Rational businesspeople generally want to avoid the courtroom.  Litigation, as I regularly remind my clients, is time-consuming, expensive, and risky.  Because I primarily serve my clients in resolving disputes through litigation, which occur “ex post” (after the fact) rather than addressing potential issues “ex ante” (before the event), I do not get many opportunities to share contract-drafting tips that could help my clients avoid having to visit me.  I offer this article to help businesspeople and their deal lawyers to draft contracts that do not end up on my desk.

I have begun with the first of a five-part series called “A Litigator’s Perspective on Drafting Contracts that Keep You Out of Court” that will cover the major concepts of contract drafting.  This article addresses the anatomy of a contract, the importance of “boilerplate” provisions, and discusses risk allocation provisions, such as representations and warranties.  Future articles will address (1) covenants, rights, and declarations; (2) assignments and delegations, conditions, and discretionary authority; (3) term, termination, defining the contract, and interpretative provisions; and (4) drafting guidelines.

I hope to offer some guidance to you and all my business and entertainment clients to help understand the anatomy of a commercial contract and the purpose of the various provisions contained in one.  My ultimate goal is to help you draft contracts that will keep you out of court — or ensure that if you  end up in a contract dispute, you will maximize your chance of having the contract enforced in your favor.

The articles are only excerpted here, but each article and the entire series can be downloaded by clicking here: Part I, Part II, Part III, Part IV, (part V will be updated when it becomes available); or by clicking the links at the end of this post.

Introduction

In order to draft contracts that minimize the risk of litigation, businesspeople must avoid the temptation of treating a contract as a holy artifact.  Many clients—especially the ones who draft their own contracts—just want to have a document that says “contract” at the top, that consists of no more than two pages, and that has signatures at the bottom.  But then these same clients expect that contract to be “bullet-proof.”  All this arrangement does is provide a false sense of security to the client, which the client will ultimately pay for through big litigation bills. Having a contract does not protect a business; having a well-draftedcontract does, though.

Businesspeople must realize that effective contract drafting takes time and a contract must be custom-drafted for each deal because a contract is a blueprint.  And just like a person would not use a random set of blueprints to build his or her dream house, he or she should not use an “off-the-shelf” agreement to document a business deal that is important enough to warrant a contract in the first place.

According to Professor George W. Kuney, “contract drafting is making a record of the parties deal and creating the mechanisms to:  foster agreement; foster performance; and provide for enforcement and dispute resolution.”[1]

Reusing an old form contract or a contract that a business used on a prior “similar” deal often gives businesspeople a false comfort because that agreement was not likely crafted to address the needs of the current deal.  There is nothing wrong with using a precedent form, but it must be used cautiously and each provision should be carefully evaluated in light of the needs of the current deal.  A contract that does not address the specific issues of the deal may be worthless when it is needed the most.

When is the contract needed the most? Well, typically, not until something goes wrong.  After a contract is signed, it usually gets filed in a drawer (best case scenario) or left attached to an email in one party’s inbox (worst case scenario).  No thought is given to the contract until someone begins trying to break it or file a lawsuit.

Another thing to keep in mind is that having a contract in place does not mean that the other party is going to do the right thing and abide by the contract.  Contracts, typically, are not “self-enforcing.” That is why an effectively drafted contract provides specific remedies or risk-allocation provisions to provide mechanisms for handling failures to perform.  A contractual right that does not have a related remedy for non-performance is ineffective and difficult to enforce in court.

An effectively drafted contract provides a roadmap for enforcement. As Professor Kuney admonishes: “[y]ou do not want to have to sue for breach of contract. You want to be able to sue to enforce the contract. Your house, your rules, your remedies.”[2]  Suing for breach of contract generally means seeking to convince a judge or jury that the non-performing party should pay money or stop doing something.  A businessperson is in a stronger position when he or she can enforce the contract by persuading the court to grant specific performance.  How do you do that?  “You draft consequences into your contract. You use your transactional tools….” to provide “a road map for enforcement by the court and there is nothing that a court likes better than a contract that gives it that road map because it’s an easy contract case to rule on.”[3]

The last introductory point to bear in mind is that everything is negotiable.  Every jot and tittle of a contract can be negotiated—that does not mean that the opposing party is going to negotiate everything, but it means that a contract is not set in stone and a businessperson has an opportunity to negotiate anything in the contract to make sure the contract achieves his or her objectives.

