Articles

Contract Drafting Techniques

A Manual of Style for Contract Drafting

Over the last month, I have become enamored with Kenneth A. Adams book, A Manual of Style for Contract Drafting. I first became aware of the book while reading a popular lawyer drafting blog, decided to purchase it shortly thereafter, and have been fascinated by it every since. Not that I agree with everything in it; there are some suggestions that don’t fit with my specific practice area or, in some cases I suspect, the different styles prevalent in different parts of the country. Nonetheless, after fifteen years of practicing as a corporate lawyer, I found the book a good refresher in some areas, and providing new insight in others. I thought I would highlight a few of the books’ suggestions in this month’s newsletter.

The Title

The title is placed at the top center of the first page, in all capital letters. State simply the kind of agreement involved (EMPLOYMENT AGREEMENT or OPTION AGREEMENT), and do not include party names in the title.

Don’t use a title that looks at a given transaction from different perspectives, as in AGREEMENT OF PURCHASE AND SALE, it goes without saying that a purchase necessarily also entails a sale (one of my favorite most obvious observations).

If a contract amends, or amends and restates, another contract, then say as much in the titled, and the title should also refer to the type of agreement involved, and number each amendment (or at least from the second amendment onward): AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT.

The Introductory Clause

The introductory clause is usually formatted as a single paragraph. Begin by referring again to the type of agreement, beginning with This, and draft it as a sentence. Don’t capitalize the type of agreement (it is already stated right above in the title). Since it is a sentence, it needs a verb, which is the is dated clause (avoid the unnecessarily complex or redundant is made or is entered into and the doubly complex is made and entered into).

In my practice, it is preferable to put the date in the introductory clause as opposed to having each party date the agreement next to their signature. In some contexts, however, dating it at the end is appropriate. One, if you anticipate that the number of days it will take to get all parties to sign the agreement will be more than a couple days, such that there might be a significant discrepancy. Two, when the contract date is critically important, such as an agreement that will be reviewed by outside auditors, or if the date is near the end of a financial period such as a fiscal quarter. Regardless of which method is used for dating an agreement, avoid having a date in the introductory clause and dates on the signature pages. Finally, use the straightforward format of December 31, 2012 rather than this 31st day of December, 2012, and spell out the date.

In all cases, use between rather than among or by and between. State the party names and identify individuals as such, and entities by the full name under which it was registered in its jurisdiction of organization. The book suggests that party names should be in all capitals, but I tend to disagree because it hides the true spelling of a parties’ name. But keep it simple, such as ABC Corp., a Delaware corporation rather than a corporation organized under the laws of the state of Delaware. Do not put the address of parties in the introductory clause; these are more appropriate in the notices section of the agreement.

Define each party, right after the party name for individuals, and right after the jurisdiction reference for entities. Put the defined term in parenthesis and quotation marks, and bold the defined term to make it stand out. When selecting a defined term for a party name, the circumstances of the agreement will dictate whether your use a term that is specific to them, or more generic such as (the “Company”). Generally, it is easier to read a contract that used defined terms specific to the named parties, unless (i) the parties play traditional roles, such as lender and borrower, (ii) the contract focuses on a single entity, such as an LLC operating agreement, or (iii) the identity of the parties is not known at the time the contract is first drafted.

Never give alternative defined terms, such as (“ABC” or the “Company”).

One of the areas where I disagree with the book is the use of the defined term the Parties. In many situations, there are references in the agreement to parties that is intended to be more broad that the specific group of parties to the agreement, and I find it helpful to clarify, even though it requires a little more work in drafting the agreement, especially the miscellaneous clauses found at the end.

For example:

ASSET PURCHASE AGREEMENT

This asset purchase agreement is dated December 31, 2012, and is between The Widget Company, a California corporation (“Widget”), William Smith, an individual (“Smith”), and Excellence, Inc., a Utah limited liability company (“Excellence”). Each of Widget, Smith, and Excellence shall be referred to herein as a “Party” and collectively as the “Parties.”

Recitals

The book outlines three types of recitals: (i) context recitals, which describe the circumstances leading up to the parties entering into the contract, (ii) purpose recitals, which indicate what the parties wish to accomplish, and (iii) simultaneous-transaction recitals, which describe other agreements or elements of a transaction of which this particular agreement may be a part. He suggests that recitals should not be numbered or lettered, but I tend to disagree. He also suggests that recitals do not need to be set apart with a heading, such as Recitals or Witnesseth, and should not start with Whereas.

Because recitals should not contain terms of the agreement, there is no need to incorporate them by reference. Defining terms in the recitals is perfectly acceptable.

Summary

So far, I’ve covered only the title, the introductory clause, and the recitals. A Manual of Style is 430 pages of details, covering additional concepts such as reasonable efforts and the time of day, all the way to proper form for signature pages. Fascinating, in a twisted transactional-lawyer sort of way. I would encourage anyone involved in transactions to have a copy of handy.