BASIC PRINCIPLES OF CONTRACT

DRAFTING

COURSE MATERIALS

Chris Goddard, with Amy Fellner and Rue-Ann Ormand

 COURSE AIM AND GOALS

AIM

To introduce participants to the principles of contract drafting, and in

particular to the practical world of international contracts in English.

GOALS

• Provide a theoretical overview of legal and linguistic approaches

to contract drafting.
• Enable participants to implement theory in context of practical
exercises involving realistic situations, including examples of real
contracts airbrushed for confidentiality.

ASSESSMENT CRITERIA
To pass the course

• Attend 12 x 1-hour lectures/seminars

• Complete course assignments with minimum score of 60 from
wide choice of assignments.

Note:
1. Assignments that attract score are shaded grey.

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 TABLE OF CONTENTS

PART 1: GLOSSARY OF CONTRACT TERMS……………………………………Page 5

PART 2: COURSE TEXTBOOK

Chapter 1: Process of Contract Drafting; Elements of Effective Contracts………..Page 11

Section A: Fundamental Policies and Values of Contract Law

Section B: Sources of Contract Law
Section C: General Writing Principles Applicable to Contract Drafting
Section D: Using Defined Terms

Chapter 2: Contract Principles……………………………………………………….Page 22

Section A: Basic Attributes of the Contractual Relationship

Section B: Overview of Contract Standard Provisions
Section C: Promises and Conditions
Section D: Warranties

Chapter 3: Establishing Agreement, Rights and Obligations, Remedies………….Page 28

Section A: Establishing an Agreement: Offer, Acceptance and Consideration

Section B: Remedies

Chapter 4: Planning Ahead for Problems; Contract Interpretation………………Page 31

Section A: Termination Provisions

Section B: Impracticality of Performance and Frustration of Purpose
Section C: Risk Allocation in Contracts
Section D: Clauses that Address the Possibility of Future Litigation

Chapter 5: Other Important Clauses; Assembling Contracts……………………..Page 36

Section A: Understanding General Clauses

Section B: Assignments
Section C: Contract Interpretation Issues

PART 3: BASIC LANGUAGE GUIDE TO DRAFTING LEGAL DOCUMENTS IN

ENGLISH…………………………………………………………………………………Page 41

PART 4: ASSIGMNENTS……………………………………………………………….Page 53

Section A: Introduction and Self-Assessment

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Section B: Contracts Terminology and Language Development Exercise
Section C: Redrafting Skills Exercise
Section D: Exercises: Does a Contract Exist?
Section E: Contract Structure Exercise
Section F: Exercise: Analyzing Promises and Conditions
Section G: Exercise: Drafting Termination Provisions
Section H: Exercise: Agreement to Use On-Line Banking Services
Section I: Exercise: Extract From Loan Agreement
Section J: Exercises: Reading and Understanding Contracts
Section K: Sales Representative Agreement Drafting Exercise
Section L: Drafting Exercise: Employment Agreement
Section M: Negotiating and drafting exercise: Contract for International Sale of Goods
Section N: Further exercises

PART 5: APPENDIX DOCUMENT FILE………………………..Page 90

I. Loan Agreement
II. Select CISG Provisions
III. Online Banking Agreement
IV. ABC Car Hire Terms and Conditions
V. Employment Agreement
VI. Distribution Agreement
VII. Property Lease – residential
VIII. Property Lease – commercial
IX. Incoterms 200
X. Agency contract
XI. Procurement contract
XII. Share purchase agreement

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PART 1: GLOSSARY OF CONTRACT TERMS

Technical and Specialized Vocabulary

Here are a few terms that you might encounter in the course of the discussion, along
with some other terms that might be of use. Please remember, these are not technical
definitions. Strictly technical definitions would require us to spend more time on the
details of various legal systems than is useful for our purposes. Rather, these are
general descriptions of the sense of the various terms.

ADR – this is short for alternative dispute resolution, or ways to resolve

disputes outside of the courtroom. The term typically encompasses negotiation,
mediation and arbitration.

Assignment - the transfer of rights or duties by the assignor to the assignee.

This may occur only by agreement or by operation of law, for example, when
someone dies or when a company is bankrupt.

Battle of the Forms – a common business situation where business parties

establish their relationship by sending standardized forms to each other. Often, the
terms of the forms do not agree, and it can be difficult to tell if the parties have
concluded a contract, and if so, what the terms of that contract are.

Boilerplate – the clauses, generally appearing at the end of a contract, which

are used to settle general matters such as choice of law, notice procedures,
amendment procedures, interpretation issues, dispute resolution mechanisms and the
like. The term also has a more general definition meaning any standardized or
preprinted form for agreements. The term is also used to talking about the 'small
print'. For example, the small print after a TV commercial about a product or contest
which list all the various restrictions.

Choice of Law – often, the parties to a contract will specify which rules of
law should be used to resolve any dispute between them. Particularly in international
transactions, the choice of law can be a significant point of negotiation among
lawyers. Choice of law (what legal principles will be used to resolve the dispute)
should be distinguished from choice of forum (where the dispute should be resolved)
and choice of dispute resolution method (litigation or some form of ADR).

Common Law – this term, when contrasted with Civil Law, refers to legal
systems which have their origin in the British legal system. The legal system of the
United States is from the common law tradition. Within the U.S. legal system, the
term is used to distinguish judge-made law from statutes (made by legislatures) or
regulations (issued by the executive branch of government). It may also refer to the

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method of analysis that a court uses to interpret a statute, regulation or other rule of
law, and may include the concept of precedent.

Condition Precedent – an event that must happen before a contract or a

contractual obligation goes into effect.

Condition Subsequent - a happening which terminates the duty of a party to

perform or do his/her part.

Consideration – a common law concept which requires (in essence) that a

promise be part of an exchange to be enforceable as a contract.

Contracts of Adhesion – standardized contracts, usually presented on a take-

it-or-leave-it basis, to parties of unequal bargaining strength.

Covenant – this term used in a contract means a promise which, if not carried
out, will carry legal consequences. Often, covenants are divided into Affirmative
Covenants (the things the promisor agrees to do) and Negative Covenants (the things
the promisor agrees not to do).

Cure Periods – often, when a Default occurs under a contract, the obligor
may have a certain period of time to cure the Default before the obligee is allowed to
exercise Remedies. Sometimes the obligee is required to give notice before the time
begins to run (in which case lawyers will speak of “Notice and Cure Periods”).
Notice and Cure Periods are sometimes more casually referred to as “grace periods.”

Default – the circumstances where an obligor under a contract is considered to

be in breach of the contract. In formal written contracts, Defaults often include
failure of a Representation or Warranty to be true when made, failure to perform any
Affirmative or Negative Covenant, insolvency or bankruptcy, as well as other
enumerated situations tailored to the specific circumstances.

Equity – this term, which is often used to mean fairness, also has a more
technical legal meaning. It used to be that the Common Law system was rather rigid,
and in order to obtain relief, a litigant had to fit into a limited class of situations.
Sometimes, this rigidity produced results that seemed very unfair. Eventually, a
second type of court was created to hear those cases -- those where there was “no
remedy at law” but “equity” demanded a remedy. In most jurisdictions, the separate
court systems, consisting of “Courts of Equity” have been abolished, but in many
areas the distinction between cases sounding in “law” and those sounding in “equity”
persist. In other contexts, “equity” refers to the amount by which a property’s value
exceeds the debt (or Liens) against it. The legal concept of equity in this sense is not
known to the civil law (Romano-Germanic ) system, and can cause problems. For

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example, in a US or UK contract, "“equitable remedies" does not mean “fair,
reasonable, and just” but refers to remedies applied under the common law concept
of equity. In practice, this means remedies other than plain compensation – e.g., a
court order for specific performance of the contract, or an injunction.

Estoppel – an equitable concept that prevents a party from raising an

argument when the party has acted unfairly, fraudulently, or otherwise
inappropriately. (EU equivalent: “legitimate expectations”).

Events of Default – When a Default remains uncured under any applicable

Notice or Cure Period, contracts typically provide that an Event of Default has
occurred. Once an Event of Default has occurred, the obligee may generally pursue
Remedies.

Excuse - something that forgives performance and bars enforcement of the

contract. If performance of a contractual obligation is excused, this relieves the
nonperforming party of liability.

