Drafting Contracts

13 April

• No class on 4/20, final will be on 4/27
• Handout #1: Miscellaneous provisions boilerplate example.
• Handout #2: Severability, etc., boilerplate example.
• Handout #3: Notice boilerplate example
• The exam will be about 20 short-answer questions: fix the errors in this provision. Spelling, language usage, tabulation, ambiguity, etc. And a couple small draft-a-provision assignments. It will be open-note.
• It will count for 1/11 of the grade (i.e., same as the assignments).
• People think of boilerplate as an afterthought, and assume that everything is standardized, and you can use one set for all circumstances. But lots of time there are important issues covered there. So you want to customize them to your particular situation.
• If the parties are entering into an arrangement that consists of multiple documents, you'll want to make sure that the boilerplate is the same for all of them. Otherwise you'll get into confusion and strife.
• Things like choice of law, etc., can be dispositive in litigation, so you want them right. Lots of times, though, people sort of run out of gas at the end, and overlook the "general and administrative provisions." So litigators are always mad: how could you have let the client sign this? why didn't you do that? And so on. Best to pay attention to this stuff, because it's embarrassing when you get caught out.
• It would be a great idea (especially if you have tinkered with boilerplate in any unusual way) to get a litigator to look it over. They generally have three rules to live by:
  1. Think about what is the most likely thing that could go wrong, make a party unhappy, etc. This is where working with a lawyer who has experience can make a really big difference: they've lived through these sorts of agreements before, and know what kinds of issues crop up. If you can anticipate these things, you can include provisions to sidestep them or resolve them up front.
  2. Draft every contractual provision with the expectation that the language in that provision might be dispositive in litigation. So avoid ambiguity.
  3. Consult a litigator before finalizing the contract. For obvious reasons, time and money may make this impractical.
• Might also want to consider whether your client is likely to be a future plaintiff or a future defendant. Generally, your client is more likely to become a plaintiff if it's going to be receiving payment under the contract, and vice-versa for paying under the contract.
• If you're looking plaintiff-y, you want certainty, or a guaranteed right to unconditional payment. And a local forum for any disputes. Local choice of law. These will help limit collection expenses.
• The defendant side wants to put as many protections as possible: you want the right to withold payment, basically. Lots of conditions precedent to payment (it wants to be sure it receives the benefit of the bargain before it has to pay). Local law and forum are also desirable here.
• Governing Law: this is probably the most important of the boilerplate provisions. It probably should be in every single contract. If you don't include it, any contract dispute is likely also to include a governing law dispute. Basically, you're saying which state's law controls dispute. Without this provision, you get common-law choice-of-law principles, and that's hard stuff (esoteric, bizarre, unpredictable: the state with the most substantial relationship to the disagreement, and the parties will not agree about this).

  How do you decide which law to select? Frequently, there are a number of jurisdictions that could be reasonable for this. Think about:

