When it comes to writing contracts, clarity and conciseness rule the day. A poorly drafted contract can not only confuse the parties as to what is expected from whom, but it can also become a litigation quagmire if a later disagreement over the terms results in a lawsuit.
If you don’t believe me, I can tell you that I once spent five years of my life litigating a dispute over whether the terms “dehydrated vegetables” and “dehydrated vegetable products” — both used in various places in one contract — had the same meaning. I can assure you that seemingly minor drafting oversight costs each party tens of millions of dollars in litigation costs.
If you’re new to drafting contracts, here are some tips that will help you avoid these sorts of costly mistakes.
Writing contracts and agreements
Writing contracts and agreements require a meticulous approach. Begin with a clear title and an introduction that identifies the parties and purpose.
Define key terms, specify obligations, and outline payment terms, if applicable. Include the contract’s duration, termination conditions, performance standards, and, when necessary, provisions for confidentiality and intellectual property.
Clarify liability, indemnification, and the process for dispute resolution, specifying governing law and jurisdiction. Address how amendments will be made, include an entire agreement clause, and outline severability.
Provide space for all parties’ signatures and comply with any notary or witness requirements. Attach relevant documents and have legal counsel review them. Keep copies for reference. Customization is essential, and legal advice is recommended for complex contracts.
Aside from what I’d refer to as these essentials, there are several considerations I’d urge you to bear in mind when writing contracts that might not necessarily be the first thing you think about — secondary aspects that are important to be cognizant of.
Whether you’re an attorney or paralegal writing a contract, keep these in mind when conjuring up that next draft.
Be clear about the parties and the subject matter
At its core, a contract is a set of promises between two or more parties concerning a certain subject. For example, an Automobile Purchase Agreement is typically entered between a car dealer (Party 1) and a car buyer (Party 2). The Agreement sets forth each party’s obligations with respect to the transaction. This sounds simple, but it is an easy place for mistakes to be made.
Let’s say, for example, that Jane Smith walks into a car dealership seeking to buy a car on behalf of her business, “Jane Corp.” If the contract is drafted between the dealership and Jane Smith — instead of the dealership and Jane Corp. — it would create an entirely different set of obligations than Jane intended.
Specifically, she would be personally on the hook for making payments on the car as opposed to her business having responsibility. You can imagine what a nightmare that might create for Jane down the road.
Use plain language
While legal terminology is sometimes necessary, strive to use plain, straightforward language as much as possible. Complex sentences and legal jargon can create confusion and lead to misinterpretation.
Write in a way that anyone reading the contract can easily understand. This not only helps in making the contract clear but also reduces the likelihood of disputes over ambiguous terms.
Be consistent with defined terms
Most contracts contain a “Definitions” section. Generally speaking, this section will capitalize certain terms that are intended to have meaning beyond what is typically understood. Using our prior example, the Jane Corp. agreement might have the defined term “Car.” The standard use of the word “car” could refer to any car that has ever been manufactured. But in our example, “Car” is defined as “a 2019 Mini Cooper Clubman, bearing Vehicle Identification Number XXXXXXX.”
By specifically defining this term, readers of the contract know that “Car” (with a capital C) can only refer to that specific automobile. If “car” (without a capital) is used elsewhere in the contract, readers know that the term is being used generally (e.g., “Party 1 is a car dealership located in Sunnyvale, California.”). See the difference? As you review the contracts you’ve drafted, make sure the defined terms are capitalized only as intended.
Understand basic principles of contract law
Law students are required to take an entire year of Contract Law in order to graduate. You don’t necessarily need to have all of that knowledge, but a basic understanding of contract principles is important if you’re going to be preparing agreements.
Concepts like offers, acceptance, and consideration are just a few of the basic things you’ll need to understand before you draft a contract. Fortunately, in the age of Google, you can give yourself a decent education in these principles. Also, don’t be afraid to ask your supervising attorney if there are particular concepts you need to understand before you undertake a contract drafting assignment.