Execution - (1) signing; the parties execute the contract by signing it; (2)
performance; the parties may execute a contract by carrying out their obligations and
duties; (3) enforcement of a judgment, order or writ (execution of judgment); (4) in
criminal law, carrying out a death sentence. This word is a good example of
polysemy – words with multiple meanings – in legal language.

Force Majeure – an “act of God” which prevents one party from performing
the obligations owing under a contract. Commonly such things as war, riots,
earthquakes, floods, strikes and the like are included. The common law generally
takes a stricter approach to force majeure than civil law legal systems.

Impracticability – A legal doctrine closely related to Force Majeure. If some

unanticipated event makes performance of the contract unusually burdensome, some
legal systems will allow a party to be excused from the contract under the doctrine of
impracticability. Different legal systems have varied requirements for invoking this
doctrine.

Indemnity – an agreement in which one party agrees to reimburse another

party if it is held liable. An indemnity is in the nature of a guaranty, but typically is
used when the party offering indemnity has some interest in, involvement with, or
control over the events leading to liability. Indemnity clauses are often found in
commercial contracts, and may be coupled with “hold harmless” provisions. In a
“hold harmless” provision, the first party says that they will not hold the second
party responsible for certain actions, even if the first party might otherwise have the
right to do so under applicable law.

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 Independent Contractor – this term is usually used to contrast with “agent”
or “employee.” The basic idea is that an independent contractor is free to do only
that work that it contracts to do, in the way it contracts to do it. In contrast, an agent
or an employee is subject to the discretion or control of the party for whom they are
working. The chief importance of the concept is in the context of vicarious liability -
- a person is generally not responsible for the misdeeds of its independent contractor,
while it may be liable for the misdeeds of its agents or employees.

Intellectual Property – right given by law to a person in connection with

intellectual, industrial or artistic work. Intellectual Property includes, among other
things, patents (inventions), designs (graphics), trademarks (names or marks used to
identify goods) and copyrights (rights of authorship). Due to the information
revolution, the nature and extent of information which is protected as intellectual
property is a rapidly changing field.

Joint Venture – a very broad term used in many different contexts. In its
general sense, it means more than one person getting together for the purpose of
making a profit in a speculative enterprise. In this regard, it is very similar to a
Partnership, but it tends to be used for limited undertakings. Often, particularly in
reference to central and eastern Europe, American lawyers use the term to refer to
profitable activities done in cooperation with foreign governments or foreign
nationals.

Letter of Credit – a financing device whereby a bank, at the request of a

customer, agrees to pay a beneficiary upon satisfaction of certain conditions.
Typically, the conditions are limited to presentation of specified documents. The
bank makes the agreement as a service to its customer, and will seek reimbursement
from its customer if it is required to make payment under the terms of the Letter of
Credit. Letters of Credit are often divided into “Documentary Letters of Credit,”
which are often used as a normal means of payment in international trade, and
“Stand-By Letters of Credit” which are more in the nature of a bank guarantee.

License – this term has many meanings, depending on the context. Its
general sense is permission to use the property of the licensor. It is often used in the
context of Intellectual Property to mean the agreement by which the owner of the
Intellectual Property gives someone else permission to use it, typically for a royalty
or a fee. License agreements are often used to transfer technology from one party to
another. Absent the License, the licensee’s use of the Intellectual Property would be
against the law. The term is also used in completely different contexts. For instance,
a movie theatre ticket is often characterized legally as a “License.”

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 Lien – a creditor has a Lien on a piece of property owned by a debtor when
the creditor has a contingent claim to that property. Sometimes, the debtor
voluntarily gives the creditor a Lien as a form of security for payment; other times
the creditor receives the Lien by operation of law. Usually non-payment of the debt,
or an Event of Default under any contract creating the debt, allows the creditor to
Foreclose on the Lien.

Liquidated Damages – when parties to a contract settle in advance the

amount of damages which will be available should one party fail to perform.
Liquidated damage clauses are generally subject to close scrutiny under U.S. and
U.K. law. This is also sometimes called a Penalty clause.

Partnership (including General Partnership and Limited Partnership) – a

voluntary (unincorporated) association of two or more persons for the purpose of
making a profit. In a general partnership, all of the partners are personally liable for
the debts of the partnership, and have a management role. In a limited partnership,
general partners exist alongside limited partners. General partners are personally
liable and have a management role; limited partners are not personally liable and do
not have a management role. Partnership as a concept is not known or recognised in
all legal systems.

Recitals – in a formal written contract, the clauses that explain who the parties
are, and their purposes for entering into the contract (i.e., background). Sometimes
called “Preamble”.

Remedies – the actions that can be taken upon an Event of Default.

Sometimes an aggrieved party can take action on its own. This is often referred to as
“self-help.” Other times, the term “remedies” is used to describe the court
procedures and decisions that are available to help an aggrieved party. (See “Cure”).

Representations and Warranties – statements made by a party in a contract

which, if untrue, carry legal consequences. Sometimes representations and
warranties need not be explicitly stated by the parties, but instead are implied by law.

Rescission - cancellation of a contract by mutual agreement of the parties

prior to its performance.

Risk of Loss – who bears the risk if the goods covered by a contract are
damaged or destroyed. Risk of loss is particularly important when goods are being
transported long distances between the seller and the buyer. If the seller bears risk of
loss during carriage, and the goods are destroyed in transit, the seller has a
responsibility to provide substitute goods. If the buyer bears risk of loss, the buyer
generally must pay for the goods, even though they never arrive. Often parties cover

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the risk of loss with insurance, so the ultimate loss may rest with an insurance
company. In practice, areas of risk are dealt with by INCOTERMS and insurance (or
re-insurance).

Secured Transaction – a voluntary transaction in which a debtor gives a

creditor a Lien on its property to secure payment or performance of an obligation.

Security – this particularly confusing term is used in at least two very

different contexts. First, it is used to refer to property that is subject to a Lien. The
property is “security” for the debt secured by the Lien. A more precise term for this
concept would be “collateral.” “Security” is also used in the context of investment
securities – such as stocks, bonds, and other evidences of ownership or indebtedness
which are regularly traded.

Severability - the characteristic of a contract that allows for removal of duties

or portions that are incorrectly or illegally drawn up. The parties may agree that
incorrect, impractical, or illegal portions be severed from the agreement and replaced
by language that best reflects the intent of the parties and comes closest to the
business objective of those severed portions. Severance allows the remainder of the
contract to be valid and enforceable.

Specific Performance – a court orders specific performance when it requires

a party to carry out its obligation, rather than merely paying damages. Specific
performance is an extraordinary remedy, that is to say not usually available, under
American or U.K. contract law. It is a good example of an equitable remedy (see
Equity ).

Tender - is a bid or formal offer. A proposal of terms is extended generally

('put out for tender' or 'competitive bidding'), inviting prospective parties to respond
by making a bid or tender. Do not confuse with legal tender, which is money.

Unconscionability – a U.S. concept which has its roots in Equity, and which
allows a court to refuse to enforce a contract or a portion of a contract which it
considers to be particularly unfair.

Void - is absolutely null, empty, having no legal force, and incapable of being
ratified. In contracts it refers to an attempt at formation of contract which is
equivalent to no contract at all.

Voidable is capable of being voided, or later annulled. If a contract is formed

but voidable, it may either be ratified (US) or confirmed (UK) by conduct or else it
may be voided by one of the parties. Once ratified, the promise is enforceable. If it
is voided, it is unenforceable.

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PART 2: COURSE TEXTBOOK

CHAPTER 1: Process of Contract Drafting: Elements of Effective

Contracts

Section A: Fundamental Policies and Values of Contract Law

Introduction
While a course on contract drafting may seem dry and technical, there are a number
of strongly held ideological values underlying contract law and its rules are
motivated by conscious and deliberate public policy. Understanding these policy
themes can help a practitioner appreciate the goals and assumptions underlying the
legal rules involved in drafting contracts.

