Leading up to the 2019 holidays, Russo Law LLC released a series of contracting tips over social media as part of a campaign titled 12 days of Free Contracting Tips. Those posts have been aggregated here:
Tip #1 Do your Diligence
- Before putting pen to paper, request all information that will verify your counterpart’s representations. Without that, it’s very possible that you will overpay, get taken for a ride, and be left holding the bag.
- Don’t accept emails or written representations of the other side that are not included in the contract. Every true fact can be independently verified. Whether its ownership/title, proof of funds, or expertise, there is a government entity, bank, or reference that can provide you with documentation that will help you unearth red flags your counterpart is hiding.
- CAUTION – If you don’t do your diligence, you may be later foreclosed from asserting that it was reasonable for your to rely solely upon the oral/unverified reps, which would prevent you from making a case that you were fraudulently induced into executing the contract. Tread carefully.
Tip #2 Write In Plain English
- Too many think that “legalese” is a language. It’s not. Instead, it is best to use plain language when drafting contractual terms. If a non-lawyer can’t understand it, then you should probably go back to the drawing board.
Tip #3 Include recitals
- Recitals typically appear at the beginning of a contract and provide context for the agreement. They often begin with the word “WHEREAS” (e.g., “WHEREA, Buyer seeks to purchase real property from Seller…”).
- Although the recitals aren’t required, they provide enough background that an outside party (such as a judge or jury) can quickly understand the parties’ intent.
Tip #4 Contra proferentem
- In most states, unclear terms of contract will be interpreted against the party who drafted it–sort of how a tie goes to the runner in baseball.
- To overcome that presumption, consider including a clause like this: “Not Construed Against Drafter. Both parties have had full opportunity to negotiate the terms of this Agreement, and neither party intends that this Agreement will be construed for or against either party because of that party’s role in drafting this Agreement.”
Tip #5: Carefully craft non-competes / solicits
- These clauses prevent former employees from working for a competitor, soliciting clients, or recruiting their former colleagues. State laws vary on how they will be enforced.
- But, generally, they are more likely to be enforced if they are limited in duration, geographic scope, and the market segments to which they apply. If they are not properly tailored, the court will revise (a.k.a. “blue pencil”) them accordingly.
Tip #6: Clearly Define terms
- Defined terms lead contracts to be more concise and easily understood and interpreted. For example, what you meant by splitting “profits” may be clear to you but not to your counterparty or a judge/arbitrator. Is it gross or net profits? What sales or proceeds will be deemed “profits” in the first place?
- Answer all of these questions in a lone definition upfront (“Profits” shall mean …) then use the Capitalized defined term throughout.
Tip #7. Beware of Common Words with legal significance
- Differences in the legal meaning of a word and its standard usage can lead to confusion in a contract. For example, labeling an individual as an “agent” or “employee” can carry specific legal significance in terms of the individual’s legal authority to act on a party’s behalf.
- Be very careful any time you use a word that you recognize as possessing a specific legal meaning. Don’t know the legal meaning? Don’t’ fret! You can always consult Black’s Law Dictionary (which is available online). If you don’t intend to apply that legal meaning, go back to the drawing board or call your favorite law firm #RussoLawLLC.
Tip #8. Don’t Overlook Grammar AND Punctuation!
- You may not appreciate the importance of a single comma until you learn the hard way that the placement of this seemingly insignificant piece of punctuation may wind up costing you millions. The tense of pronouns, conjunctions, verbs, and punctuation must be used carefully and precisely.
- These are often minor details during negotiation but are critically important when papering the transaction. They are also often overlooked because the drafter is too close to the document to catch them and relies too much on spellcheck.
- Therefore, consider enlisting the help of a disinterested party to proofread your draft or…(here comes the shameless plug) . . . just hire #RussoLawLLC to put your mind at ease.
Tip #9 – How Will Disputes Be Handled?
- Too often parties want to ink a deal so badly that they won’t raise concerns about how a future dispute might be resolved. The fear is that by focusing on how future disputes will be resolved you might send the wrong message that you foresee the deal going south. However, when things do go south, you will invariably be left to pick up the very expensive pieces.
- The best way to avoid becoming embroiled in expensive, protracted, and migraine-inducing litigation is to have a litigator (who seen firsthand how contract disputes play out) review the contract BEFORE its signed. That way you can ensure all terms impacting dispute resolution (e.g., governing law, forum selection, indemnification, limitations on liability, structured negotiations, arbitration, mediation, “med-arb,” attorneys’ fees, etc.) will work in harmony. It also allows you to blame your lawyer for requesting the necessary revisions. And who doesn’t like to make their lawyer the fall guy, right?
Tip #10 – Do You Want to Limit Damages?
- Many contracts include provisions that limit or cap one party’s potential liability: “X hereby waives, releases, and agrees not to sue Y upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by X.” If correctly worded, and paired with a carefully crafted dispute resolution clause (more about those in tomorrow’s tip), liability limitations can be an effective tool to dissuade litigation seeking outlandish damages.
Tip #11 – What about attorneys’ fees?
- In the US, each party pays their own lawyer’s fees in actions relating to a breach of a contract unless the parties agree otherwise. That default rule (a.k.a. the “American Rule”) applies if the contract is silent on the issue.
- Issues sometimes arise when parties mistakenly believe an indemnification which requires a counterparty to pay their attorneys’ fees for claims brought by third-parties also covers fees for dispute between the contracting parties themselves.
- The solution is to add in a separate clause titled “Cost and Fees” which specifically addresses how fees will be handled in disputes between the contracting parties; either the parties will pay their own way or the prevailing party is entitled to have their fees reimbursed.
Tip #12 – Don’t Go at It Alone
- Familiar with canons of contractual construction? Do you know how the principles of ejusdem generis or expresio unis est exclusion alterus work? Do you even speak Latin? Don’t fret. Lawyers understand these principles and draft contracts with them in mind. Granted, some agreements are so basic that a lawyer might not be necessary. But more often than not, a deal (especially the more complex ones) will close more smoothly with the aid of an experienced attorney who can quickly spot issues, knows what to request during diligence, and will draft with your best interest in mind.
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Russo Law LLC deploys unparalleled training and modern technology to guide investors, businesses, owners, and executives efficiently through corporate, contractual, commercial real estate, and litigation issues. Call (+1-929-262-1101) or email today to learn more.
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