Wednesday, April 6, 2011

Contract Drafting with Precision

Some languages are very precise. For example the German language is very precise and when you see a word that may be 20 plus characters or more long, it’s because the word is describing something exactly.  Other languages like English are far less precise. Individual words can easily have a number of different meanings.  The impact of this is when you deal with contracts in English or another less precise language, as the drafter of the document you need to be precise. A second reason for being precise is that in the event of ambiguity, Courts will normally interpret the ambiguity against the party who drafted it.

Precision needs to start with the Bid or Request Phase where you need to tell the Supplier exactly what you need or want. Two things can happen if you don’t.  One is they can make an assumption about what you need, and they may be assuming something that is costlier than what you really need.  They may also interpret it in a manner that is most favorable to them. I did construction contracting for a number of years and probably half the changes I saw throughout the course of a project resulted from either the drawings or specifications not being precise. Contractors would use that lack of precision to interpret the requirement in the way that was most favorable to them. Then, if you wanted something different than they were planning to provide, it required a change (and additional cost). Precision needs to apply not just to the contract but also to any documents that make up the contract.  Trying to slide something through by being ambiguous can only lead to a dispute that you will lose one way or another. You may win the battle, but lose the war.  

There are a number of ways to be precise:

Use Defined Terms
A “defined term” is either:
·   A term defined in the Definitions section of the Agreement or Agreements.
·   A term defined within the text of the Agreement after its initial use (an “in-line” definition)
·   Make sure you always capitalize each use of a defined term.
o   For example: “Product” – when capitalized, the parties signify that the definition applies. If “product” were not capitalized, the definition of “Product” would not apply, causing confusion on what the parties intended “products” to mean.  
             Make sure that the same terminology is used in all documents.
             If your contracting approach uses multiple documents to create an agreement, do not assume that the current template is compatible with the definitions of existing agreements. Make sure the definitions and defined terms are consistent.
Use the right “standard of commitment”
The words you use to describe the obligations of the parties create different standards of commitment. For example you can:
1. Intend to do something
2. Agree to agree in the future
3. The party can make a commitment that they may do something
4. Agree to agree in the future with both parties acting in good faith
5. Agree to act in "good faith"
6. Agree to do what is "commercially reasonable"
7. Agree to do what is "reasonable"
8. Agree to do it with "best efforts"
9. Make a conditional commitment (If X happens then we will do Y)
10. Make an absolute commitment ("shall, will")
11. Make a material representation.
12. Make a warranty.

Use words to define whether it is a right or an obligation. Obligations must be performed, rights may be exercised.
Write “active voice” sentences
             Active voice sentences are shorter, and easier to read and understand than sentences that we write in the passive voice. In active voice sentences, the subject performs the action expressed in the verb; the subject acts
             In sentences written in the passive voice, the subject receives the action expressed in the verb; the subject is acted upon
            Supplier shall deliver the Product to the Buyer on June 1, 2009 (active voice example)
            The Product shall be delivered to the Buyer on June 1, 2009 (passive voice example with agent performing the action omitted)
Active voice sentences are more clear and concise, they clearly define who does what.  Passive voice sentences are longer and can create confusion.  They can also de-emphasize the responsibility of the acting party. For example: “The Product shall be delivered to the Buyer on June 1, 2009” (the party responsible for the action is not identified)
Manage any “incorporation by reference”.  Include the information that makes no mistake about what document you intend to include by referring to the title, the date, or revision, and the number of pages.
Always check to make sure you language answers five basic questions:
·   Who is responsible to perform the action?
·   What are they responsible to do?
·   Where will it be done?
·   When will it be done?
·   How will it be done?
Example:  Supplier shall deliver the Product to Buyer, ex-works Supplier’s dock in Taipei, Taiwan, on August 1, 2009. Who” is the subject of the sentence. In this case it’s the Supplier. “What” is the delivery of the Product. “Where” is the Supplier’s dock in Taipei, Taiwan. “When” is July 1, 2012.”How” is Ex-Works

Other ways to drafting with precision:
·   Make your sentences short.
·   Use common words
·   Be precise. For words with multiple meanings establish a defined term or don’t use them
·   Avoid repetition as it creates the potential for conflicts.
·   If you use an example make sure it’s accurate and can only be interpreted one way. 
·   When including a list, identify whether it’s inclusive or not. . “This includes, but is not limited to”.
·   Follow each issue to completion to make sure the term is established.
·   If documents should not be of the same standing, make sure you establish the priority.
·   Ensure that the section and sub-section numbers are in the correct sequence
·   Ensure accuracy of all cross-references.
·   Ensure accuracy of dollar amounts by stating amount in both alphabetical and numeric descriptions.
·   Ensure accuracy of percentage references by stating percentages both alphabetical and numeric descriptions.
·   Ensure accuracy of date and time period references by searching for: Day, Date, Week, Month, Year, and Annual
·   Ensure references are clear by defining them e.g. Does  “Day” mean business day or calendar day. If you use Business day, whose Business day applies?
·   Ensure that uses of “include” (and variations) are consistent (e.g., including but not limited to vs. including)
·   Ensure that each defined term is actually used in all appropriate places (including the defined terms for both the “Supplier” and the “Buyer”)
·   When needed to show the intent add clarifying statements or examples.
·   Perform a spell check. Read the document, as the functionality of word processing spell checks will not highlight when the incorrect word is used if it is spelled correctly.
             If you are using an agreement that you used for another Supplier, make sure you remove all references to them.
             If you are using a template that contains instructions or alternatives, delete the instructions and select the alternative you want.
             Be extremely careful in incorporating any Supplier document as part of your agreement. Even if you give it the lowest priority, as long as the language included in it doesn’t conflict with the other terms it could place additional restrictions or obligations on the Buyer or relieve the Supplier from any obligations where your agreement may be silent. For example, if your agreement was silent about the implied warranties of merchantability or fitness for a particular purpose and the Supplier’s document disclaimed them, you would not have those warranties.  

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