  1. You want a well-developed and predictable body of law. For corporate, that's DE and NY, generally. Not ND, where the courts might not have ever rendered a decision about these issues. In fact, NY (and DE) have statutes saying they'll hear cases from anyplace, subject to some amount-in-controversy restriction because they want to continue to be the venue of choice.
  2. Pick one that's favorable to you, if possible.
  3. Pick one that you're familiar with.
  4. There are public-policy and statutory issues that foreclose certain choices. Internal corporate disputes are always resolved in the state of incorporation. Likewise real estate conveyances.
• In the Olden Dayes(TM), courts wouldn't enforce governing law (or forum selection) provisions, because they saw them as a usurpation of the court's function. But that has changed, and now they're generally workable. Not always, though (e.g., in a contract of adhesion, where there was no bargaining).
• Sometimes you'll see choice-of-law to get the substantive law, but not conflict-of-law principles (there's a problem called renvoi, where one state's conflict-of-law principles might just forward the issue to another state). That's mostly a theoretical issue now: courts apply their own choice-of-law rules when deciding whether to enforce the governing law provision.
• A governing law provision needs to be clear about whether it applies only to the contractual terms in the contract, or to broader categories as well (e.g., torts that arise incidental to the agreement). So decide whether you're dealing with contractual or extra-contractual matters, or both (i.e., "disputes arising out of or related to the provisions of this contract"). There's a long line of cases related to deciding whether a governing law provision is narrow or broad. Probably good to err on the side of being broad. You can split issues between states, also, if you are fancy; this is uncommon, but there's nothing wrong with doing it.
• Forum Selection: Designates, by agreement of the parties, one or more courts to have personal jurisdiction over the parties with respect to disputes arising out of the agreement. Can be
  • Mandatory: only one court can hear this case
  • Permissive: we agree that this court can hear it, but others can also work
• Bremen v. Zapata: SCOTUS case from the 70s saying that forum selection clauses are OK. They, like governing law provisions, used to be disfavored, but are fine now. The forum ought to be in the same state as the governing law (technically not a requirement, but you'll annoy everyone if you do otherwise, and risk the selections not being enforced. Consider:
  1. Convenience: how hard is it to get there
  2. Propensities of the docket/strategic considerations (e.g., "rocket dockets").
  3. General political leanings in the area, or relationship between your client and the area
  4. Don't just pick a state: pick a particular court within the state. And don't pick federal district court as your only forum (because either diversity or subject matter jurisdiction is required).
• Waiver of Jury Trial: this is a less common provision, but you might want it anyway ("the buyer waives its right to trial by jury in all matters related to this contract"). These provisions are sometimes ineffective, because of constitutional issues. If you're a large corporation, you might well like to get people to waive their jury trial rights (juries see large corporations as nice deep pockets). Bench trials are also cheaper and quicker. And where the facts in dispute are highly technical, juries may not be much help anyway. In order to be effective, these waivers must be knowing, intentional, and voluntary. Otherwise they won't be enforced. Things to do:
  1. Put it right above the signature line.
  2. Make it bold, and in a larger font.
  3. Use a caption that says what it is.
  4. If there's a Table of Contents, put it there, and in bold.
  5. Make it bilateral: so that both parties are waiving.
  6. Get the signatory to initial it, if it's a natural person.
  7. Consider getting the other party's lawyer to sign a document certifying that the provision got explained.
  8. Use the language "knowingly, intentionally, and voluntarily."
  So you need to go to quite some lengths to make this enforceable.
• And there's mandatory arbitration as well. There are good and bad sides of this, of course: arbitrators tend to split the baby, even though one side might have a winning case. Arbitration is a lot more private than a courtroom, it's usually faster and cheaper, the decisions are usually final and non-reviewable. There's no guarantee that arbitrators are smarter than judges. You want to draft these carefully if you have complex subject matter at stake, to make sure you get someone neutral and capable.

  Do not just pick a boilerplate arbitration clause: this really should be customized, and you have a great deal of freedom. You can designate individuals, or groups thereof, you can set timelines, procedural rules, what law should be applied, where the arbitration will take place, etc.

  Bear in mind that a lot of arbitrators are former judges and lawyers, and they make their living by referrals (i.e., from happy customers). So you might want just to find a successful practicing lawyer in the subject area, who is not making a living as an arbitrator, and hire that person.

• Even if there's no arbitration clause, the parties can still agree to go to arbitration, of course. And you can do mediation as a step before arbitration.
• There's maybe a little turn away from arbitration lately: folks are wanting discovery and reviewability, at least some of the time.
• Notice provisions: define what counts as notice (fax, in person, and via overnight courier are commonly accepted, because the sender can easily monitor whether the recipient has gotten the item). First Class Mail is sometimes not allowed: required registered or certified mail. E-mail has obvious issues. The provision should say who can get notice, how it can be delivered, when it can be delivered, and when it takes effect. See Handout 3.
• Severability: if any provision is found to be legally prohibited or unenforceable, the offending provision is severed from the contract, and the rest of the contract shall be enforced as written. Don't do this thoughtlessly, though: you might want the contract to evaporate entirely if some provision is invalid: in fact, you might want to disclaim severability (i.e., "the parties regard each term as essential to the agreement"), at least for certain terms.
• Amendments: should be required to be in writing, signed by both parties. This isn't always enforceable: a course of dealing might create estoppel-- the parties, by their actions, have amended the provision saying all amendments must be in writing.
• Merger or integration clauses: this is the entire, final, and exclusive agreement. Under the parol evidence rule, the parties wouldn't be able to introduce evidence that there were other side-agreements to this contract. A "partially integrated" contract is final, but not necessarily exclusive: so other evidence can be introduced to supplement it, but not contradict it. If a contract term is ambiguous, the parol evidence rule doesn't apply, and evidence can be entered (evidence of fraudulent inducement to enter into a contract is always admissible).
• Counterparts: makes it possible for the contract to be executed separately by the parties, so that you don't all have to sign the same piece of paper.
• Other frequently seen stuff: assignability, force majeur, captions or headings (i.e., they don't mean anything), further assurances (if something is left out, the parties are required to do what's needed to make sure the intent of the agreement is fulfilled).
• A good resource is Tina L. Stark: Negotiating and Drafting Contract Boilerplate.
• Assignment: the only one that needs significan surgery is the jury trial one.