „verb-

heavy‟ structures that would, in the passive, be covered by nouns. A verb gives a sentence its action,

whereas a noun places the reader outside the context. This means that a text also becomes more

vivid in the active voice. Not only does the active voice keep a sentence simpler, it also tends to make

the sentence clearer.

Lawyers are known to nominalise verbs: in the lawyer's eye, a shareholder does not resolve but

adopts or makes a resolution; a buyer does not pay but makes a payment; a party does not notify in

writing but gives a written notice; a service provider does not act appropriately but takes appropriate

action. No! Try to avoid these nominalisations and build on verbs as much as possible.

Personalise! A method to make contracts dry as dust is to „impersonalise‟ the contract provisions.

Impersonal sentences can be recognised by phrases such as It is agreed that. Often, this phrase is

redundant because it would be followed by something like A shall do x and y, which is sufficient and

clear. If it is not, the actor (i.e. the debtor of the obligation) is probably missing. Similar examples, in

which the debtor potentially remains unclear, start with The Parties agree to.

Use the singular. If possible, obligations and other provisions should be drafted in the singular and

using the present tense. The idea behind this is that the use of plural nouns and prepositions such as

and, or, each, every or any may create ambiguity. With those prepositions, it may be questionable

whether in a particular context a reference should be made to a single member of the group identified

by the noun, or to the entire group. For example, instead of:

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The Parties shall promptly notify each other of the occurrence of events of force majeure.

It is better to write:

A Party shall promptly notify the other Party of the occurrence of an event of force majeure.

Nevertheless, whilst Europeans are comfortable addressing a party or a thing by writing his or her, in

U.S. style contracts, the gender is forcefully avoided. A technique for avoiding the issue is to use the

plural („they‟) instead of the singular („his or her‟ (or is it „her or his‟?)).

(d) Delete unnecessary words

“In der Beschränkung zeigt sich erst der Meister.” 4 (Dare to delete.)

…Finalising a contract by deleting the superfluous words makes it precise. Cleaning up a contract

starts with deleting truly redundant wording. Redundant are:

[The Parties agree that] Borrower shall…

[Licensor and Licencee agree that] if…

In the examples, it is appropriate to start with Borrower shall or If. Even worse are lead-ins such as It

is agreed that… or Licencee acknowledges and agrees that… There is rarely any need to include

such a lead-in, unless it serves to emphasise a carve-out. Similarly, replace the names of the parties

(e.g. Licensor and Licencee, Seller and Purchaser, Lessor and Lessee, Service Provider and

Customer) by the Parties.

Necessity and importance. Cleaning up a draft contract includes a closer review as to whether

provisions are necessary. In particular, if an obligation implies a strong incentive to perform (e.g.

because payment of a certain price requires on time delivery of a standard product), a purchaser

would not need to provide for elaborate provisions on tests of conformity. Deleting unnecessary words

brings the truly important matters to the surface. This is even more important in contract drafting than

in other forms of writing. A woolly novelist may bore the reader; but a wordy contract drafter may even

create ambiguity.

Functionality and balance. In a well-drafted contract each part has its role in relation to the other

parts, and all parts fit together in a balanced and efficient manner. The use of unnecessary words in a

contract provision may lead to unwanted questions: “now that the whole contract is so much to the

point, why did the parties elaborate on this particular item?” Or: “look at the detailed level of that other

provision; if it was so important to provide for solutions on this part, wouldn‟t it have been logical – if

the parties wanted it – that they had actually done so?”

Choose one angle only. Consider the following example:

4 Goethe, Natur und Kunst, 1802.

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Seller shall specifically indemnify, defend and hold harmless Target and Purchaser from and

against any Losses which are incurred or suffered by any such party and arising out of, relating

to, resulting from, or incurred in connection with any shortages with respect to carbon dioxide

emissions allowances for the calendar year ending 31 December 2010. For this purpose,

Losses means all liabilities, losses, damages, fees, Encumbrances, Taxes, awards, judgments,

assessments, fines, sanctions, penalties, charges, costs, expenses, payments, all interest

thereon, all costs and expenses of investigating and defending any claim, lawsuit, arbitration or

proceeding and any appeal therefrom, all reasonable attorneys‟, accountants‟ and expert

witness‟ fees incurred in connection therewith and all amounts paid incident to any compromise

or settlement of any such claim, lawsuit or arbitration.

