The only contracts that see the inside of a courtroom are those that are poorly drafted or don’t accurately capture the parties’ intent. Here are five contract drafting mistakes and how to avoid them.
- Adapt an appropriate form to reflect the parties’ intent. Recycling agreement forms is common, but can be disastrous if you use the wrong form or don’t thoroughly adapt the document to the deal at hand. Be very careful when reviewing and revising the documents. And ask your clients to confirm that you’ve captured their intentions. Encourage them to question anything that doesn’t make sense and to consider whether any important point has been left out.
- Avoid memoranda of understanding (MOU) and letters of intent. A MOU or a letter of intent is sometimes used when the business team wants to rush “something in place.” They rarely include all the contract terms that a careful lawyer would require. If the business terms or legal issues are complex and require more time to negotiate, consider a preliminary, first-phase-only agreement. With lower stakes and an interim relationship, it should be easier to negotiate than a longer-term agreement, while avoiding the problems of the typical MOU.
- Don’t use a “best efforts” standard to define party obligations. The “best efforts” standard is too subjective. What qualifies as “best” for the receiving party may fall far short of what the performing party considers “best.” Courts have allowed testimony on the parties’ intent and expectations not stated in the underlying contracts. This means depositions, testimony, and more money in the litigators’ bank accounts. Instead of using a “best efforts” clause, state specifically what must be done. This will provide more objective standards and reduce the chance that the parties’ expectations aren’t aligned.
- Require the aggrieved party to state explicitly “this is a Notice of Default (or Termination)” and make sure it’s received. Require the parties to identify legal notices as such, with a statement like: “Any notice required under Sections X, Y, and Z of this Agreement shall refer to this Agreement, including the specific section under which notice is being given.” In most instances, Sections X, Y, and Z would be the sections addressing specific breaches, notice of default and cure periods, and notice of termination. Don’t allow important notices to be faxed or sent by email; instead, require that notices be delivered personally, by express courier, or by registered mail, with signature on delivery.
- Ensure that obligations make sense and the document is internally consistent. Mistakes are easy to make. A clause or phrase that looks correct may simply make no sense in the context of a transaction. Other errors creep in when the business teams negotiate on a parallel track with legal counsel, developing complex and detailed schedules or appendices that address business and operational issues. Some of those points may overlap or conflict with the “legal” terms and conditions negotiated by the lawyers. Cobbling together pieces of various agreements also creates internal inconsistencies. Always have at least two people read the document from start to finish. Cross check all defined terms, and—especially if the document was initially provided by the other party—question the relevance and applicability of any point that seems unnecessary or inappropriate. Point out what changes you’ve made to business terms and have your client verify their accuracy.
This material is adapted from Helen Leah Conroy’s article Ten Ways That Transaction Lawyers Can Make Litigators Rich, which was published in CEB’s California Business Law Practitioner, a quarterly that includes nuts-and-bolts information on a wide range of topics. In Part 2 of this post we’ll cover five more common mistakes discussed in the article.
Get expert guidance on contract drafting generally in CEB’s Drafting Business Contracts: Principles, Techniques & Forms.
Other CEBblog™ posts on effective contract drafting:
- 4 Tips for Defining Contract Terms
- Which Contract Form Should You Use?
- 5 Writing Tips for Every Contract You Draft
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