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1. 2 One of my favorite books is Working With Contracts – What Law School Doesnt Teach You, by Charles M. Fox, a partner in the New York City law firm.

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Presentation on theme: "1. 2 One of my favorite books is Working With Contracts – What Law School Doesnt Teach You, by Charles M. Fox, a partner in the New York City law firm."— Presentation transcript:

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2 2 One of my favorite books is Working With Contracts – What Law School Doesnt Teach You, by Charles M. Fox, a partner in the New York City law firm of Skadden, Arps, Slate, Meaghest & Flom. Most of the quotes in the slides come from this book – the others come from Understanding Contracts, by Jeffrey Ferriell and Michael Nevin. (This latter book is a general text on contracts law – not a primer on contract drafting). Also, in California, we have a number of form books, which are of great help – one of the best is the multi-volume California Transactions Forms – it contains five huge volumes of different types of contracts for business transactions. I often refer to this source. (In fact, our class on Thursday, March 16, 2006, will be based on Chapter 6 of this 34 chapter series – something to look forward to!). Resources for Drafting Contracts

3 3 Every contract needs plain English. Three of the very best books on the subject are: The Elements of Legal Style, by Bryan A. Garner (considered the preeminent authority on legal language and writing); The Elements of Legal Writing, by Martha Faulk and Irving Mehler; Plain English for Lawyers, by Richard C. Wydick.

4 4 Everything is negotiable EVERYTHING! Even things the other party tells you are not negotiable ARE NEGOTIABLE. Even pre-printed forms and boilerplate terms are negotiable. Everything is Negotiable

5 5 Question: Will you be tasked with negotiating? Answer: Only after you prove your competence and reliability. Everything is Negotiable

6 6 A.Be comfortable with your duties – if not, do not sign the contract. B.Be clear about your desires, requirements and expectations at the beginning of the negotiations – this makes for easier and faster negotiations. C.Be insistent about including a remedy within the contract if there is a breach by either party – if the other side balks, maybe you should not do business with him/her/it. D.Unless it is truly an emergency, dont be in a hurry – always be prepared to walk away. Four Cardinal Rules for Negotiating Contracts

7 7 These are contracts with the language/terms already set. Since parties usually do not negotiate when using form contracts, review the language/terms carefully. Remember slide #6 (dont be in a hurry – dont do what I once did – to be explained in class). Form Contracts F I N I S H

8 8 In contracts drafting, plagiarism is a virtue. A lawyer drafting a contract should always try to start with a form designed for the kind of transaction involved, or from a contract previously used in a similar transaction. There are several reasons for not wanting to reinvent the wheel: Form Contracts

9 9 1.Starting a contract from scratch is more time- consuming than marking up a good form; 2.Precedents contain provisions that address issues in ways that are generally accepted in the legal and business communities; 3.Boilerplate provisions that have been used and accepted in previous transactions are less likely to require careful review and negotiation. Form Contracts

10 10 Use model form contracts when drafting – much better than starting from scratch. Do not use the language/terms of the model/form contract unless it makes sense for your situation. Be careful to eliminate legalese – most model/form contracts are filled with it. Form Contracts

11 11 The Freys (p.127) are correct - Draft From an Outline An outline helps the drafter present the terms of the contract in a logical, orderly fashion. An outline prevents the omission or duplication of essential terms. See example 6-1 on p. 127

12 12 Good legal writing (including contract drafting): 1.Does not include legalese (aka lawyerisms); 2.Is written in plain English. Eliminate Legalese Plain English for Lawyers by Prof. Richard Wydick First published in 1978 and created a real change in the legal profession. Good legal writing does not sound as though it had been written by a lawyer.

13 13 Lawyerisms: Eliminate Legalese Lawyerisms are words like aforementioned, whereas, res gestae, and hereinafter. They give writing a legal smell, but they carry little or no legal substance…They baffle and annoy, and give a false sense of precision and sometimes obscure a dangerous gap in analysis. A lawyers words should not differ without reason from the words used in ordinary English.

