Contract Drafting for the 21st Century (Practical Advice From Beyond the Ivory Tower) Brad Pederson and Shauro Bagchi Maslon LLP March 7, 2017 "I am the last one to suppose that a piece about the law could be made to read like a juicy sex novel or a detective story, but I cannot see why it has to resemble a cross between a nineteenth century sermon and a treatise on higher mathematics." Fred Rodell, Goodbye to Law Reviews Revisited, 48 Va. L. Rev. 279, 282 (1962). 1
Goals of This Presentation "[L]egalese is worse than smoking cigarettes. To kick the habit is extremely hard." Rudolf Flesch, How to Write Plain English: A Book for Lawyers and Consumers (1979). Help you draft clear and enforceable contracts so your clients (and if contested, judges) understand them. Give you a "recipe book" of best practices and practical tips. Discuss and dissect a few sample provisions. 2
WHEREAS, no one understands the literal meaning of the term "whereas" and it is unnecessary; Introduction, Recitals, & Background "Whereas" literally translates to "it being the case that " Archaic! Eliminate it unless your primary audience wears powdered wigs. The background should explain in plain English the background and goal of the transaction. Often procurement agreements need little to no background, so consider whether it is necessary. Recitals and background are not part of the agreement unless specifically incorporated. Consider using party names v. generic terms for the parties throughout agreement Customer & Supplier; Buyer & Seller; Landlord & Tenant 3
Organizing & Labeling the Contract Organize contract so that business folks reviewing its terms can easily identify the relevant provisions to review. Consider using exhibits and statements of work when the contract involves significant "business" terms or input. Use clear headings as a reader's roadmap: "Dispute Resolution" v. "Arbitration" "General" or "Miscellaneous" v. specific headings for "boilerplate" provisions (assignment, severability, etc.) Section heading should track content of the provision. Don't sneak waiver of jury trial (as an example) into severability section. 4
Incorporating Other Documents (1 of 2) Properly incorporate exhibits, statements of work, and external policies. Good: "The terms and conditions of the [Other Agreement/Document] are incorporated into and made a part of this Agreement." Bad: "The terms and conditions of the [Other Agreement/Document] shall also apply." Ensure no ambiguity between incorporated terms and those in the contract. 5
Incorporating Other Documents (2 of 2) Incorporate AND create an order of precedence Ex. "This Agreement, its exhibits and schedules (each of which is incorporated into this Agreement), and any SOWs (each of which is incorporated in this Agreement), constitute the entire agreement between the parties relating to the subject matter of this Agreement and supersedes any prior agreement or understandings between them with respect to the subject matter of this Agreement." You also need to specify what happens if terms conflict Ex. "If there is an inconsistency, ambiguity or contradiction between the terms of this Agreement and any of its exhibits, schedules or SOWs, the following priority governs which term will control: [this Agreement, SOW #[ ], Fee Attachment # [ ], etc.]" 6
Look Under the Hood Do The "Standard" Provisions Still Make Sense? Audit period and tail. Insurance limitations and periodic proof of insurance. Privacy standards/requirements. Payment terms when invoices should be produced, how long to pay, how to resolve disputed amounts, currency, how taxes will be handled. Specify date and time of performance Good: Jones will deliver the horse to Smith at 574 Ridge Road, Durango, Colorado, by 5:00 p.m. on August 1, 2015, at Jones's expense. Bad: Jones will deliver the horse to Smith. (See How to Draft a Bad Contract by Mark Cohen.) Notices likely no telefax/faxes are being sent. Pros/cons with email. Ensure effectiveness is clarified for each type of delivery. 7
Ownership of Intellectual Property (1 of 2) "Work Made For Hire" is a term of art and required to be in the contract if purchaser of services/work wants to own the deliverables. Include assignment clause. Draft precisely distinctions should be made between "pre-existing" or "background" IP/technology, IP/technology developed during term of agreement, third party IP, and modifications/derivatives created after the fact. Clearly identify what each party owns. 8
Ownership of Intellectual Property (2 of 2) Fulsome Provision Elements "Materials & Deliverables" What does the Buyer "own?" Pre-Existing Materials What "secret sauce" or background "stuff" is Vendor bringing to the relationship? Does Vendor own it all? What about modifications? What about modifications, derivatives and improvements that have nothing to do with Buyer's data, information or "stuff?" Does Buyer get a license to Pre-Existing Materials so it can continue to use the deliverables? Does Buyer get to modify/create derivative works based on that license? Third Party Materials What "secret sauce" or background "stuff" is a third party bringing to the relationship (usually through Vendor)? Does Buyer get to approve any Third Party Materials? Derivatives/improvements to Third Party Materials? License to Third Party Materials? 9