The drafter of this „specific indemnity‟ entangled many related concepts by referring to the same thing

in different ways. I draw your attention to a few that have a common denominator:

liability (i.e. the legal consequence);

damages (i.e. the legal subject of liability);

costs and expenses (i.e. the factual and accounting terms for only a part of the damages, in this

case even further specified by reference to costs of all imaginable legal support and dispute

settlement proceedings);

payments (i.e. the factual action of transferring money);

claims (i.e. the procedural act by which someone is held liable);

incurred or suffered by (i.e. the way the damages came into existence and timing); and

arising out of (i.e. the causation required for liability).

A good lawyer would probably delete the legal and accounting terminology: the legal terminology

applies by operation of the law itself, and accounting terms should otherwise come in under the legal

heading of „damages‟. Because some legal concepts such as „damages‟ and „causation‟ can give rise

to disputes as regards their scope, it may be important to provide for uncertainties inherent to such

concepts. The drafter would have achieved a better result with:

Seller shall indemnify Purchaser against all damages related to any shortage of carbon dioxide

emission allowances granted for the year 2009 (including damages as a consequence of any

prohibition to operate).

Similarly, the following provision can be much shorter:

This Agreement may be terminated at any time prior to the Completion by either Party, if the

Completion shall not have been consummated on or before 31 March 2008, provided that the

termination right shall not be available to any Party whose failure to perform any material

obligation under this Agreement is the cause of such delay.

The provision states an exception that will likely apply in every mature jurisdiction; you cannot have

your cake and eat it too. Therefore, more appropriate would be:

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Each Party may terminate this Agreement at any time before Completion, if the Completion

shall not take place before 1 April 2010.

However, the principle of caveat emptor (buyer beware) and the parol evidence rule in English law

may create an incentive to adopt a cautious approach to drafting, explicitly setting out the important

exceptions.

What about the following? Is it really necessary to make sure that if you refer to a third party, this is

substituted by the defined term Person, defined as:

an individual, a corporation, a partnership, a limited liability company, a joint venture, a joint

stock or other company, an association, a trust or other entity or organisation, including a local

or national government or an agency, institute or instrumentality thereof?

The elements that might trigger some uncertainty, if any, are probably the inclusion of (informal)

partnerships and various governmental bodies. Rather than the use of a definition, a clarification in the

interpretation section would be more appropriate. But reconsider first: if a warranty states that neither

Seller nor Target received a notice of any Person relating to the status of X, would you consider that

there is a likelihood that, whilst a local governmental authority might fail to qualify as a „person‟ within

the strict meaning of the word, a liability claim will fail (if Target actually did receive a warning notice)

on the ground that the warranty did not specify the authority as such „Person‟?

A good drafter determines what is important. It is important to understand where in the business the

real risks or avoidable exposures are, or where the desired performance by a party is not self-evident.

Secondly, a drafter should consider whether providing for it is necessary; in other words, who carries

the burden of any true uncertainty? Often, deleting words or clauses makes clear what really matters.

1.2 Accuracy

Using plain English is a step towards the drafting skill of accuracy. „Accuracy‟ requires more than the

capability to distinguish legal, factual, accounting, procedural and legal-procedural concepts from each

other. A lawyer should also identify the subtleties resulting from the negotiations. A skilled drafter

translates this into accurate wording, ties in precisely those aspects which fill any unaddressed gaps,

omits to „clarify‟ matters that were deliberately left vague and avoids ambiguities.

(a) Think analytically and draft ‘MECE’

One of the complications of the drafting principle to be „accurate‟ is a drafter‟s tendency to be

exhaustive or to ascertain that the concept is well covered. An important guideline for improving your

accuracy (and accordingly your confidence that you did a good job) is to think analytically and draft, in

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McKinsey's terminology5, 'MECE' (mutually exclusive, collectively exhaustive) or, in French

philosophical terms, 'cartesianic'.

MECE and cartesianic mean that, consistent with the ideas of Descartes, the drafter cuts the greater

contractual concepts into understandable pieces in respect of which he or she is convinced that those

pieces are all the pieces, because they leave no gaps and do not overlap.

