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How to Keep Contracts Out of Court (Part 2) – CEBblog™
2 Comments on How to Keep Contracts Out of Court (Part 2)
The key to keeping contracts out of the courtroom is drafting them well and making sure that they accurately capture the parties’ intent. In Part 1 of this post, we discussed five common contract drafting mistakes and how to avoid them. Here are five more.
Ensure that notice procedures and default triggers work together. Default and notice procedures invariably come into play when problems arise. For example, a contract provides “If such default is not made good within ninety (90) days after the receipt of such notice, the notifying party may terminate…” but the notice clause states that “Notice shall be deemed to have been given for all purposes, and effective as of the date of mailing….” Instead of framing notice procedures in terms of “giving” and “receiving,” you should cast all related notice clauses in terms of “effective” notice: “If such default is not cured within ninety (90) days after notice of default is effective under Section _ _[the notice procedure section]_ _, the non-defaulting party may terminate, effective immediately on notice of termination.”
Don’t forget start and end points. Determine the most sensible, objectively measurable event in the context of the deal to use as a starting point for measuring time. “Accrual” of a cause of action is often not objectively measurable, at least not without litigation. On the other hand, the “effective date of notice of default” can be precisely defined. Often it’s not a good idea to include the effective date of the agreement in the printed text, because it may take days or weeks to fully execute the document and the parties don’t want to begin performance until both sides have signed. Define the effective date as the “later date of execution” and then instruct both sides to make sure that whoever signs the document also dates it.
Don’t keep them guessing. Many problems in contractual relationships result from not addressing the “what ifs” and “what thens” relating to the parties’ performance obligations. Problems arise when it isn’t clear what happens on a party’s breach or when the agreement prescribes terms relating to a right or obligation during some initial period but not after that period elapses.
Define “material breach.” What is “material” may be subjective. To clarify each side’s expectations, discuss with the client’s business team what really matters. Address it explicitly, to the extent possible, especially with regard to default, notice, and termination procedures.
Include a “jointly drafted by the parties” clause. Civil Code §1654 embodies a rule familiar to every first year law student: If no other rule of construction applies, “the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.” With so many lawyers using email to exchange drafts of documents, parties in litigation can easily trace who drafted what. Unless one party provides a form of agreement but doesn’t allow any negotiation or modification, a clause that removes CC §1654 as a litigation risk benefits both parties. The “miscellaneous” provisions should include a clause stating that: “The parties agree that this Agreement shall be construed as if both parties jointly wrote and prepared it.”
When drafting contracts, be a “professional pessimist” whose job it is to determine and address all the things that could go wrong in the future.
This material is adapted from Helen Leah Conroy’s article Ten Ways That Transaction Lawyers Can Make Litigators Rich, which was published in CEB’s California Business Law Practitioner, a quarterly that includes nuts-and-bolts information on a wide range of topics. Get expert guidance on contract drafting generally in CEB’s Drafting Business Contracts: Principles, Techniques & Forms.
Other CEBblog™ posts on effective contract drafting:
Tags breach of contract, contract drafting, contract terms, litigating a contract dispute, litigation, writing a contract
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2 replies on “How to Keep Contracts Out of Court (Part 2)”
How to Keep Contracts Out of Court (Part 1) | CEBblog™says:
[…] Practitioner, a quarterly that includes nuts-and-bolts information on a wide range of topics. In Part 2 of this post we’ll cover five more common mistakes discussed in the […]
Do Both Spouses Need to Sign Contracts? | CEBblog™says:
[…] How to Keep Contracts Out of Court (Part 2) […]