Don’t reinvent the wheel
Millions of people will be writing contracts right this second! Literally millions of people have written contracts before you, and millions of people will do so after you. If you’re stuck on a particular contract clause, don’t be afraid to look at what your predecessors have done.
First, ask the assigning attorney if she has a template you can work from. There are dozens of standard clauses that your firm has perfected over the years, and there is no reason you shouldn’t pull from others’ work. Things like Choice of Law clauses, Jurisdiction clauses, and Merger clauses will undoubtedly exist on your server. Use them.
If you’re still stuck after looking at firm documents, don’t be afraid to pull from online resources. Just make sure that you do more than a simple “cut and paste” job. Look at the language you’ve found and analyze whether it fits in your situation.
Ask a litigator
This tip comes from someone who spent an entire career litigating bad agreements. Sometimes it is hard for non-litigators to see problems with contracts. The language is clear to you; why wouldn’t it be to everyone else? By asking a litigator to review your contract, you might get an entirely different perspective on the contract you’ve created.
Remember the five years of litigation that resulted from using “dehydrated vegetables” and “dehydrated vegetable products” interchangeably in a contract?
That entire lawsuit could have been avoided simply by having a litigator review the agreement before it was put out for signature. Litigators are trained to find ambiguities and holes in an agreement. For your client’s sake, why not turn to them before there is a dispute?
Regularly review and update contracts
Contracts should be living documents, reviewed and updated regularly to reflect changes in business relationships or legal requirements.
Establish a systematic approach by setting a schedule for periodic reviews of key contracts, especially long-term or ongoing agreements. Annual reviews are a minimum requirement, ensuring that the contract still reflects current relationships and expectations.
Trigger-based reviews should occur after significant events like mergers, acquisitions, or changes in market conditions.
Engage relevant stakeholders, including legal counsel, financial advisors, and key business personnel, in the review process. Document every review thoroughly, noting identified issues and the rationale behind updates.
This documentation provides clarity and justification if disputes arise. Regularly updating contracts ensures they remain effective tools for managing relationships and mitigating risks, helping businesses avoid legal issues and maintain the relevance of their agreements.
Keep detailed records
Maintaining detailed records of all versions of a contract, including drafts and communications regarding revisions, is crucial. Implement a robust version control system to track all changes, clearly labeling each version with a unique identifier and date.
Save every draft along with notes and comments from all parties involved, preserving the negotiation process’s context.
Keep all correspondence related to the contract, including emails, letters, and meeting notes, to provide evidence of the parties’ intentions and understandings.
Securely store signed versions, maintaining both physical and digital copies, with regular backups for digital files. Maintain an audit trail logging who made changes and when to ensure accountability.
Ensure your record-keeping practices comply with legal requirements for document retention and confidentiality.
Detailed records provide a clear history of the contract, essential for resolving disputes and demonstrating compliance with legal standards, protecting your organization and clarifying obligations.
Conclusion
Writing contracts demand a paramount commitment to clarity and precision, for even the slightest drafting oversight can lead to substantial confusion and costly legal disputes.
An illustrative anecdote underscores the profound repercussions of ambiguous language within a contract, where the interpretation of seemingly similar terms led to a protracted and expensive five-year litigation ordeal. For those venturing into the realm of contract drafting, there are several key strategies to sidestep such costly blunders.
First and foremost, it is vital to clearly identify the parties involved and the subject matter in the agreement, avoiding potential pitfalls of personal liability versus corporate obligations.
Defined terms must be used consistently and judiciously to prevent ambiguity. Fundamental knowledge of contract law principles is a prerequisite, and it’s advisable to consult with an experienced attorney or utilize established templates when uncertain about specific clauses.
Lastly, seeking the counsel of a litigator can offer a fresh perspective and help uncover potential ambiguities or pitfalls in the contract.
Meticulous contract drafting, grounded in legal principles and thorough review, is the linchpin to mitigating costly disputes and fostering effective, mutually understood agreements.