14 14 Words & Phrases to Avoid 1.acknowledge and confess 2.act and deed 3.afford an opportunity 4.aforementioned 5.aforesaid 6.alter or change 7.and/or 8.annul and set aside to whether 10.attached hereto that point in time 12.authorize and empower 13.because of the fact that means of reason of virtue of 17.cease and desist 18.comes now 19.confessed and acknowledged 20.conjecture and surmise 21.convey, transfer and set over 22.covenant and agree 23.cover, embrace and include 24.deem and consider 25.due and payable 26.due to the fact that 27.during the course of 28.during the period when 29.during the time that 30.each and all

15 15 and clear and unfettered 48.from and after 49.from the point of view 50.full and complete 51.give and grant 52.give, devise and bequeath 53.good and sufficient 54.good consideration 55.goods and chattels 56.have and hold 57.have an effect on 58.have an impact on 59.have a tendency to 60.heed and cause 31.each and every 32.entirely and completely 33.file an action against and conclusive and proper and suitable 37.for and during 38.for and during the period 39.force and effect 40.forswear 41.for the period of 42.for the purpose of 43.for the reason that 44.forthwith 45.fraud and deceit Words & Phrases to Avoid

16 16 Words & Phrases to Avoid 61.hereafter 62.hereby 63.herein 64.hereinabove 65.hereinafter 66.hereof 67.heretofore 68.herewith 69.hitherto 70.hold and keep 71.hold, perform, observe, fulfill, and keep accordance with as much as connection with favor of instances in which lieu, in place, instead and in substitution of lieu thereof my stead and place order to reference to regard to 83.insofar as…is concerned spite of the fact that terms of truth and in fact view of 88.just and reasonable 89.keep and maintain 90.kindred character

17 17 91.last will and testament 92.let or hindrance 93.lot, tract, or parcel of land 94.made and entered into 95.made and provided 96.made, ordained, constituted, and appointed 97.maintenance and upkeep 98.mind and memory 99.modified and changed and just 101.null and void 102.of and concerning 103.on the basis of 104.on the part of 105.order and direct 106.ordered, adjudged, and declared 107.over, above, and in addition to 108.pardon and forgive 109.part and parcel 110.peace and quiet 111.perform and discharge 112.point in time 113.prior to 114.remise, release, and quit to claim, residue, and remainder 116.revoked, annulled and held for nought 117.said (i.e. the said document) 118.saith and except 120.seized and possessed Words & Phrases to Avoid

18 18 Words & Phrases to Avoid 121.shun and avoid 122.situate, lying, and being in 123.stand, remain, and be 124.subsequent to 125.suffer and permit 126.suffer or permit 127.thence 128.thenceforth 129.therefrom 130.therein 131.there is no doubt that 132.thereof 133.thereout 134.thereover 135.therethrough 136.thereto 137.thereunder 138.this is a topic that and complete 140.true and correct 141.truth and veracity 142.undertake and agree 143.unless and until 144.until such time as 145.void and of no effect 146.whensoever 147.whereby 148.wherefore 149.wherein 150.whereof

19 whereas 152.whereat 153.whereon 154.whilst 155.with the exception of 156.with reference to 157.with regard to 158.with respect to 159.witnesseth 160.written document 161.written instrument Words & Phrases to Avoid

20 20 The Active Voice not the Passive Voice. Short sentences. Everyday language where possible – do not make readers (who will be mostly non-lawyers) scramble for a dictionary. Concrete words – be specific – contracts should not be vague. Use…

21 21 The next 12 slides are taken verbatim from Chapter 6 of California Transactions Forms, Bancroft-Whitney (1997), written by attorney Michael Overly of Newport Beach (you will receive a handout of Mr. Overlys checklist of common contract clauses in class on Thursday, November 3, 2005): Common Contract Provisions

22 22 I.Provisions Concerning Contract Formation A.Offer 1.Bilateral 2.Unilateral 3.Irrevocable Option 4.Revocation of Offer Common Contract Provisions

23 23 B.Acceptance/Rejection of Offer 1.Unconditional acceptance 2.Conditional acceptance 3.Exercise of option 4.Rejection of offer 5.Rejection and counteroffer Common Contract Provisions

24 24 II.Introductory Provisions A.Identification of the Parties B.Effective Date of Agreement C.Recitals D.Consideration Common Contract Provisions

25 25 III.Conditional Provisions A.Conditions Precedent B.Performance to Promisors Satisfaction C.Conditions Concurrent D.Conditions Subsequent E.Force Majeure Common Contract Provisions

26 26 IV.Modification and Termination Clauses A.Modification B.Termination on Specified Date C.Termination on Specified Event D.Conditions Permitting Termination E.Termination on Notice F.Termination on Default G.Termination for Cause H.Attorney Fees upon Termination Common Contract Provisions

