Business Law

Chapter 12:

Drafting Contracts

Legal Professionals and Contracts

• Law firms are often called upon to either assist in the creation of a contract or to actually draft a contract as a whole.

Why Business People Want to Avoid Litigation

• Litigation is a long, drawn-out, and costly procedure. Cases may take years to successfully litigate

Avoiding “Legalese” in Contracts

• One of the biggest temptations for a legal professional when preparing a contract is to use legal-sounding jargon and other impressive words to emphasize the seriousness of the document.

Contract Law Resources

• There are numerous resources for contract law.

• Some are better than others.

Formbooks

• A contract formbook contains a wide variety of contracts, clauses, and other materials that act as a guideline for a person creating a new contract.

• Laypersons often make the mistake of assuming that a form from such a book is the only thing that they need to address all of their legal concerns.

Treatises

• Written by eminent legal scholars, a treatise focuses on a narrow area of the law and explores it in detail.

Casebooks

• Casebooks contain interesting and seminal cases on particular topics of law.

Statutes

• Some contracts have specific requirements set out in statutes.

• If you fail to meet these legal prerequisites, the contract may be void.

Appellate Decisions

• Appellate cases interpret and expand on statutory laws.

Internet Sites

• Pay sites, such as Westlaw or Lexis-Nexis, provide a wealth of the information that would be almost impossible to duplicate in print form.

General Books on Contracts

• For a legal professional, these books are essentially useless.

Drafting Contract Clauses

• Drafting contracts requires attention to detail and conformity with the law.

Checking for the Contract Basics

• All contracts must meet the basic elements set out in the previous chapters of your text.

Offer and Acceptance

• Contracts usually do not detail the history of the negotiations between the parties.

• It is always a good idea to gather evidence about negotiations, especially the offer-acceptance period because it may become an issue later.

Mutual Assent

• Mutual assent is a contract detail that not only can be gathered from the contract, but also should be presented clearly and unambiguously.

Capacity

• Other sources must be used to determine capacity.

• This may require some research into the parties’ backgrounds as well as additional information about the negotiations themselves.

Legal Subject of Contract

• The contract should be checked to make sure that it contemplates actions that are legal in the jurisdiction where it will be performed.

Drafting an Offer

• An offer must contain specific language and show an evidence to enter into a contract.

Drafting an acceptance

• An acceptance is valid if it unequivocally accepts the offer as stated, without changing any of the essential terms.

Recitals of consideration

• Consideration is the legal detriment assumed by both parties to the transaction.

• A simple phrase such as “in consideration of…” is often sufficient.

Specific Contract Clauses

• There are concerns for specific types of contract clauses.

Goods and services

• Contracts involving the sale of goods are a common form of contract.

• The transaction may also fall under the UCC.

Statute of Frauds

• When a contract falls under the jurisdiction of the state Statute of Frauds, the statute must be followed closely.

“Time is of the essence”

• A contract clause that states that time is of the essence means that performance must occur by a specific date or the contract will be voided.

“Trade or business secrets”

• If the client wishes to insert a provision preventing an employee from releasing sensitive information about trade or business secrets, the contract must contain some provision that specifically states what types of information should not be released.

“Noncompete”

• Noncompetition clauses in contracts are usually reserved for employment contracts.

• Courts will generally not enforce such provisions when they are overly broad.

Contract of “Adhesion”

• The small print found on the reverse of airline tickets or other types of forms is just as binding as the large print on the obverse.

• Such contracts have often been found to be invalid.

The Fine Print

• The fine print is the contract.

• As a general rule, a party is presumed to have read the entire contents of any contract that he or she has signed.

Conditions

• Is the language used in the clause open to interpretation as a condition?

• If so, what type of condition is it?

Payment

• Payment is one of the most important contract clauses for the parties, even though it may have no greater significance to the contract drafter than any other contract provision.

Damages

• Damages can come in many forms, from consequential to punitive.

• Although most contracts are silent about the topic of damages, it would be prudent to include some provision about damages in a contract.

Time

• What is the effective date of the contract?

• When is performance to be carried out?

Choice of Law

• A choice of law provision is simply a contract clause that states which jurisdiction will have the power to hear and decide any litigated issues under the contract.

Parol Evidence Rule

• The parol evidence rule is an evidentiary rule that states that when a contract is written it is the sole and exclusive evidence of the contractual obligations between the parties and a court will refuse to hear any oral testimony that attempts to modify those contract provisions.

Death of The Parties

• In most situations, when an individual dies his contractual obligations die with him.

Bankruptcy

• Bankruptcy is an action filed in federal court to discharge an individual or a business liability.

• These liabilities can include contractual obligations.

Attorneys' Fees

• The “attorneys’ fees" provision in the contract is a simple statement that provides for the payment of an attorney for any expenses related to litigating issues under the contract.

Alternative Dispute Resolution

• An arbitrator is a person who is appointed either by the courts or selected by the parties who will attempt to resolve the differences between the parties.

Notice

• The party should be given sufficient time to receive notice and to take action based on it.

• However, the notice period cannot be so long as to make it impractical to give it in the first place.

Termination

• Contracts can terminate by the agreement of the parties or by some other factor.

• When the parties wish to terminate by agreement, is there a contract clause that provides a mechanism for doing so?

Modification

• The manner of modification should be expressed in the contract so that all the parties know how it can be done.

Signature Provisions

• When the parties sign the contract they are expressing their intent to be bound by the entire terms.

• The signature provision should be clearly set out so that each party knows exactly where to sign.

Exhibits and Attachments

• Contracts often contain exhibits and attachments to which the contract refers.

• A contract might contain a ‘deal memo’ or a memorandum of contract.

Contracts Under Seal

• In most jurisdictions, the old common law form of “contract under seal” has been abolished.

Double-checking the Contract

• The final contract should be reviewed very closely.

• Each contract clause and provision should be examined to make sure not only that it is the actual agreement between the parties but also that it does not contain any grammatical or spelling errors.