McKinsey’s principle to be ‘MECE’. The two related concepts of 'mutually exclusive, collectively

exhaustive' can be explained as follows: a description of acts or events is 'collectively exhaustive' if no

other act or event is conceivable. In contract drafting terms it means that describing a course of action

is collectively exhaustive if all variants are caught (under the addressed conditions or circumstances).

When you roll a dice, it will inevitable show a 1, 2, 3, 4, 5 or 6 and they capture all possible outcomes

exhaustively. 'Mutually exclusive' are subject matters that exclude each other without any overlap. If

you throw a coin, you can rest assured that the outcome is either heads or tails (yes, if you throw it in

on the beach it might show the edge, which is why arguably the edge makes heads and tails

collectively exhaustive, but still is mutually exclusive).

Descartes. The MECE-principle was probably identified by the 17th century philosopher and

mathematician René Descartes. In his Discours de la méthode, and more elaborately in his Regulae

ad directionem ingenii (i.e. rules on the direction of the mind), he restated a few principles to deduct,

on the basis of a hypothesis, an explanation or description of any investigated problem. Traditionally,

the French PhD-doctorate books are set up according to Descartes' method. Descartes proposed that:

"if we are to understand a problem perfectly, we must free it from any superfluous conceptions, reduce it to

the simplest terms, and by a process of enumeration, split it up into the smallest possible parts."

Drafting technique. Now, let's translate this into contract drafting. A draftsperson often deals with the

question how to address a subject of discussion (or agreement) in such manner that the future will not

show lacunas or reveal an interpretation that had not been put into the words by the parties. The task

of a drafter is therefore to think analytically, to create a systematic structure, and to write logically. To

identify the smallest possible parts, the drafter may revert to concepts such as:

substance vs. procedure

objective elements vs. subjective elements

content vs. form

cause vs. effects

a concept vs. manifestations of the concept

(chrono-) logical sequence: before and after delivery/closing

By converting these concepts into the case at hand, a drafter may establish a belief that the entire

subject is captured into the contract.

5 The MECE-principle (pronounce MEESEE, like in see me) is addressed in two bestsellers of Ethan Rasiel

(McKinsey). Ethan M. Rasiel, The McKinsey way, McGraw-Hill 1999; and Ethan M. Rasiel and Paul N. Friga, The McKinsey mind, McGraw-Hill 2002 (both are translated into several languages).

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(b) Examples of improved accuracy

Example 1 – Service Agreement. An example of improving the accuracy can be found in a contract

for services. In such a contract, a drafter will probably address how and when delivery and acceptance

of the service takes place. Applicable statutes typically provide that any shortcomings must be claimed

“within a reasonable period of time” or “without undue delay” and that a claim assessment also takes

into account the rules of the particular marketplace. It may help to investigate how such deadlines

actually operate in the given context and provide for customised (i.e. precise) timeframes. A contract

attempting to fill in the vagueness of such statutory provisions should align with the wording of the

statutory provisions accurately, and deviate from them precisely. Likewise, such deviation is easier to

accept by the other party. Also, if the deviation is at first sight incompatible with mandatory law, being

precise may well justify the settlement of an uncertain element of such mandatory provision.

Example 2 – SPA price adjustment. A similar example can be found in share purchase agreements

with a price adjustment mechanism. Typically, such mechanisms provide for strict timeframes within

which a party must deliver (or respond to delivered) financial accounts. If the preparation is no more

than the push of a button, a short period may well suit both parties‟ interests, but if the work is much

more complicated than producing quarterly or annual results (e.g. because the cut-off date is

potentially a random day of the month), a longer period of time seems to be inevitable. Such informed

proposal is easy to explain and probably very acceptable (and if the other party bluntly responds with

a doubled or halved timeframe that may well be countered). The period desirable for reviewing

financial statements delivered to a purchaser, on the other hand, requires that the purchaser becomes

acquainted with the applied accounting principles, the way they are adopted in reality, as well as the

reported facts and valuation assessments actually being true and accurate.

Example 3 – ‘milestoned’ procedure not results. For another example, if the contracting parties are

unable to completely describe the desired end-result („content‟), they may define milestones

(„procedure‟) ascertaining that certain procedural steps will be taken in a pre-described manner, as

this would enable each party to intervene at appropriate times and places. The quality of an end-result

will certainly improve if the parties have established (and adhered to) a procedure ascertaining

adequate evaluation. If contract parties are unable to foresee all possible events of default or all

circumstances in which very considerable damages may occur, it would probably be more appropriate

to provide for notification procedures and subsequent obligations to cooperate, than to say that in case

of Events A, B or C, the seller will indemnify the purchaser. The latter manifestations will frequently

trigger liability-avoiding behaviour (often including passivity and hence even greater damages).