Freedom of Contract
The power to enter contracts and to formulate the terms of contractual relationships
can be regarded as an integral part of personal liberty. For instance, this respect for
the exercise of personal liberty is the policy reason underlying the rule in contracts
that one may not be bound to a contract absent that person’s assent. In the United
States, the power of contracting is understood to be one of the innate rights
originating in the people and guaranteed by the Constitution. Liberty of contract
also enforces individual rights to hold and deal with property. Like other liberties,
freedom of contract is limited by corresponding rights held by other persons and by
the state’s legitimate interest in appropriate regulation. Such regulation may be
directed, for example, at protecting weaker parties from the free exercise of
overwhelming contractual power by stronger dominant parties. The ideological basis
of contract freedom is reinforced by economic principles, as well. For example,
economic intercourse is most efficient when its participants desire it and are free to
bargain with each other to reach mutually desirable terms.

Morality of Promise
There is also a longstanding moral dimension of contract in law: that there is an
ethical as well as legal obligation to keep one’s promises. Thus, contracts should be
honoured not only because reliability is necessary to foster economic interaction, but
simply because it is morally wrong to break them. Although it often seems that the
role that this basic moral value plays in contract law is subtle, society and courts are
not indifferent to the ethical implications of dishonouring contracts—especially in
the case of deliberate breaches that are motivated by bad faith.

Accountability for Conduct and Reliance

Another fundamental value of contract law is that a person should be held
accountable for words or acts reasonably manifesting intent to contract, and that the

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other party, acting reasonably, should be entitled to rely on that manifestation of
assent. An objective test of reasonableness is thus often used to evaluate a party’s
conduct. For example, a party’s intent in entering into a contract is often evaluated
in light of the person’s state of mind as made apparent to the outside world (as
opposed to the true and actual state of mind of the party at the time). The value of
protecting reasonable reliance is pervasive in contract law.

One corollary to this principle is that a person who has entered a contract has the
right to rely on the undertakings that have been given; if those undertakings are
breached, then the law must enforce them.

Another corollary to this principle is that, when parties in numerous specific

situations feel secure in relying on promises, the expectation arises in society as a
whole that contracts can be relied on and that there is legal recourse for breaches.
This concept of security of contracts is indispensable to economic interaction.
Without it, there would be little incentive to make or rely upon contracts.

Social Justice and Protection of the Underdog

Modern contract law is also sensitive to the imposition of contractual obligations
through coercion, dishonesty or lack of meaningful choice resulting from power
imbalance.

Fairness
Contract law has some express doctrines that address questions of unfairness, such as
doctrines of unconscionability and good faith.

Economic Aspects of Contract Law

Because contracts are concerned with economic exchanges, contract law must
inevitably be economic in its purpose. After all, the goals of contract law include
facilitating trade and commerce, regulating the manner in which people deal with
each other in the marketplace, and enforcing commercial obligations. In the United
States, the basic philosophy of contract law has been capitalist and geared toward the
ideal of a free market.

Section B: Sources of Contract Law

Introduction
Contemporary contract law seeks to respect free markets, regulate the freedom of
powerful contractors, safeguard the rights of weaker parties, and affect social policy
concerning matters of consumer protection, employee rights, and business ethics.

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The English and American legal systems developed a general doctrine of contract
law through analysis of court decisions, from which they extracted a set of coherent
and well-defined rules, which were then used as a basis for constructing more
abstract principles. These general principles formed a framework for organizing and
linking the rules into a body of doctrine. Thus developed the classic theory of
contract law, which stresses facilitation of contractual relationships and favours an
objective approach. More recently, contract law incorporates a broader context that
considers not merely the applicable doctrine but also such other factors as economic,
relational and ethical perspectives. Contract law has evolved to reflect a
sophisticated mix of doctrine, policy and process.

Comparing the Civil and Common Law Approaches to Contract Law

The system known as the “Common Law’ developed in England, and became
adopted in Britain’s foreign territories. Thus, the common law of England has
remained the basic legal system in most of Britain’s ex-colonies, including the
United States. Therefore the term “common law”, used in the broadest international
sense, designates a country whose legal system is based on the common law of
England. On the other hand, continental Europe developed civil legal systems
derived from Roman law. The Civil systems have a long tradition of comprehensive
codification and tend to focus on their codes and scholarly commentary as a source
of law. In contrast, common law systems tend to emphasize more strongly the role
of the judge in development of the law.

The Meaning of “Common Law”

In addition to characterizing the English and American legal systems on an
international level, the term “common law” refers to those portions of law based
upon decisions of the courts (as distinct from those created by legislation). In
common law countries, many statutes govern aspects of contracts. These statutes
tend to codify the common law by taking rules and principles already developed by
judges and putting them into statutory form, in order to clarify the law or make it
more accessible. Such statutes may also reform, alter or modernize the common law
rules, or create new rules to deal with problems not yet addressed by the courts.
Despite considerable legislative attention to contracts, the field is still regarded as
part of common law because judge-made rules continue to predominate.

Commercial Codes
Civil law countries have long used codes in their legal systems. Although the United
States has a common law legal system, it has enacted a commercial code called the
Uniform Commercial Code (UCC) to apply to certain specific types of commercial
transactions. The UCC is not applicable to all contracts but does cover sales and
leases of goods, negotiable instruments and documents, and security interests in
personal property.

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CISG
The United Nations Convention on Contracts for the International Sale of Goods
(CISG) applies to international sales transactions involving countries that are
signatories to the treaty. The Convention covers only issues of contract formation
and the rights and duties of the parties. It does not address matters touching on
contract validity, such as fraud, or illegality. It also excludes product liability issues.

Judicial Opinions
A fundamental principle of justice is the equal treatment of people in like situations.
As common law developed, it became established practice for court decisions to be
recorded so that they could be used as the basis for resolving later cases. Thus, a
court decision not only settled the dispute between the immediate parties, but it also
formed a rule to be followed in the next case involving similar facts. This allows for
efficiency in the administration of justice, enables people to predict case outcomes
more accurately, and serves to provide justice in the sense of equality of treatment
before the law. The principle that a judicial decision creates a rule of law, binding
upon later cases with similar facts, is known as the doctrine of precedent (in Latin,
stare decisis). This doctrine is peculiar to common law. Although civil systems
accord some weight to judicial precedent, they rely primarily on comprehensive
codes and scholarly commentary as a source of legal rules. Under the civil systems,
court decisions are typically regarded as an exercise in applying the law rather than
the process of creating law. European judges thus generally see their role as dispute
resolution rather than law-making. Hence court decisions in civil law countries tend
to be short, not very analytical, and fact-based. Court opinions in common law
countries, on the other hand, typically include substantial analysis in which the judge
justifies and articulates the rationale for the rule and its application in the case. The
statement of the court’s rule and reasoning are the portion of the case that constitutes
the precedent. Note that the Court of Justice of the European Communities is
developing its own approach, combining elements from both common law and civil
law systems. Its decisions affect laws in all Member States of the European Union.

Section C: General Writing Principles Applicable to Contract Drafting

Contract Drafting Process

Before writing, make sure you are clear about what parts the contract must include
and what situations the contract must cover. Know what the parties in fact want.
Precisely because this is an obvious point, it is often overlooked. Try outlining the
contract to make sure that all the needed pieces are included and are organized
logically.

The following guidelines may be helpful to you in beginning to draft a contract:

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1. Reconcile yourself to writing many drafts of the contract to get it right. If you
try to get all the details right in the first draft, you are likely to miss some
important larger points.

2. Use clear, simple, businesslike language. Much progress has been made in
this area, particularly in the areas of insurance and finance. Be careful not to
slip back into overuse of “legalese”. Use only the technical terms you need
and define them if necessary.

3. Make each clause do one thing, not more. Outlines can help you here by
breaking down the whole contract into a series of small points.

4. When revising, check for ambiguities:

a. Check to make sure that you have used only one term for one item or
person. Referring to the same person, item or concept by two different
terms creates an ambiguity that invites misunderstandings later. If
needed, include a definition section to define all your key terms, so that
the reader understands any unusual terms.

b. Check also to be sure that you have not used one term for several
different items or persons. This can create unwanted ambiguities.

5. After polishing each clause in the contract, reread the document as a whole,
looking for larger contradictions between parts of the contract, rather than
wording problems within one clause. In your concern for the details, you may
have overlooked some larger ambiguities.

6. Somewhere along the way, consult others. No one person can imagine all the
pitfalls that the parties to any contract are hoping to avoid. No one person can
imagine all the ways some reader can misconstrue a point.

Importance of Multiple Drafts

Always try to write more than one draft of any given legal piece. Let the first draft
be creative, thorough and imperfect. Include everything you think necessary to the
piece and all things that you think might be useful.