27 27 V.Assignment A.Assignability B.Assignable on Prior Written Consent C.Binding on Successor and Assigns Common Contract Provisions

28 28 VI.Penalty and Liquidated Damages Clauses A.Statutory Maximum B.Liquidated Damages, Subject to Reasonableness Standard C.Remedies Cumulative Common Contract Provisions

29 29 VII.Dispute Resolution A.Arbitration B.Attorney Fees Common Contract Provisions

30 30 VIII.Construction of Contract A.Governing Law B.Forum Selection C.Integration Clause D.Severability Clause E.Joint Drafting and Neutral Construction F.Undefined Terms Common Contract Provisions

31 31 IX.Warranties A.Warranty Regarding Litigation B.Warranty of Title C.Warranty Regarding Tax Liabilities D.Warranty of Authority to Execute E.Warranty Regarding Community Property Common Contract Provisions

32 32 X.Miscellaneous Clauses Common Contract Provisions A.Definitions B.Taxes C.Confidentiality D.Compliance with Laws and Ordinances E.Further Assurances F.Contract Entered Into Freely and in Consultation with Counsel G.Incorporation of Schedules and Other Attachments H.Place of Performance I.Effect of Titles and Headings J.Notices K.No Waiver L.Calendar dates M.Time of the Essence N.Joint and Several Liability

33 33 XI.Execution of Contract A.Counterparts B.Spousal Consent Common Contract Provisions

34 34 Date: II. Introductory Provisions A contract must have a date. The agreement may provide that it becomes effective or that performance is required on a later date – but the date of the contract is the date that it is first executed and delivered. The date of a contract is usually recited in the first paragraph. Sometimes the date is at the end of the contract with the signature lines.

35 35 Recitals: These provisions must be drafted especially carefully. They are the paragraphs at the beginning of a contact that recite the factual background of the contract. II. Introductory Provisions

36 36 Consideration: Provision setting forth what each party is providing and receiving for their respective promises. II. Introductory Provisions

37 37 Condition precedent: III. Conditional Provisions The provisions specifying the requirements that must be satisfied before a party is obligated to perform under a contract or before the contract is enforceable are known as conditions precedent…Conditions are often colloquially referred to as outs, because a failure by one party to satisfy its conditions allows the other party to get out of the contract or to terminate certain of its obligations.

38 38 III. Conditional Provisions Condition concurrent: Conditions concurrent mean that both parties performances must occur simultaneously. Example: In a contract between Helen and Bob in which Helen promises to sell her car to Bob for $1000, Helens duty to tender delivery of the car is subject to the condition that Bob perform his promise to pay the $1000.

39 39 III. Conditional Provisions Condition subsequent: A condition subsequent is an event which, if it occurs, excuses a duty which has already matured.

40 40 III. Conditional Provisions Force majeure: Frequently a part of construction contracts to relieve a party of performance obligations or liability for damages upon the occurrence of an unforeseeable event that could not be avoided through the exercise of reasonable care.

41 41 III. Conditional Provisions Performance to promisors satisfaction: This provision is subject to a good faith requirement - otherwise the promise would be deemed illusory.

42 42 Modification: IV. Modification & Termination Describes the requirements for entering into amendments, consents, and waivers. This section should always require amendments, consents, and waivers to be in writing…It is preferable to require all of the parties to sign each amendment, waiver, and consent.

43 43 Assignment: V. Assignment In many cases, the provision governing whether and under what conditions the parties may assign their rights under the agreement is found in the miscellaneous section. The primary exception to this is agreements where assignability is one of the key substantive issues, such as partnership agreements and shareholder agreements.

44 44 Remedies: VI. Remedies A bare bones contract could omit any discussion of what happens if the parties fail to perform in accordance with the terms of the contract. As every lawyer learned in law school, the aggrieved party could ask a court to fashion a remedy for breach based on statutory and case law. However, sophisticated commercial parties are generally reluctant to rely on a judge or a jury to do this, and for this reason many contracts have remedial provisions. Remedial provisions have two elements: a description of the events that give rise to the right to a remedy, and the remedies themselves.

45 45 VI. Remedies Termination: Termination of the contract is one of the most common remedies, and results in neither partys being required to continue performance under the contract (although in some cases the right of termination may be exercised together with other rights, such as the right to receive indemnification payments or liquidated damages).

