The golden rule of writing any contract (Part 2 – tips)

Caution

Quick recap of Part 1: when writing a contract, you are not writing for yourself or for the counterpart, but you are rather writing for a third party, that you like it or not. In the worst case, the third party will be a judge. Based on my experience, this is the golden rule: think as you were writing for a person that completely ignores the background of the deal, your organization, your business and your counterparts. Here are some practical tips:

1. Recitals: whether they are legally relevant or not (depending on the jurisdiction), recitals help the reader understand the background and the purpose of the transaction. Recitals should include descriptions of the parties’ business, the reason why the parties wish to enter into the contract and their expectations. If there is a chain of events, put them in chronological order like a diary (e.g. On 15 February 2016 Alfa entered into a letter of intent with Beta without consulting with their lawyer; On 16 February 2016 Alfa realized it made a pretty bad mistake; etc.). Recitals can also be used strategically in order to make a party aware about the consequences of the breach of the contract.

2. Scope: always spend one line or two to say what the main obligations of the parties under the contract are. That would help all readers (including the judge) to understand the purpose of the document and quickly recall the legal provisions applicable to that contract.

3. Definitions: define any word or expression that a third party may not understand, including technical jargon, even if both parties know its meaning. Definitions should be short but self-explanatory at the same time. For instance, “CFA” does not seem an inspiring definition for “Closing Financing Amount”, but “Closing Date Financing Agreements Amount” lacks brevity. Also, avoid double definitions, such as “the Target or the Company”, they just mislead the reader. In any case, the real tip here is to describe in simple words any technical expression that the porter of your building would not understand. In particular, accounting terms deserve very precise definitions as they may be interpreted in many ways (think of Ebitda, Net Debt and Net Working Capital in M&A transactions: everybody seems to know what they are, but then when the parties try to break down all the items composing each of these accounting terms there are always different views).

4. Structure of obligations: at cost of being redundant, each obligation should contain at the minimum the following details: time reference (a date or a term, whether linked to the occurrence of an event or the fulfilment of another obligation), name of obliged party, name of the beneficiary of the obligation, action qualifying the obligation (a delivery, a payment, etc.), object of the obligation (an asset, a service, a product, an amount of money), place where the obligation has to be performed, if relevant.

5. Consistency: as far as the form is concerned, the same font, spacing, numbering and format should be used throughout the contract. While lawyers like to repeat that form is substance, many times I have seen a horrendous substance notwithstanding a perfect form. For instance, that happens when the same matter is regulated in different sections or annexes of the contract. In the best case, you will have overlapping provisions, if not contradictions. Moreover, keeping provisions of the same kind together contributes to the readability of the contract (apples with apples and pears with pears).

6. Clarity: use plain language. Avoid legal jargon, Latin and any unnecessary foreign expressions. Avoid double negatives, passive voices and words with more than one meaning. Repeat the names of the parties in each sentences (and every time you do, a school teacher dies). In civil law contracts, use references to the applicable provisions of law, just to put the judge on the right direction. Try to avoid generic expressions such as “material”, “substantial” and “reasonable”.

7. Brevity: keep sentences as short as possible. Prefer short words. Avoid adjectives and adverbs where not necessary. Limit the use of subordinated clauses. Avoid sentences between parentheses or dashes.

8. Paragraphs: make sure each paragraph has a number. Do not use bullet points, forcing your client to count them during a meeting is just embarrassing. Moreover, I have noticed that long contracts with no tables of contents and section titles are really hard to manage by a third party user. Section titles also are of use during drafting as they serve as skeleton for the contract and help keeping provisions of the same kind together.

9. Annexes: use annexes to keep the body of the contract clear from details, such as procedures, technical requirements, commercial conditions, formulas, accounting principles. Annexes are also recommended in case the length of certain clauses (such as representation and warranties in M&A contracts) could disrupt the flow of information. In such respect, I always recommend to put your head into the annexes even if they are not supposed to have legal contents or implications. Indeed, technical annexes often lack logic or consistency with the rest of the contract. To mitigate the risk of conflicting provisions, use a prevalence clause stating that the body of the contract prevails on the annexes.

10. Examples: do not be stingy with examples, especially if you are incorporating in the contract accounting principles, calculations, formulas or technical details. Highly recommended in price adjustment clauses.

While writing this article, a thought grew in my mind: what if one has no interest in being too clear? Indeed, one may be willing to conceal the implication of a certain legal provision or to undermine its effectiveness. I quickly realized that I could put together topics for an article about “dirty drafting”. Coming soon…

Copyright Giorgio Mariani 2016. All rights are reserved.

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