Then use second, third, fourth and other drafts for rewriting, revising, and polishing.

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Guidelines for Revising Drafts of Contracts
Revising occurs after rewriting in the writing process. Revising concentrates on
small-scale organization, sentence structure, transitions, paragraphing, grammar, and
punctuation.

There are two things to remember about revising. First, do not revise while you
write; this slows down both the writing and the revising processes. When you are
writing, concentrate solely on your ideas, no matter how unpolished your writing
may seem. Revise later. Second, when you revise, do it in stages. It is exhausting
and inefficient to try to revise on every level at once. Use your time for revising to
move from general writing problems to more specific ones.

1. ACCURACY: No amount of readability will replace accuracy, so

make sure you check first for the content of each legal point. Ask yourself the
following questions:

a. Is the content accurately stated?

b. Could any points be misunderstood because of ambiguity?
c. Are irrelevant facts or other irrelevant information excluded?
d. Are terms of art used correctly?
e. Are key terms used correctly?
f. Are paraphrases accurate?
g. Are names of parties and their status correct?
h. Are the citations accurate?

2. ORGANIZATION:

a. Are paragraphs internally logical?

b. Are there clear and precise transitions between paragraphs and
sentences?

3. READABILITY:

a. Are subjects and verbs close together?

b. Are unnecessary modifiers eliminated?
c. Are sentences not overly long?
d. Are lists clearly structured?
e. Are unnecessary prepositional phrases eliminated?
f. Is the text generally concise?

4. STYLE:

a. Is style consistent?

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 b. Is the tone and level of formality appropriate and consistent?

Try to give each of these categories your full attention for the specific amount of
time you have parcelled for the task. After you have finished revising, you can
move on to polishing the draft.

OTHER POINTS

General:
No archaic terms (e.g., hereinafter, hereby)
No legal pairs (e.g. good and sufficient)
No Latin or foreign expressions (e.g., bona fide)
Plain English, not legalese.

Precision: revising old text

Precise language provides firm standards for compliance and enforcement. It avoids
vagueness such as ‘… provide reasonable assurance that…” But what is “reasonable
assurance”? Perhaps this came from the words of a statute and the writer wants to
avoid an interpretation. On the other hand, perhaps the writer wants to keep some
interpretative freedom. This should be used as rarely as possible.

It is easy to create ambiguity or uncertainty by wrong punctuation, or wrong

positioning in the sentence of certain words. For example, “Do it early in the first
quarter” sets a shorter deadline than “Do it early, in the first quarter”. Likewise, “We
only recommend X” is far less strong than “We recommend X only”.
Example: “Bids must be submitted by May 6”. Is a bid submitted when sent (or
received) – and by whom? And does “by” mean the start of May 6 or the end.
Remember that Murphy’s Law (in Russian Zakon Podlosti) applies!

When revising old text, be careful of accidental changes.

Plain-language translations risk introducing errors, e.g., “Confirmation shall be filed
with this office” is more precise than “You must send us confirmation” (i.e., “file” is
more precise than “send”).
Plain-language revisions typically rearrange the text so that it is difficult to compare
the old with the new. Read each sentence in the new version and mark its equivalent
in the old text. Then decide what to do with old text that is unmarked. Two
possibilities are;
For small changes, use Track Changes to put a line through old words and
introduce new ones.
For large changes, set up two-column pages to display old and new text side by
side.

17
Use the right verb
English has many ways to describe obligation, rights, prohibition and permission,
freedom to choose and limits on that freedom. Here are some general guidelines:

To express… Use… As in…

Obligation (an order) must, will you must do it
do it
Authorization (option) may you may do it
Prohibition (a ban) must not/may not you must not do it
Preference (a should you should do it
Recommendation)
Intention (promise will we will do it
Imposing no
requirement)
No obligation need not you need not do it

Note: use verbs early in the sentence.

Don’t use “shall”

The word “shall” has several meanings that are easily confused, even by lawyers.
Use “must” if you want to show obligation, and follow the rules set out above. Keep
“shall” for formal social occasions, e.g.:
Invitation: “Shall we dance?”
Response: “Wrong verb, baby!”

An alternative is to use the present simple tense, e.g. “The buyer agrees to…”.

Prefer the singular

Although doing this may mean using “a”, “an” and “the” more often, it can prevent
uncertainty.

State requirements positively

Rarely use single negatives. Never use double negatives. Readers change negative
statements to positive ones. This process needs extra work. It also allows
misunderstanding. Each negative adds to the risk of error.
For example, better to say “can… only if”, rather than “cannot…. unless”, e.g. also:
“must be no less than X” becomes “must be X or more”, or “must be at least X”
and, “does not exclude” becomes “includes”

Repeat key terms

In the case of a novel, it can be boring for the reader to see the same word repeated
many times. In the case of a legal document, use of the same word with the same
meaning is vital -– to avoid misunderstanding.

18
At the same time, avoid the opposite problem – using one term in several ways,
especially legal terminology with more than one meaning (e.g., sanction).

Active voice
A serious problem in legal documents is overuse of passive verbs.
Documents are more readable in English if the passive is avoided.
Say again?!
You can make documents more readable in English by avoiding the passive.
OK, that’s better! Try again?
Documents in English are more readable when the drafter avoids the passive.
Also OK!
If the English-language drafter avoids the passive, then the document becomes more
readable.
OK, enough!
Passive verbs hide responsibility and make sentences longer than needed.

Possible cures
1. Put a subject (the “doer”) before the verb.
2. Cut part of the verb
3. Use another verb.

Use the Passive rarely *

Two or three time a page is enough.
Use passives when the doer of the verb is obvious, unimportant, or unknown.
Use you where possible
Often, “you” is implied (understood).
Without “you” it is almost impossible to avoid passives, especially when stating
obligations (imperatives).
The cleanest way to avoid passives is to lead with verbs as commands, e.g., provide,
avoid, include, perform.
In this way it is even possible to avoid “you must”.
Active verbs become natural for writers who ask the important question – WHO does
WHAT to WHOM? (in grammar: SUBJECT + VERB + OBJECT).

Sentences *
Keep sentences short: average 15 words. If you go over 30, you run the risk that the
reader may have a problem to follow you. As author, you are responsible for
communicating your ideas efficiently and effectively.
Note: the exception when using bullet points and lists.

19
Keep subjects and verbs together: a short interruption between a subject and its verb
will not slow readers much. But a long one will interfere with the communication
process.
Keep compound verbs together: do not force readers to keep too much in their
minds.
Put verbs early: let readers know what the sentence is going to do.
Put main clauses early: first generalize, then qualify.
Rearrange long sentences: use punctuation surgically.

Parallelism *
Look for grammatical parallelism: help your reader by being consistent.
Clarify comparisons through parallelism: consistency helps comparisons stand out.
Use vertical lists to test for parallelism: again, to help the reader – but 3-7 items.
Look for parallelism in headings: good for style and presentation.
Save words with parallelisms: at sentence, paragraph and whole-text level.

Economy *
Make verbs do more work: they are the most important.
Use more Verbs: be active, give life to sentences.
Avoid the …ion of and the …ment of: this gives a shorter, livelier sentence.
Make verbs strong: strong verbs do more work than weak ones.
Prefer the present tense: what is future when you write is actual for the reader.
Reduce length of clauses and phrases: minor ideas require minimum words.
Avoid bureaucratese and legalese: use language the reader can understand.
Remove it is and there is: unless you have no choice.
Use neither too many nor too few prepositions: enough to clarify relationships.

Note: Special rule in special case: e.g., if…., then…

* Further explanation of these guidelines is included in Part 3: Basic Language

Guide to Drafting Legal Documents in English on page 41.

Section D: Using Defined Terms

Introduction
Your goal in drafting a transactional document is to make is speak unambiguously
and accurately. Future readers should know exactly what your document means—
regardless of whether those future readers are your client, you client’s successors,
some other party, or a judge. A good technique for achieving this goal is the use of
defined terms.

20
When should you use defined terms?
A. As soon as you know you will refer to the same concept more than once in a
document; and
B. When it takes more than a few words to explain the concept

How do defined terms work?

