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Contract Drafting Rules

In the Contract Drafting course that I teach at the University of Houston Law Center, I stress a number of real-world rules designed to help get workable contracts to signature sooner and keep clients out of trouble. Here are some of those rules (adapted from a published article):

  1. Clients prize speed to signature.
  2. Other things being equal, a short, simple contract that can be reviewed and signed quickly might serve the client’s short-term and long-term desires far better than the opposite.
  3. Short paragraphs are almost always better — avoid walls of words.
  4. Single-topic paragraphs are always better.
  5. Contract length isn’t as important as paragraph length.
  6. D.R.Y.: Don’t repeat yourself — e.g., the $693,000 drafting error in a bank guaranty
  7. Steer well clear of ambiguity:
    • A.T.A.R.I.: If a term is even arguably subject to multiple interpretations, Avoid The Argument: Rewrite It.
    • W.I.D.D.: When in doubt, define.
  8. Make contracts understandable to future readers — such as jurors.
  9. Remember that contracts will usually go back into the jury room as “real” evidence, whereas the same might not always be true for lawyer-prepared demonstrative exhibits. Take advantage of that to create your own trial exhibits:
    • Use tables where appropriate.
    • Use illustrative examples and sample calculations.
    • Consider drafting explanatory footnotes — the other side might not ask to delete them, in which case the footnotes might someday become part of a trial exhibit.
  10. Other things being equal, try for “Seneca terms”: Treat your inferior as you would wish your superior to treat you.
  11. A friendly, balanced contract can signal your client’s reliability as a business partner and get you to signature sooner.
  12. Don’t leave out something that you know the other side will ask for — it’s better to include a safe version that you know your client can live with.  (It’s foolish to hope that the other side’s contract reviewer won’t know what to ask for — if you leave out a provision that you know she’ll want, she might ask for a version that your client will hate.)
  13. R.O.O.F.: Root Out Opportunities for F[oul]-ups — don’t assume perfect performance by either party.
    • What might fall through the cracks?
    • Personnel changes can happen — reassignments, new jobs, promotions, retirements, deaths (the Mack Truck Rule of Contract Drafting).
    • Build in sensible default values, e.g., a specific date & location for performance unless otherwise agreed.
    • Be practical: E.g., don’t insist on too-short a time frame, notice period, etc.
  14. Don’t assume people will want to keep their promises (that includes your client).
  15. Try to put the monkey on the other party’s back, e.g., your client will do X upon written request.
  16. Use time limits – earliest date (“sunrise”), latest date (“sunset”) — or from Neil Wertlieb: “Always address timing!”
  17. Consider expressly specifying Plan-B remedies, to be easily understood by business executives — and judges and jurors. For example:  “If Provider fails to fix the problems on time, then Customer may hire another contractor to finish the job, at Provider’s expense.”
  18. As a drafter, don’t assume you must go it alone: When in doubt, A.T.P. (Ask The Partner) or A.T.C. (Ask The Client).
  19. Consider making the other party earn what they get (or what they want to keep). EXAMPLE: Tie the other side’s exclusive rights to its meeting specific performance goals.
  20. Be sure the other side has the financial- and other wherewithal to perform:
    • Due diligence
    • Financial covenants
    • Backup funding sources, e.g., insurance, guaranties, standby letters of credit, escrow
  21. “You get what you inspect, not what you expect” (this is a saying from the nuclear Navy). So:
    • Insist on your client’s getting the information it needs / wants from the other side.
    • Do due diligence, possibly including getting third parties involved (e.g., a mechanic to inspect a used car)
    • Confirm your understanding & assumptions with reps and warranties
    • Audit provisions
  22. Humans can be “funny” — see behavioral economics. Some examples follow.
  23. Incentives matter — Charlie Munger (vice-chairman of Berkshire Hathaway). 
  24. Many people care most about their own careers.
  25. Buyer’s remorse can be a problem, especially if a better offer comes along — and competitors might do that intentionally to try to steal a deal away.
  26. People are great at rationalizing doing what they want to do.
  27. People don’t like to be told what they can and can’t do.
  28. Memories can be plastic — and sometimes “motivated.”
  29. People might cut costs to meet their KPIs, resulting in dangers or disasters. Example: PG&E criminal trial in SF over gas pipe exploding in 2010.
  30. People tend to point fingers to shift blame — and lawyers can be a favorite target.
  31. Don’t forget Hanlon’s Razor: Never attribute to malice that which can be adequately explained by stupidity — but don’t rule out malice.
  32. “Absent reasonable objection, we are allowed to do X” might be better than “Mother May I?”
  33. Plan for transition after termination; for example:
    • Consider a phase-out period.
    • Transition of customer’s business to another vendor
  34. When you can’t just say no in a contract negotiation: Creative compromises
    • Non-discrimination language
    • Advance-warning or advance-consultation requirement
    • Transparency requirement
    • Cap the financial exposure for the onerous provision
    • Package the onerous provision as part of a premium offering
  35. Negotiate limitations of liability risk-by-risk, not one-size-fits-all
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