Modifications What is the recipe for "changing" services or orders SPELL IT OUT (including the mechanics beyond just having the "right" to modify services) Submission of change orders Right to review Is execution by counterparty required? 10
Indemnification Procedure (1 of 2) DO NOT just say "Vendor will indemnify Buyer for Vendor's Services." Always include "procedure" for indemnification. 11
Indemnification: Drafting Elements (2 of 2) Notice of claim Defense mechanics Defend or tender? Who decides? If tendered, what level of participation? Selection of legal counsel? Settlement consent? If not tendered Full control of defense? Mutual cooperation in defense? Are mechanics mutual or variable depending on who is indemnifying v. indemnified? Costs of "participation" if not defending? Ability to settle with or without consent of the other party? 12
Dispute Resolution Thoughtfully integrate governing law, dispute resolution, venue, and injunctive relief provisions to avoid conflicting requirements and ambiguities. Ex. Arbitrator or mediator is selected how? 13
Dispute Resolution Create a "decision tree" and make sure contract follows (for example): Resolution Period Arbitrate Court Enforcement Venue Dispute Seek Specific Performance 14
Too Many Bigly Words? No! Sad! Tighten up legal phrasing. "in the event that " v. "if" "provided, however, that" v. "provided" "For the sake of clarity." v. just being clear. "Despite the fact that" v. "Although" "Owing to the fact that" v. "Because" Use short sentences. Shorter sentences usually make sentences clearer, reduce passive voice, and keep verbs near its object. Good: "You should rely only on the information contained in this document. We have not authorized anyone to provide you different information. (21 words)" Bad: "No person has been or is authorized to give any information whatsoever or make any representations whatsoever other than those contained in or incorporated by reference in this document, and, if given or made, such information or representation must not be relied upon as having been authorized. (47 words) " (See How to Draft a Bad Contract by Mark Cohen) 15
General Drafting Tips Attorneys' Fees Include stand-alone clause for direct claims and separate clause in indemnity section. Waive jury trial Juries are likely not as sophisticated as the parties, and putting an issue in their hands invites problems. Consideration Spell it out. Not "for good and valuable consideration, the receipt of which is hereby acknowledged." Means nada. 16
General Drafting Tips: Use Defined Terms Properly If drafted precisely and used consistently, defined terms clarify and tighten up drafting. If not, they invite ambiguity. Going overboard with defined terms can be distracting for reader. Consider the length of contract. Make it easy for the reader to locate definitions by including definitions section in longer agreements. 17
General Drafting Tips: No Passive Voice! So Sad! Sentences use passive voice when the subject of the clause doesn't perform the action you back into the sentence. Look for be-verb + past participle (verb-ed). Often, when passive voice is used, sentences are longer and more difficult to understand. Passive voice makes the sentence longer and more difficult to understand. 18
Thanks to ACC-MN and to all of you for attending! "I am particularly careful to avoid jargon, and to write simply and clearly. For certain types of writing a high level of intellect is unavoidable; but in general it is the secondrate intellect that cultivates a pretentious vocabulary and a solemn and portentous style." Richard A. Posner, How I Write, 4 Scribes J. Legal Writing (1993). (We are happy to share sample provisions. See our bios in your materials for contact information) 19
BRAD PEDERSON bradley.pederson@maslon.com p 612.672.8341 BRADLEY A. PEDERSON is a partner in Maslon's Business & Securities Group. He represents software vendors, manufacturers, brewers, and other businesses in venture formations and partnerships, corporate finance, mergers & acquisitions, and general corporate matters. Brad works with with established businesses to grow organically and through strategic acquisitions, and to realize exit events.
SHAURO BAGCHI shauro.bagchi@maslon.com p 612.672.8311 SHAURO BAGCHI is a member of Maslon's Business & Securities Group. He focuses his practice on structuring, negotiating, and drafting large-scale national and international vendor and supplier agreements across myriad industries. In addition, Shauro works on national and cross-border mergers and acquisitions as well as private company securities offerings. He also has previous experience working for the inhouse corporate legal team of a Fortune 500 Minnesota company and the United States Department of Justice.