A. “External” defined terms are unique to the external circumstances of this
particular transaction (names of parties, location of real property, etc.). They
tie the document to the outside world and the larger transaction. External
defined terms are especially useful when facts are subject to future
development and the exact details of the transaction are not yet known. They
should all be defined early in the document.
B. “Internal” definitions, by contrast, refer solely to concepts internal to the
particular document. They might refer to external defined terms.

How can defined terms simplify transactional documents?

A. They can assure that any particular laundry list will appear only once in a
document. This preserves simplicity, certainty, and consistency.
B. If properly structured, defined terms can allow you to make a necessary
change only once—by fine-tuning or modifying a defined term—as the terms
of the transaction are negotiated and modified over time.
C. Defined terms can help you prevent a maze of cross-references.

How should you create defined terms?

A. Take a “structured” approach, setting up definitions as “building blocks” that
work together.
B. As much as you try to broaden or clarify a defined term, it should still mean
what it intuitively seems to mean without close scrutiny of the definition.
C. Beware of setting up a “broad” defined term and then using it in a context
where you need a “narrow” defined term.
D. Avoid using words like “applicable” or “actual” or “selected” or “operative”.
They don’t help the user remember what the term is about.
E. When defining related concepts, the defined terms should interact in a way
that reflects the interaction of the underlying concepts
F. Collect your definitions in one place.

Final advice:
Don’t get carried away. Some concepts are simple enough, basic enough, and
sufficiently well understood (or vagueness may work in your favor) that you don’t
need a definition.

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Chapter 2: Contract Principles

Section A: Basic Attributes of the Contractual Relationship

Introduction
A contract may be defined as an exchange relationship created by oral or written
agreement before two or more persons, containing at least one promise and
recognized in law as enforceable. The essential elements of a contract thus include:
an oral or written agreement; the involvement of two or more persons; an exchange
relationship; at least one promise; and enforceability.

An oral or written agreement

Probably the most important attribute of contract is that it is a voluntary, consensual
relationship. A contract is created only because the parties, acting with free will and
intending to be bound, reach agreement on the essential terms of their relationship. It
is the element of agreement that distinguishes contractual obligations from many
other kinds of legal duty that arise by operation of law from some act or event,
without the need for assent.

Determining whether the parties actually agreed to a contract is not always easy.
The law generally gauges intent objectively in deciding whether a person agreed to a
contract. That is, the person’s overt acts (i.e., words and conduct) are evaluated to
decide whether they reasonably signified intent to enter the transaction.

Although oral contracts may be enforceable under some situations, in other situations
certain types of contracts must be recorded in writing and signed in order to be
enforceable. The legal doctrine known as the statute of frauds specifies the types of
contracts that must be written in order to be enforceable. The statute of frauds
developed in English common law, but similar rules have been codified in other
jurisdictions, including the United States. Statutes requiring written contracts
generally include situations involving contracts for the sale of land, contracts that
cannot be performed within a year, and contracts for the sale of goods.

Involvement of Two or More Persons

While it requires two parties to create a contract, it should be noted that a contract is
not confined to two participants. There can be as many parties to a contract as the
needs of the transaction dictate. In fact, multiparty contracts are common.

An Exchange Relationship
By entering into an agreement, parties bind themselves to each other for the common
purpose of the contract. Thus, the essence of a contract is the relationship. Some
contractual relationships last only a short time and require only a minimal
interaction. Other contractual relationships, however, can span many years and

22
require constant dealings between the parties, regulated by detailed provisions in the
agreement.

The essential purpose of the contract relationship is exchange. Simply stated, the
very essence of contract is a reciprocal relationship in which each party gives up
something to get something. Exchange continues to be the principal motivation for
contracting and the guiding rationale for the rules of contract law.

Promise
For a contract to exist, there must be promise. A promise is an undertaking to act or
refrain from acting in a specified way at some future time. This promise may be
made in express words or implied (i.e., inferred from conduct or from the
circumstances of the transaction). Bilateral contracts are formed when promises
remain outstanding on both sides at the instant of contracting. Unilateral contracts
are formed when one party has fully performed but a promise by the other party
remains to be performed at the time of contracting. Instantaneous exchanges, even
though consensual, do not constitute contracts because they do not involve promises.

Legal Recognition of Enforceability

It is a hallmark of contracting that it creates rules binding on the parties and confers
on them rights and obligations cognizable in law. The fundamental role of contract
law is to ensure that promises are upheld. Without legal enforceability of promises,
only instantaneous exchanges could ultimately occur—with devastating effects on
society. Where promises are broken, the power of legal enforcement enables the
disappointed party to sue. Once it is established that a contract was entered into and
breached, courts can enforce the contract by providing a remedy for the breach.
Such remedies can include monetary compensatory damages, specific enforcement
of the promise, and other types of damages. Legal enforceability thus serves to deter
breaches of contract because a reluctant party knows that failure to perform can
result in litigation with costly results.

Section B: Overview of Contract Standard Provisions

Introduction
The components of a contract will vary depending on the nature and complexity of
the transaction it reflects. There are, however, some terms that may be considered
standard that usually appear in documents in contracts in some form or another.

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Title
The title should reflect the subject matter of the transaction and, if appropriate, the
parties.

Preamble (Recitals)
Most transaction agreements begin with some form of a preamble that identifies the
purpose of the document and describes the transaction, the intent of the parties and
any assumed facts underlying the transaction. The preamble identifies the parties
and the date of the transaction as well as the nature of the transaction. In many
contracts, this appear as the “whereas” section, in which all of the statements begin
with that term.

Definitions
The use of defined terms can simplify a document immeasurably. While the number
and extent of the definition section depend upon the nature of the agreement,
virtually all contracts will include some defined terms.

Consideration
Although it need not be complicated, the consideration should be explicitly stated
since agreements must be supported by consideration. This may be expressed as an
exchange of dollars or of goods, or perhaps an exchange of mutual promises.

Covenants
The covenants memorialize the promises that are being made by the parties.
Examples include promises to deliver certain goods or to refrain from particular
activities.

Representations and Warranties

Representations and warranties identify the assumed facts underlying the agreement.
These sections represent the real heart of the deal and tend to be heavily negotiated.
An example would be a representation and warranty that the goods to be sold are in
working order.

Indemnification
The indemnification portion of the contract deals with the allocation of liability in
the event that all does not go as planned. Questions to be addressed in this portion of
the contract include who will be liable for what, and to what extent.

Breach and Cure

Although promises are not necessarily made to be broken, that possibility must be
considered when drafting a contract. What will constitute a breach of the agreement?
What opportunity will the parties have to “cure” the breach?

24
Termination
This section should identify under what circumstances the parties can terminate the
agreement and the procedures for termination.

Remedies
The remedies section addresses the consequences in the event of termination. This
section should specify what the parties are entitled to in the event of breach or
termination. It may identify a dollar amount, a formula, or simply a mechanism for
determining the appropriate remedy (such as arbitration).

Additional Important Contract Provisions

A number of other standard provisions are important to include in drafting contracts.
These include:
• Assignment
• Choice of Law
• Amendment and Waiver
• Arbitration
• Integration and Severability
• Notice
• Authority to Sign

Section C: Promises and Conditions

Introduction
By definition, all contracts—whether express or implied in fact—consist of at least
one promise. The parties to a bilateral contract, by definition, have also exchanged
promises of future performance. Because future performance is at issue, contracts
may also include conditions to performance of an obligation. The obligations
contained in a contract may be promises or conditions, the breach of which typically
has different consequences.

Promises
A promise may be defined as the manifestation of intention to act or refrain from
acting in a specified way, so made as to justify the one to whom the promise is
addressed in understanding that a commitment has been made. Typically, the
parties to a contract make multiple promises. From a drafting standpoint, parties
sometimes use language other than the word “promise” in expressing their
commitments to future performance. Language to establish a promise includes the
use of “shall”, “will”, “must”, “is obligated to”, “covenants” or “agrees to” (but see
above (p. 18). Failure to perform the obligation created by an enforceable promise
constitutes a breach of contract, which breach entitles the promisee to a remedy from

25
the promisor. Remedies for breach of promise can include compensatory money
damages or a discharge of the promisee’s own duties of performance (if any) under
the contract.