1.3 Consistency

Rather than being a novelist, a contract drafter must be consistent. A variety in wording to express the

same concept is a source of ambiguity (or even a starting point to seek a favourable interpretation of

words) and in any case confusing. Examples of concepts that are sometimes used inconsistently:

modify, adjust, amend, change…

rules, regulations, laws, statutes…

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clause, article, section, subsection, paragraph, item…

goods, product, equipment, tooling

end-result, deliverable, milestone

Order of words. Once a certain sequence is adopted, use it consistently (so avoid using both Seller

and Purchaser and Purchaser and Seller in one document). If you started to refer to its Subsidiaries,

do not also refer to Subsidiary of it.

Applying the same notions consistently within a given transaction makes contract negotiations easier

for both parties. This is also because once aggravating inconsistencies are discovered the reader will

be suspicious about any other yet unidentified inconsistency. This does not facilitate contract review

and negotiations.

Consistent repetition. A drafter should ensure that there is consistent usage when drafting a

contract. For example, if you repeatedly refer to a course of related actions, apply the enumeration or

natural order for such actions rigorously throughout the contract. You should preferably use the

enumeration or natural order in which they appear or occur in practice. Do not tinker with a natural

order or sequence of actions used elsewhere in the contract for no reason.

Consistent definitions. „Definitions‟ are an important tool to improve consistency throughout a

contract or throughout transaction documents. Lawyers often use different terminology to point at the

same concepts: the Buyer (alternative: Purchaser), Affiliates (Affiliated Companies or group

companies), Parties (the parties hereto), of this Agreement (hereof). It happens too often that a

contract includes both terminologies as a consequence of copy-paste drafting. To avoid this, differing

definitions used throughout an organisation for the same defined terms should be made consistent.

Tuning the defined terms used in all model contracts, should be part of contract upgrading work.

Clauses and real life. Consistency should not only exist within a contractual framework but also

between the contract and its reality: the actual performance under a contract should be consistent with

what was agreed (or better) and vice versa. This means that contract provisions need to be consistent

with how a debtor or creditor, or the industry or business environment in which they perform, actually

operates.

More burdensome are differing standards of conduct required by one-sided provisions used as model

contracts. For example, do all definitions of Confidential Information strictly require that:

disclosed written information is marked „confidential‟ or „proprietary‟ (and oral information

summarised in writing and identified as „confidential‟ within 30 days after its presentation)

or do you also define Confidential Information to cover:

disclosed information, which must reasonably be deemed to be confidential?

Any such definition should not contradict the general discipline of your own employees. Also, merely

changing the provisions of a model confidentiality agreement will not drive organisational discipline

13




into marking documents as „confidential‟. On the other hand, using both definitions can be appropriate

depending on the context. If you do choose to work with both, think first: there may well be a good

reason to require the above discipline in a patent department whereas it might be completely obsolete

for a sales department. Your contracting policy should be consistent with real life.

A similar example of inconsistency: many divestment transactions include post-closing business

relationships with a mutual element. In such case, the mutual delivery of services (or products) will

probably be dealt with in different contracts. Ensure that you apply one payment term consistently for

both parties: very few people acknowledge the reasonableness of agreeing on a short payment term

for one party and a long payment term for the opposite party.

Readability and consistency. In her A writer‟s reference6, Diana Hacker recommends that when two

or more concepts are parallel, they are easier to grasp (and remember) if they are expressed in

parallel grammatical form. A single word should be balanced by single words, phrases by phrases and

clauses by clauses. It basically means that by summing up those concepts, the same grammatical

structure should be repeated consistently. For example:

Open Source Licence Terms means the provisions in any licence for software, which require,

as a condition of use, modification or distribution of any part of such software (a Work): (a) the

making available of source code or design information regarding the Work; (b) the granting of

permission for creating derivative works regarding the Work; or (c) the granting of a royalty-free

licence to any party under intellectual property rights regarding the Work.

