Drafting a Business Contract: A Guide for Young Lawyers
by Matthew A. ("Matt") Cordell
Your client or supervising attorney has requested you prepare a contract to "cover" (or "paper") a proposed business transaction. Following a pattern you will come to recognize, the client or supervising attorney will likely begin by assuring you the deal is "simple," summarizing it in 60 seconds or less, and then mentioning that he or she wants a "standard" contract in place by…well…yesterday. As a relatively new lawyer, you have read plenty of contracts but have not drafted one for a transaction like this before. Where do you start?
Perhaps the most fundamental document in business law is the contract. Lawyers deal with them every day but, as business litigators know, even excellent lawyers will eventually draft a contract which results in unintended consequences. This article provides some basic advice for young lawyers drafting business agreements. Each specific situation will require unique considerations, whether legal or practical, but the following guidance will apply to most contracts.
Understand The Arrangement. It is not possible to effectively prepare a contract for a transaction or relationship that you do not understand. If the first explanation you are given leaves questions in your mind, do not be too embarrassed to ask for additional information or clarification. While you do not need to have a thorough understanding of, for example, all of the technical details of a software program to negotiate a license for its use, you do need to understand the basic expectations of the parties which might, or might not, necessitate a high-level understanding of the underlying technology. Additional questions will come to mind as you draft the written agreement. Make a detailed list of these questions to raise later, as described below.
Locate Several Examples And Borrow Carefully. Reinventing the wheel by starting from scratch often wastes time and money and increases the risk you will overlook an important provision. Use existing resources if possible. Chances are that your firm or legal department has handled similar agreements in the past. In addition to form databases available through Lexis®, Westlaw®, and other fee-based sources, free sources include the website of the Business Law Section of the North Carolina Bar Association and the Securities and Exchange Commission's EDGAR database (where contracts are often filed as exhibits to corporate reports). The Washburn University School of Law has compiled a list of sources for forms and examples at http://www.washlaw.edu/legalforms. Finally, your client might have a similar agreement used in a prior deal. If the transaction is very unusual and good examples cannot be located elsewhere, consider asking the client for a copy of a prior contract, but be aware that some clients might view this unfavorably.
There are a few caveats regarding the use of form or example contracts that must be noted.
• One obvious but all-important fact to bear in mind is that agreements used in other deals reflect the terms and dynamics of those deals rather than the deal at hand. The concerns, expectations, and bargaining position of your client in the matter at hand may be very different.
• Do not assume that citations to statutes, regulations, accounting standards, or other industry standards in an example are up to date. Check all citations for accuracy and applicability.
• Do not rely on your word processing software to change the party names for you. I cannot count how many times I have seen the name of a party to a prior contract buried within a new contract. Do not let a simple oversight embarrass you by creating the impression that you mindlessly cut-and-paste.
Focus On Representations, Warranties, Liability Standards, And Indemnification Provisions. These are the areas in a contract where attorneys can add significant value for their clients. Representations and warranties set out the promises each party makes to the other(s) and must be worded precisely. Recognize the importance that liability provisions and terms like "gross negligence" and "consequential damages" have to your client. Remember that getting a liability or indemnification provision without a pocket deep enough to support it is worth little. Consider whether insurance, bonding, or guaranties are appropriate.
Do Not Dismiss Recital Clauses. Some young lawyers, wishing to do away with anachronistic language and formatting conventions, omit recital clauses (the explanatory paragraphs often beginning with "Whereas"). Though not as important as the operative terms of an agreement, recital clauses remain relevant. These clauses provide the context and purposes of the parties and help the parties, judges, and juries understand what each party intended.
Give Attention To The "Boilerplate." Choice of law, forum selection, and other "boilerplate" clauses can become important when business relationships sour. Ignore them at your client's peril – and your ownclient will be best served if you explicitly address all important terms and assiduously avoid vague or ambiguous language. In certain circumstances, however, the default rule under applicable law may be favorable to your client, and you may reasonably believe that the other party would seek to change the term if you spelled it out in the agreement. In those situations, your client may be better served if the specific term is not addressed in the agreement or negotiations. Similarly, your client may want a term that the other party rejects. If the other party is intransigent and the term is not a deal-breaker, your client may be better served by an ambiguous term to which the other party will agree rather than a specific term that is not favorable to your client. These situations are the exception rather than the rule and, aside from these limited circumstances, you should purge ambiguity from your contracts.
Be Appropriately Assertive. You are your client's zealous advocate, but you do not serve your client best by packing the agreement with draconian terms that the other party is certain to reject. Doing so may set a counterproductive tone that could ultimately impede getting the deal done. On the other hand, you may reasonably decide to include some non-critical terms in favor of your client that can later be conceded in negotiations. Find out the relative bargaining power of the parties and what your client values most, and then draft a contract that benefits your client, but be prudent about it.
Provide A Draft For Review. When you have a draft ready (and have had an assistant or colleague proofread it for you), provide it to your supervising attorney (or, if you do not have a supervising attorney, your client) for review. Be sure to ask all the questions you have compiled, point out all terms which require further instruction, and explain any assumptions you may have made. Remember to point out any risks you have identified. Numbering the paragraphs in the agreement will facilitate this and other discussions. It may be necessary to go through more than one round of revisions before you are ready to deliver a final document, but you should make your best efforts to minimize the number of drafts by anticipating questions and concerns.
By following these basic guidelines, you can be confident in your ability to efficiently and effectively draft business agreements that meet your clients' needs. •
Matt Cordell focuses his practice on corporate, securities, banking, and commercial law at Ward and Smith, P.A.
This article was first published in February 2012 in The Advocate by the North Carolina Bar Association.