Conditions
Conditions refer to events, the occurrence of which either triggers or discharges the
duty of a party to a contract to perform the obligations created by the promises. It is
important to understand that such conditions refer to conditions to performance of an
obligation of a contract that has already been formed. An event that conditions
performance may be either a “condition precedent” or a “condition subsequent”. A
condition precedent is an event that must occur before performance of an obligation
becomes due. Thus, the occurrence of the condition precedent triggers the
obligation in the contract. In contract, a condition subsequent is an event whose
occurrence discharges an obligation. The use of conditions precedent is more
common in contract drafting. Typical language for the expression of conditions are
phrases such as: “if…, then…”; “provided that…”; “on condition that…”; “in the
event that…”. In addition to express conditions written into the contract, some
conditions may be implied from circumstances (such as usage of trade). The
consequence for non-occurrence of an event that is made a condition of an obligation
in a contract can be significant: the conditioned obligation of a party typically would
become discharged.

Section D: Warranties

Introduction
Most agreements will include affirmative duties owed to each party by the other
party, in specific sections setting forth each party’s respective performance
obligations. In addition, contracts generally include warranties, indemnities, and
limitations on warranties.

Warranties
Simply stated, a warranty is a promise. Warranties are, for the most part, promises
concerning the future quality or performance of goods to be sold or leased, of real
property to be sold or leased, of intellectual property to be sold or licensed, or of
services to be rendered. A breach of warranty results if the quality or performance
falls short of the promise made in the contract. In addition, commercial codes
describe the express and implied warranties that arise in certain transactions. Some
warranties are statements of facts. A breach of warranty would result if the fact
warranted is untrue. However, whether the warranty is based on promise or
statement of fact, breach of warranty has the same consequences as the breach of any
other promise.

26
Representations
Representations are statements of facts. Many types of contracts contain
“representation and warranties” sections that set forth statements and promises upon
which the respective parties rely in entering into the agreement. When thus
included in a contract, some statements of fact may be considered warranties, with
the inaccuracy of the statement having the same consequence as a breach of promise.
Other statements of facts, if untrue, may entitle the other party to seek to void the
contract on grounds of misrepresentation or to seek damages for deceit, rather than to
seek damages for breach of promises.

Indemnities
An indemnity is a promise by one party to take financial responsibility for damages
that the other party may suffer as a result of the first party’s breach of its warranties
under the agreement. Where contracts include representations and warranties, an
indemnification clause should also be included. Pursuant to such indemnities, each
party would agree to pay any damages and costs of litigation involved from a breach
of its warranties. Since both parties should be willing to bear the cost for problems
resulting from breach of their warranties (especially damages to third parties
resulting from a breach of a party’s warranties), an indemnity clause serves as a
mechanism for allocating the risk of loss from certain problems.

Limitations on Warranties
In addition to making promises (or no promises, in cases where a party disclaims all
warranties) and stating who will pay for certain costs that may arise, many contracts
address the amount and kind of damages that a party will pay. A party can seek to
limit its liability by disclaiming all warranties other than those expressly specified in
the contract. A party can also limit its liability by including clauses that provide: a
monetary cap on damages; exclusion of certain kinds of damages (such as special,
incidental, or consequential); exclusion of certain harms (such as harms resulting
from defects, for example). The legality of such limitations of liability may vary
among jurisdictions. Some jurisdictions require that any such disclaimers be
prominently displayed (such as in bold type or all capital letters).

27
Chapter 3: Establishing Agreement, Rights and Obligations, Remedies

Section A: Establishing an Agreement: Offer, Acceptance and Consideration

Introduction
Five essential elements of a valid contract include: competent parties; subject
matter; legal consideration; mutuality of agreement; and mutuality of obligation.

Competent Parties
Competency of parties includes being of adult age (18 years of age in some
jurisdictions) and being in complete control of mental faculties. This means that the
contracting party must not have a mental defect that would affect his/her ability to
understand and appreciate what he/she is doing.

Subject Matter
The contract must clearly and sufficiently set out the subject matter of the agreement.
The subject matter may not be illegal or for an illegal purpose.

Legal Consideration
Simply stated, consideration is the inducement to a contract. It is the cause, motive,
price or impelling influence, which influences a contracting party to enter into a
contract. Legal consideration is consideration recognized or permitted by the law as
valid and lawful. It is also referred to as good or sufficient consideration. The most
common form of consideration is money. However, goods or services or a
combination thereof may also constitute valid consideration.

Mutuality of Agreement
For a contract to be valid and enforceable, the parties must be in agreement as to
their respective rights and duties under the agreement. Mutuality of agreement is
also referred to as a “meeting of the minds.”

Mutuality of Obligation
The doctrine of mutuality of obligation provides that neither party to a contract is
bound unless both parties to the contract are bound. Thus, if performance of an
obligation (which is the consideration of the particular contract) is elective, rather
than mandatory, and the other party is required to perform some duty, then there
would be no mutuality of obligation and, accordingly, no valid enforceable contract.

28
Section B: Remedies

Introduction
A breach of contract terms occurs when a party fails to perform either fully or
adequately the obligations provided in the contract. In the event of breach, the non-
breaching and performing party may be provided relief for the breaching party’s
failure to perform its obligations.

Damages
Damages are generally designed to compensate the non-breaching party for the
benefit of its bargain. Damages may be compensatory, consequential, punitive or
nominal. The non-breaching party generally has an obligation to mitigate its
damages. Types of damages include:
• Direct damages: Losses incurred by the victim of a breach in acquiring the
equivalent of the performance promised under the contract, so as to substitute for
the performance that should have been rendered by the breaching party.
• Consequential damages: Losses suffered by the victim of a breach going
beyond the mere loss in value of the promised performance (direct damages), and
resulting from the impact of the breach on other transactions or endeavors
dependent on the contract.
• Punitive damages: Damages awarded, not to compensate the victim for
established loss, but to punish the breaching party and make an example of him.

Liquidated Damages
At the time of contracting, the parties may wish to avoid disputes and uncertainty
over damages if a breach should occur in the future. They may include a term in the
contract itself that seeks to fix in advance the amount of damages to be paid if a
breach occurs. Such “agreed damages” provisions are referred to as liquidated
damages clauses. Liquidated damages clauses can be enforceable if the clause was
fairly bargained, was a genuine attempt to forecast probable loss, and is not
disproportionate to the actual loss ultimately suffered. If the clause fails to meet
these standards, it is generally treated as a penalty and is unenforceable.

Specific Performance
The non-breaching party may seek a court order to force the breaching party to
perform in accordance with contract terms. This remedy is generally granted in
situations where money damages are inadequate as a remedy.

Rescission and Restitution

Another remedy involves cancelling the contract and making restitution to the
parties. Rescission is the cancellation of a contract. In its most common use,
rescission is the victim’s termination of the contractual relationship following a
material and total breach by the other party. Rescission ends the victim’s

29
performance obligations under the contract. Restitution is a judicial remedy under
which the court grants judgment for the restoration of property or its value to the
damaged party.

Reformation
Reformation is an equitable remedy that allows the parties to rewrite or reform the
contract as originally created in order to reflect what they intended.

Limitations and Waivers

The non-breaching party may waive its right to enforce a remedy. Generally,
contracts provide that waiver of one event of default does not mean waiver of any
future defaults. If permitted by law, the contracting parties can limit the type and
amount of remedies provided to the non-breaching party.

Voidable Contracts
A contract that is void is not legally enforceable and the parties thereto are not
legally obligated to each other. Generally, contracts are void because the subject
matter is not legal or one of the contracting parties does not have the competency to
contract. For example, a contract to commit a crime is void and cannot be enforced.

A contract that is voidable is otherwise a valid contract but the obligations can be
avoided for certain reasons permitted by law (such as duress or lack of capacity).
The party with the capacity to void the contract can choose to ratify the contract and
perform the obligations thereunder.

An unenforceable contract is generally a valid contract but is not enforced because of

public policy.

30
Chapter 4: Planning Ahead for Problems; Interpreting Contracts

Section A: Termination Provisions

Introduction
When negotiating a contract, special attention should be given to “exit provisions”.
Well-drafted termination provisions are among the most valuable contractual
protections.

Termination for Cause provisions

Termination “for cause” refers to a material breach that is not cured within a
specified period.

Opportunity to Cure provisions

Termination sections often grant the damaged party the right to terminate the
agreement in the event of a material breach of the agreement by the other party.
With respect to curable breaches, such provisions typically provide that the damaged
party shall have the right to terminate the contract if the breach is not cured within a
specified time period.