Anatomy of a Contract

As mentioned above, a contract is not a holy artifact.  It is a blueprint, and blueprints come in different styles but they all have the same basic format.  The same is true of contracts.

Most contracts have the following sections:

1)     Title

2)     Exordium (an overly fancy word for “introduction”)

3)     Recitals

4)     Key Deal Points (the provisions that address the substance of the deal, e.g., purchase price, services, delivery, and the like)[4]

5)     Governing Provisions / Boilerplate

a)      parties, assignees, and third party beneficiaries

b)      events of default, dispute resolution, and remedies

c)       financial and risk allocation (e.g., representations and warranties, insurance requirements, and indemnity provisions)

d)      communication between the parties and the outside world (e.g., notice provisions, and publicity restrictions)

e)      defining the contract (e.g., provisions that require modifications be in writing, and “integration and merger” clauses)

f)       interpretive provisions (e.g., severability clauses, and governing law)

6)     Definitions;

7)     Signature Blocks; and

8)     Exhibits, Attachments, Schedules, “Standard Terms,” Etc.

Some drafters like to put the definitions at the beginning of the contract; others prefer them at the end.  There is no cookie-cutter way to organize the sections of a contract and no “legally required” way.  There is what can be considered “best practices,” and I believe that the best practices include (i) structuring the document so that “key deal points” come before the governing provisions/boilerplate, (ii) keeping related provisions close to each other, and (iii) ensuring that the document flows as a coherent whole from beginning to end.

By the way, one does not need to be a lawyer to draft a contract.  I almost invariably recommend that a client retain counsel to negotiate and draft the contract, but there is no law requiring it.

Boilerplate Matters

I am not a fan of the use of the phrase “boilerplate” to describe the material that generally comes at the end of the contract.  Unfortunately the term is here to stay, so I will use it.  Boilerplate has a negative connotation—commentators deride the legal profession for the use of boilerplate; businesspeople consider boilerplate unimportant verbiage in the contract that justifies lawyers charging outrageous fees; and young lawyers frequently copy-and-paste it from one contract to the next without any thought.

In actual practice, it is often the so-called boilerplate that contains the key provisions that impact who wins and who loses in contract litigation.

One scholar defines boilerplate provisions as a “road map, telling the parties how to govern their relationship and administer the contract.”[5]  Boilerplate provisions come in a variety of categories, including those that address the following issues: (i) parties, assignees, and third party beneficiaries; (ii) dispute resolution and remedies; (iii) financial and risk allocation; (iv) communication between the parties and the outside world; (v) identifying what constitutes the contract; (vi) interpretive provisions; and (vii) others.[6]  In my view several of the categories that Professor Stark describes as “boilerplate,” I would prefer to classify as a “governing provision.”

End Notes


[1] Tina L. Stark & George W. Kuney, Transactional Skills Training: Contract Drafting – The Basics, 10 Tenn. J. Bus. L., 139, 155 (2009).

[2] Id. at 156.

[3] Id.

[4] Selecting the perfect term to describe these heart-of-the-deal provisions is an exercise in futility.  In any given deal, any provision could be a “key deal point,” (such as a particular representation or warranty).  Please forgive the lack of precision.

[5] Tina Stark, Negotiating and Drafting Contract Boilerplate, § 1.01 (2002).

[6] Id.


Download the articles:

  • The first part is available and can be downloaded here.
  • The second part is available and can be downloaded here.
  • The third part is available and can be downloaded here.
  • The fourth part is available and can be downloaded here.
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