Open Source Licence Terms include: (a) the GNU General Public Licence (GPL) or

Lesser/Library GPL (LGPL), (b) the Artistic Licence (e.g. PERL), (c) the Mozilla Public Licence,

(d) the Common Public Licence, (e) the Sun Community Source Licence (SCSL), (f) the Sun

Industry Standards Source Licence (SISSL), (g) the Sun Industry Standards Licence (SISL),

and (h) the Open Software Licence.

In case of claims related to a defect in the Software, Licencee shall …; in case of claims related

to an infringement of intellectual property rights, Licencee shall…; in case of claims related to

the Hardware, Licencee shall…

On the Closing Date, each indicated person shall take the action as follows:

(a) Acquired Companies to enter into the Transitional Services Agreement with Seller;

(b) Purchasers to pay to Seller the Purchase Price;

(c) the Parties to execute the Deed of Transfer and to execute the Deed of Pledge, in each

case in the presence of the Public Notary;

(d) the Public Notary to register each Purchaser in the shareholders register of Acquired

Companies as the holders of the Shares;

(e) Purchasers to hand over letters of resignation as members of the management bodies of

companies of Seller‟s Affiliates in Spain; and

(f) Seller to hand over letters of resignation for each of its appointed members of the

management bodies of companies of the Acquired Companies‟ Affiliates outside Spain. 6 Diana Hacker, A writer‟s reference, Bedford/St. Martin‟s, Boston/New York, 6th ed. 2009, S1.

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Diana Hacker obviously gives some other examples, which include the consistent use (or consistent

non-use) of adjectives in enumerations.

Mark-ups and negotiations. Inconsistencies often arise when a provision is drafted and redrafted

during the negotiation process. Do not refrain from reinstating consistency in a subsequent mark-up,

even in sensitive provisions, as long as you do so consistently (and accurately). An example of this is

a provision with several exceptions, qualifications or conditions. Particularly if they are added at

different stages in the drafting process, they may not be expressed in a consistent or grammatical

fashion. For example:

Borrower may not incur or permit to subsist any Encumbrances on any of its assets, other than:

(a) Encumbrances arising in the ordinary course of business;

(b) Borrower may grant Encumbrances on equipment to secure indebtedness incurred to

finance the purchase price of such equipment; and

(c) Encumbrances described in Schedule 3 shall be permitted.

The approaches reflected in the three exceptions are each correct. Nevertheless, each item reflects

an approach inconsistent with the others, making the provision more difficult to follow. In the example,

the approach reflected in item (a) is preferable, because it prevents unnecessary repetition with the

lead-in provision.

1.4 Vagueness and ambiguity

This paragraph discusses two aspects of contract drafting that are not of a drafting- or language-

technical nature but nevertheless very important: the use of vague terms and ambiguity. They are

probably the source of most contract interpretation disputes.

(a) ‘Avoid vague terms’

Rule and exception. The title of this paragraph – avoid vague terms – Is a best practice rule with

important exceptions. As a general principle, vagueness should be avoided, but many vague terms

serve a useful purpose. As a general principle, a contract should be clear about the obligations of

each party. However, clear obligations are not always agreeable. In such case, the principals may well

work on the basis of a gentlemen‟s agreement reflected by some vague wording of intention,

materiality or reasonableness. Remember, however, that if an obligation is not clear, the strongest

contracting party will have the benefit of the doubt as to whether it did perform duly.

Although contracts should be clear, many obligations are incapable of being defined in an all-

embracing manner. For example, precise criteria may depend on extraneous uncertainties or the

parties may be willing to assume clear (and even stricter) criteria only after a minimum level of mutual

trust has been established. In such cases, it would be inevitable to use a vague term. It makes sense

15




to elaborate on such vague terms by agreeing on conditions or milestones to achieve certainty at a

later time and place.

Examples of vague or unspecified contract terms are the concepts of reasonable, undue delay,

material, substantially and properly. It is probable that the concept of good faith is also such a vague

term. Essentially, it introduces a standard of conduct which has yet to be defined, and reflects a call

for „good-housekeeping-behaviour-but-not-too-much‟. I disagree with this. Good faith is a subjective

state of mind requiring due and sincere consideration.

Cultural difference. Generally, lawyers from jurisdictions with systematic codifications of the laws of

obligations feel much more comfortable with vagueness than those from a common law jurisdiction.