Events Triggering Termination

Contracts also often grant the parties the right to terminate upon the occurrence of
certain specified events. These can include (but are not limited to):
• Insolvency, bankruptcy or liquidation
• Merger of the other party
• Change of control of the other party
• Changes in governmental regulations
• Failure to meet certain specified performance levels

Section B: Impracticality of Performance and Frustration of Purpose

Introduction
Mistake concerns an error of fact in existence at the time of contracting, so
fundamental to the premise of the contract that it precludes the formation of true
assent. Impracticability applies when events following contract formation are so
different from the assumptions on which the contract was based, that it would be
unfair to hold the adversely affected party to its commitments. There is an important
difference between mistake and impracticability. A mistake causes a defect in
contract formation, permitting a party to be excused from accountability for a
manifestation of assent. Impracticability, on the other hand, has nothing to do with
any problem in formation and presupposes that a binding contract was made. Rather,

31
it is concerned with whether a post-formation change of circumstances has such a
serious effect on the reasonable expectations of the parties that it should be allowed
to excuse performance. Similarly, the doctrine of frustration of purpose is also
concerned with a post-formation change of circumstances but in a slightly different
context than the doctrine of impracticality of performance.

Elements of the Excuse of Impracticality

The excuse of impracticability can be available to the party who is adversely affected
by the change in circumstances. However, all elements to this defense must be
satisfied in order for a party to be excused from performance. These elements
include:
1. After the contract was made, an event occurred, the non-occurrence of
which was a basic assumption of the contract.
2. The effect of the event is to render the party’s performance
“impracticable”, i.e., truly burdensome.
3. The party seeking relief was not at fault in causing the occurrence.
4. The party seeking relief must not have borne the risk of the event
occurring.

Understanding the Limitations on the Excuse of Impracticability

Impracticability arises from the occurrence of an event which event must be so
contrary to the assumptions of the contract that it changes the very basis of the
exchange. An event is unforeseen by the parties if they themselves did not
contemplate it as a real likelihood. Most occurrences external to the contract could
quality as events, such as: war, a natural disaster, a strike, and so on. A change in
the law or government regulation could also be an event. On the other hand, a
change in market conditions would not generally be regarded as a contingency
beyond the contemplation of the parties. A person should not be able to take
advantage of his own wrongful or negligent act, and a party who makes performance
more difficult or disables himself from performing, cannot expect to be excused from
liability. Risk allocation is often the dispositive issue in impracticability cases.
Thus, if the party adversely affected by the event has expressly or impliedly assumed
the risk of its occurrence, then the non-performance cannot be excused even when all
the other elements of an impracticability defense are satisfied. Thus, careful drafting
is required with respect to risk allocation in a contract.

Frustration of Purpose
Like impracticability, frustration of purpose is concerned with a post-formation
event, the non-occurrence of which was a basic assumption on which the contract
was made. This event must not have been caused by the fault of the party whose
purpose is frustrated; and that party must not have borne the risk of its occurrence.
The doctrine of frustration of purpose differs slightly from the doctrine of
impracticability. The essential difference lies in the effect of the event. Frustration

32
of purpose arises when the impact of the event is on the benefit reasonably expected
by a party in exchange for the performance, rather than directly affecting the
performance of the adversely affected party by making it unduly burdensome. In this
case, the event so seriously affects the value or usefulness of that benefit that it
frustrates the contract’s central purpose for that party. As to the purpose that has
been frustrated, the purpose must be so patent and obvious to either party that it can
be reasonably regarded as the shared basis of the contract.

Section C: Risk Allocation in Contracts

Introduction
Risk allocation is often the dispositive issue in mistake and impracticability cases.
The analysis of risk allocation is relatively straightforward: if the party adversely
affected by the event had expressly or impliedly assumed the risk of its occurrence,
the non-performance cannot be excused even if all other elements of a defense or
excuse are satisfied. The first place to look in determining risk allocation is the
contract itself. If the parties realized that a particular future event could affect
performance, the contract may include an express and specific term assigning risk.
Even if the parties do not have a particular contingency in mind, the contract may
have a more general provision allocating the risk of disruptions or calamities. Such
general provisions are called force majeure clauses.

Force Majeure Clauses

Force majeure is a term used to describe a “superior force” event. Force majeure
clauses have two purposes: they allocate risk and put the parties on notice of events
that may suspend or excuse service.
The essential requirement of force majeure is that the invoking party’s performance
of a contractual obligation must be prevented by a supervening event that is
unforeseen and not within the control of either party. Typical force majeure
provisions include: “acts of God”, superseding governmental authority, civil strife
and labor disputes. However, there is no uniform set of events that constitute force
majeure. Instead, force majeure remains a flexible concept that permits the parties to
formulate an agreement that corresponds to their unique course of dealings and
industry idiosyncrasies. Moreover, recent world events have increased the necessity
of including additional unthinkable events, such as terrorism and the risk of
biological and chemical warfare.

Negotiating Force Majeure Clauses

Parties negotiating a force majeure clause must scrutinize the events and allocation
of risk to assure that the clause is not one-sided or unenforceable.

33
Drafting a Force Majeure Clause
In drafting force majeure clauses, parties may rely on general clauses or specifically
enumerate which events will constitute force majeure. A prudent force majeure
clause specifically enumerates the events that will prevent performance and entitle a
party to suspend or excuse an obligation. Force majeure clauses may also include
language that is industry specific.

Invoking a Force Majeure Clause

Generally, a party may invoke a force majeure clause if an enumerated event occurs
that is out of the party’s control and prevents performance of a contractual
obligation. The burden of proof is on the party seeking to invoke the force majeure
clause. The force majeure event may either suspend or excuse a party’s
performance.

Sample Force Majeure Clause

Neither party shall be liable in damages or have the right to terminate this Agreement
for any delay or default in performing hereunder if such delay or default is caused by
conditions beyond its control including, but not limited to Acts of God, Government
restrictions, wars, insurrections ad/or any other cause beyond the reasonable control
of the party whose performance is affected.

Additional Risk Allocation Clauses

In addition to a force majeure clause, a contract may impliedly place risk on a party
by means of a provision such as a warranty, an undertaking to obtain insurance, or
some other commitment from which the assumption of risk may be inferred. It is
good planning for the parties to consider potential risks and to provide for them
clearly in the contract. This reduces the possibility of later disputes and litigation.

Section D: Clauses that Address the Possibility of Future Litigation

Introduction
Too often, a situation that might have been quickly and easily resolved by simply
referring to well-drafted contract language turns into costly and time-consuming
litigation. Whether the contract is simple or complex, clauses that address the
possibility of future litigation should never be overlooked.

Forum Selection Clause

Forum selection clauses specify the place where lawsuits will be filed in the event a
dispute arises between the parties to a contract. Specifically, the parties utilize such
clauses to expressly agree to litigate all disputes arising from the contract in a

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specific jurisdiction and venue. Such clauses offer obvious practical value, as
selecting the forum in which a contract dispute is to be heard can help keep the
litigation in a nearby forum, reduce future costs, and eliminate the need for
challenges to jurisdiction in the event suit arises.

Choice of Law Clause

Parties may also negotiate which laws will govern their contract. Specifically,
choice of law clauses specify the legal jurisdiction under which the agreement shall
be governed and construed. While there are clear advantages to the parties for
inserting such clauses into their contract, there must also be a rational reason for the
specified choice of law. Such clauses require careful research and negotiation,
because the laws of different jurisdictions may affect the parties differently. A
choice of law clause may not completely shelter a party from having the laws of
other countries imposed upon it (for instance, by claims of third parties), but the
clause may at least define the laws that govern the immediate relationship between
the contracting parties.

Alternative Dispute Resolution Clause

Many types of agreements contain alternative dispute resolution clauses that obligate
the parties to submit their disputes to arbitration or mediation rather than litigation.
Alternative dispute resolution procedures are often cost-effective and enable
disputing parties to pursue their claims more quickly than traditional litigation.
Through the use of alternative dispute resolution clauses, the parties can agree to
such specific matters as: whether the arbitration will be binding or non-binding; how
the arbitration provision is to be triggered; where the arbitration would take place;
which rules will govern the arbitration proceedings; and the selection of the
arbitrators. Thus, properly drafted dispute resolution clauses can provide assurance
to the parties that their disputes will be resolved through the less expensive and
speedier processes of arbitration or mediation rather than by litigation. Moreover,
alternative dispute resolution clauses are of particular value in international
agreements, in light of the availability of established arbitration institutes to serve as
a forum for disputes involving contracting parties from different countries.