46 46 The remedy of acceleration is found primarily in debt financing agreements. The exercise by a lender of this right results in the indebtedness under the agreement being accelerated, i.e. becoming immediately due and payable by the borrower despite a later stated maturity date… VI. Remedies Acceleration: Acceleration often has catastrophic consequences. Usually, the mere threat of acceleration is sufficient to cause the defaulting party to make significant concessions in exchange for the lender agreeing not to accelerate.

47 47 VI. Remedies Indemnification: Terms caps, baskets, and indemnification termination to be discussed in class. An agreement may provide that a party breaching its representation or covenants will be required to indemnify the other party for all costs, damages, and losses incurred as a result of the breach.

48 48 These clauses provide for one party to make a specified payment to the other party upon the occurrence of certain events. VI. Remedies May not be penalties: 1.The actual amount of damages in the event of a breach must be difficult to compute and 2.The amount of liquidated damages must represent a good faith attempt to estimate the actual damages that may be suffered. Liquidated Damages:

49 49 Alternative Dispute Resolution: VII. Dispute Resolution Rather than agree to a specific remedy for breach of contract, the parties sometimes agree to a particular method for resolving their disputes, such as arbitration or mediation. Many agreements include a provision requiring the parties to submit any dispute that arises to a panel of arbitrators, whose decision, including any remedy they impose, will be binding. Arbitration provisions are typically enforceable – courts usually dismiss action brought in violation of such a clause.

50 50 Attorneys fees: Attorneys fees and litigation costs are not, generally, recoverable as damages for breach of contract. Therefore, parties often make them recoverable by contract. VII. Dispute Resolution

51 51 VIII. Construction of Contract Choice of law: This provision states that the contract is to be interpreted and enforced under the law of a particular jurisdiction…. This is the most important of the miscellaneous provisions and should never be omitted from any contract, no matter how short or informal. It specifies that all substantive legal issues arising in connection with the enforcement or interpretation of the contract are to be resolved by looking to the law of the chosen jurisdiction. Without this provision, any dispute regarding a contract will most likely also involve a dispute over the law governing the contract. Anyone who has taken a conflict of laws class knows the complexity of the issues that can be involved in a judicial determination of this issue.

52 52 VIII. Construction of Contract Forum selection: This provision is designed to ensure that a dispute regarding the contract will be heard in a particular court or the courts of a particular state. This is achieved by having the parties agree that they are subject to the personal jurisdiction of such courts. Sometimes this provision is drafted to provide that the jurisdiction to which the parties consent is the exclusive jurisdiction to litigate issues arising under the contract.

53 53 Integration: This clause provides that the agreement is the entire and exclusive agreement between the parties with respect to its subject matter. This clause prevents the parties from arguing that there are side agreements or understandings that are not set forth within the four corners of the agreement. This may be extremely important in the event of a dispute. VIII. Construction of Contract

54 54 VIII. Construction of Contract This provision states that if a clause in the agreement is found to be legally prohibited or unenforceable, the offending provision is severed from the rest of the agreement which otherwise continues to operate as originally written. Otherwise, there is a risk that a court may throw out the baby with the bathwater and refuse to enforce the entire contract. Severability:

55 55 IX. Representations Aka Warranties: Representations and warranties are statements of fact made in the contract by one party to the other party as of a particular point in time. Their purpose is to create a snapshot of facts that are important to the recipients business decision to enter into the transaction. The failure of a partys representation to be true will result in the other party having rights and remedies under the contract.

56 56 XI. Execution of Contract Execution clauses: Every written contract must be signed, or executed by each party to the contract. This is an absolute requirement: failure to have the parties execute the written contract means that the contract has not been entered into and may not be enforced by the parties. Yes – unless barred by the Statute of Frauds, oral agreements ARE enforceable, but, as discussed in class, because of evidentiary problems, it is always preferable to have every agreement embodied in a signed writing.

57 57 An oral contract is not worth the paper it is written on. XI. Execution of Contract Samuel Goldwyn, great legal scholar

58 58 A short agreement will often be in the form of a letter, addressed to one party from the other, and signed by the sender with a separate signature line for the receiving party. Agreements in this form are usually shorter and less formal than contracts not in letter form…Some letter agreements refer to the parties as you and we. This makes it very difficult for the reader to remember who is who, and should be avoided…Define the parties in the normal fashion, as Seller, Borrower, Lessee, or by reference to the partys name: ABC for Alpha Binding Co., for example. XI. Letter Agreements

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