This may be explained by the fact that, by definition, codifications are built on vague terms that acquire

their purpose in real life. Statutory references to materiality and reasonableness impose a balance of

interests as well as a duty to explain. Similarly, in common law jurisdictions the individual freedom

(and accordingly, the freedom of contract) may well prevail over vague (limiting) concepts such as

good faith and fair dealing.

Several „vague terms‟ are used in various typical contexts, but not always accurately. In the printed

book Drafting contracts7, several aspects of the use of the terms reasonable, material, substantially

and without undue delay will be discussed.

(b) Ambiguity

Principle. A contract drafter should at all times avoid creating ambiguity.

Almost every contract contains ambiguities if only as a consequence of the trade off against the other

drafting principles of being concise, using plain language and writing short sentences. This is a

paradox because ambiguity is often the result of a drafter‟s attempt to accurately capture all

circumstances and exceptions potentially applicable in the context. Nevertheless, if it is clear that the

scope of a provision does not cover a particular fact or event, it is counterproductive to include an

exception. Including the exception permits an argument to be made that the scope of the provision is

really intended to be broader than it appears; otherwise why would the exception be included?

Grouping exceptions. An inconsistent use of exceptions, limitations and qualifications in one

sentence may create ambiguity. For example:

Except as … X …, Seller shall not increase the salaries of any employee (other than Y…) above

the levels in effect on the Signing Date, provided that increases may be made when … Z …

The sentence consists of three positions where exceptions are created. In the case of short

exceptions, it will read much better if they are placed at the beginning of the sentence. Conversely, if

exceptions are voluminous, it is better to place the main point of the covenant (i.e. that Seller shall not

7 Willem J.H. Wiggers, Drafting contracts, Techniques, best practice rules and recommendations related to contract

drafting, forthcoming (Spring/Summer 2011).

16




increase salaries) at the beginning and all the exceptions are consistently placed together in a series

at the end or in a separate sentence:

Seller shall not increase the salaries of any employee above the levels in effect on the Signing

Date, except that Seller may (a) … X …, (b) increase the salary of Y…, and (c) provide for

increases when … Z …

Visual enumeration. If the series is subdivided into enumerated subparagraphs, it would also be

possible to create exceptions on exceptions (as would often be necessary, but create an additional

source of ambiguity).

Sub-enumeration. When enumerations result in page-crossing lists of items, it may well be advisable

to sub-enumerate the list. A typical example of such list can be found in share purchase agreements

(where between the effective date and completion of the transaction, a number of actions would not be

permitted without the prior approval of the purchaser), or in joint venture agreements (listing the items

that are subject to approval by the joint venture partners or a supervisory body). Business people who

are supposed to work with such list feel uncomfortable as to whether all relevant matters are indeed

listed or whether a desired action is subject to approval. Instead of one list of 25 to 30 items, it may be

recommendable to subdivide the list into several topical „sub-lists‟ (e.g. operational matters, IP-related

resolutions, financial and tax matters, corporate structure-related decisions, employment and pension

related matters and miscellaneous topics).


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upgrading services, you might be somewhat suspicious: what are we going to learn that we

don‟t know already? This e-book may serve as evidence of the quality of work Weagree

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Upgrading your model contracts. When you are about to improve the model contracts

used across your organisation, Weagree‟s e-books may be helpful to learn from the lessons

we learnt. Lots of things can go wrong if you just follow your intuition. We can give you

guidelines.

Contract drafting principles. On the Weagree website, we publish about an abundance of

aspects related to contracts and contract drafting. You will come across many mainstream

contract drafting principles. We explain that In witness whereof is an old-fashioned common

law phrase (and meaningless in civil law jurisdictions). We tell you that writing and/or is

thoughtlessly ridiculous. Furthermore, our online book introduces many other drafting notions

and contains plenty of best practice rules, for example on the use of defined terms and

definitions. Enjoy!

Weagree contact:

+31 (0)20 616 9696 (t)

+31 (0)6 461 555 08 (m)

[email protected] (Willem Wiggers)

Copyright © Weagree 2011. Courtesy reprint of a part of Willem J.H. Wiggers, Drafting contracts, Techniques, best practice rules and recommendations related to contract drafting, (forthcoming Spring 2011).

mailto:[email protected]

Documents

Weagree eBook, General Contract Drafting Principles 1