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Chapter 5: Other Important Clauses; Assembling Contracts

Section A: Understanding General Clauses

Introduction
Contracts typically include a general section containing a number of business matters
relating to the agreement. These clauses are usually located at the end of the
agreement. Some general matters to be considered for inclusion in contracts are
described below.

Integration Clause (Entire Agreement Clause)

It is customary to provide that the agreement constitutes the entire agreement
between the parties. The purpose of this clause is to state for the record that there are
no representations, warranties, terms or conditions between the parties other than
those set out in the agreement. Such clauses are intended to prevent related dealings
or agreements between the parties entered into before or after the execution of the
agreement, from being used to vary or interpret its provisions.

Waiver Clause
There may be times when the parties want to waive a breach or default of a provision
of the agreement. A clause dealing with this circumstance usually provides that a
waiver of a breach or default will not constitute a waiver of a succeeding breach or
default of the same provision. Another typical waiver clause provides that any delay
or omission in exercising any right under the agreement does not constitute a waiver
of that right.

Time is of the Essence Clause

A clause can also be inserted to provide that, in relation to certain events, time is of
the essence. This means that time periods and limitations must be strictly observed
or else the contract is terminated.

Amendments Clause
Sometimes the parties want to change the agreement. A typical amendments clause
providing for this possibility would state that the agreement may be amended only in
writing and must be agreed to by an authorized representative of both parties.

Independent Parties Clause

This clause typically provides that the agreement will not create a legal relationship
between the contracting parties (such as a partnership, joint venture, franchise or any
other form of business organization or relationship). Neither party has the authority
to create obligations on behalf of the other party except as provided in the agreement.

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Survival Clause
It is customary to specifically provide for the survival of an obligation after the
termination of the contract. For example, if the parties intend for warranties to
survive the termination of the agreement, then they would specifically so state in a
survival clause.

Severability Clause
If the contract is ever litigated, it is possible that a court could rule that only a part of
the agreement is invalid, illegal or unenforceable. To provide for this possibility, an
agreement can provide that the invalid, illegal, or unenforceable part can be severed
from the agreement and that the remainder of the agreement can continue in full
force and effect.

Remedies Clause
An agreement often provides a statement of remedies that are available in case of a
breach. However, there are also general remedies available under the law. This
legal situation is often addressed by including a provision that states that the
remedies expressly stated in the contract shall be in addition to, and not in
substitution for, those generally available under the law.

Further Assurances Clause

Including this clause obligates parties to perform further actions or execute further
documents after closing or execution, either indefinitely or for a specified period of
time.

Currency Clause
When negotiating international agreements, it is wise to insert a clause specifying the
currency in which money owing under the agreement is to be paid. This can also
come into play in the event a court awards damages under the agreement.
Consideration should also be given to specifying a conversion date in this clause.

Section B: Assignments

Introduction
It is not uncommon for a party to wish to assign certain rights to payment or
performance to a third party. Through the use of an assignment clause in a contract,
the benefit of the contract can be reassigned from the intended beneficiary to a third
party.

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Effecting an Assignment
An assignment involves the act of transferring to another all or part of one’s
property, interest or rights. To assign a right, the assigner must show intention to
make the present transfer without any further action required (by either party). From
a drafting standpoint, it is best to use an active verb to connote immediate movement
of the right from assignor to assignee. Examples include “I hereby give, transfer,
convey”. Avoid using such terms as “will” or “promise to”, because such language
suggests that the assignment hinges on a future event. Although oral assignments
may be binding in some cases, it is generally in the parties’ interests to make the
assignment in writing and executed by both the assignor and assignee. Any written
assignment should clearly identify the parties and rights being transferred. A written
assignment should also define the consideration given by the assignee (if any) in
return for the benefit of the assignment.

Limitations on Assignments
The ability of a party to assign its interest in a contract may be limited by contract, or
in some cases by law or public policy. Parties can protect themselves from
assignments by adding a clause to the contract to either: (a) prohibit assignment of
any contract right, or (b) prohibit any such assignments by one party without the
consent of the other party to the contract.

Section C: Contract Interpretation Issues

Introduction
When the terms of an agreement are expressed clearly and comprehensively, the fact
of contract formation and the extent of each party’s commitment can be ascertained
with relative ease by the interpretation of the language in the written contract.
However, problems arise in cases where the parties fail to express their assent
adequately, leave a material aspect of their agreement vague or ambiguous, or fail to
resolve or provide for a material aspect at all. Obviously, such problems can arise
when insufficient attention to detail is given in drafting the contract; similarly, poor
drafting can result in the contract not clearly reflecting the parties’ expectations.
Indefiniteness can thus result from vagueness, ambiguity, omission or irresolution.

Problems of Vagueness and Ambiguity

Vagueness results when a term is stated so obscurely or in such general language that
one cannot reasonably determine what it means. Ambiguity results when a term is
capable of more than one meaning. Ambiguity can lie in a word itself or in the
structure of a sentence; ambiguity can also result from inept sentence construction.
Sometimes, the parties’ meaning can become clear if interpreted in context. Some
clarity may be gained by reference to the parties’ course of dealing, custom or usage
in the commercial environment in which the parties made the agreement, or by

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standardized terms recognized by law. But contextual evidence cannot always save a
vague or ambiguous term. Thus, failure to properly communicate the parties’
intentions in the agreement can result in the contract not being sufficient to create an
enforceable relationship.

Omitted Terms
If a term is omitted, it simply is not there. The agreement would have a gap
regarding that particular aspect of the parties’ relationship.

Unresolved Terms
Unresolved terms result when the parties have raised an issue in their agreement, but
have not yet settled it, leaving it to be resolved by agreement at some later time. In
such cases, indefiniteness results from the parties’ deliberate postponement of
agreement on the particular term. Nevertheless, an “agreement to agree” is not
regarded as definite enough to create a firm and final contract.

“Gap Fillers”
A “gap filler” is a provision legally implied into a contract to supplement or clarify
its express language. In attempting to interpret indefinite contracts, gap fillers may
be used to supplement contracts (but not to override the parties’ probable intent).
Gap fillers are standard terms supplied by law. Some gap fillers supply generalized
obligations that are likely to be implied in all kinds of contracts; some gap fillers are
very specific and relate to particular types of terms in specialized contracts. An
example of a gap filler that supplies a general obligation is the obligation implied by
the law that the parties use their best efforts to effect the contract’s purpose.
Commercial codes (such as the CISG or the UCC) supply gap fillers that relate to
specific aspects of particular kinds of contracts.

Implication of Law Irrespective of Intent of the Parties

Nevertheless, some legally implied obligations are so fundamental to fair dealing or
so strongly demanded by public policy that they are mandatory and are part of the
contract regardless of the parties’ actual intent. Such terms are more a matter of
regulation than of intent. That is, the law’s true purpose in imposing standard terms
is not so much to ascertain what the parties reasonably must have intended, but to
limit contractual autonomy in the interests of public policy. For example, the
underlying policy may be to protect a weaker party from one-sided and unfair
contract terms. One of the most important and pervasive mandatory construed terms
is the general obligation of both parties to perform the contract reasonably and in
good faith. It should also be noted that there are some construed terms that are so
strongly implied as a matter of public policy that they become part of the contract
unless the express terms of the agreement clearly exclude them. In some cases, even
a clear exclusion is not sufficient unless it complies with specified rules that may

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prescribe the use of particular language or format. Examples would include
disclaimers of warranties.

Terms Left for Future Determination

If the parties cannot agree upon a specific term and determine to leave it for future
determination, they have a number of alternatives. First, the parties can decide on a
formula or an external source or standard in order to provide for objective criteria for
future determination of the term. As a second alternative, the parties can opt to
leave the determination of the term to the discretion of one party, although such a
provision is risky to the party who defers discretion to the other. The parties can also
opt to omit the term from the contract; however, the omission of a central term may
render the contract itself unenforceable. The parties may also deliberately defer the
term by “agreeing to agree”; however, caution is necessary in such cases since the
general rule is that no contract comes into existence until all its material terms have
been settled.

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