pointers

In drafting a contract you should always bear these following principles in mind:
• Be conversant with the parties’ wishes.
• Use a checklist of clauses that relate to the subject of the contract.
• Be precise in the choice of words.
• Use several sample contracts to establish the format of the agreement.

The Art of the Deal

16 considerations to keep in mind when drafting a contract

By Jeffrey A. Helewitz

November/December 1999 issue

One of the primary responsibilities given to the modern legal assistant is the initial drafting of legal documents. Because contract law forms the basis of most legal relationships, it’s likely that at some point, you’ll be called upon to create a contract for a client.

There are three key elements that you should keep in mind before attempting to draft a contract:

• Begin with a thorough understanding of the precise wishes of the client

• Use a checklist of clauses or topics that should be covered by the agreement

• Draft the contract by referring to any existing contracts that may cover the same or similar subject matter

Before drafting the agreement, be sure that you have a clear understanding of the precise nature of the relationship the parties intend and make certain that you are familiar with the special terminology associated with the specific industry. Every industry has its own particular phrasing and specific types of legal obligations. To understand and determine the special provisions that may apply to a given area of law, refer to texts and treatises on the particular subject. Furthermore, always ask the attorney and the client whether they have existing contracts they want you to use as the basis for the one you are going to draft.

The following checklist provides a sampling of clauses that typically appear, and should therefore be considered, when drafting a contract. However, remember that every contract is unique to the client and the circumstances involved, and as such, no one format will fit the needs of every situation you may encounter. Use the following checklist as a starting point, rather than a destination, as you embark on your contract drafting assignment.

1. Description of the Parties

This is generally the first clause of every contract. The term "description" refers to the legal name and alias of each party, the type of entity of each party and the manner of referral for each of the parties throughout the remainder of the agreement.

Sample Clause: This agreement made this [Date] day of [Month], 2000, between [Party Name], a Delaware corporation (hereinafter referred to as "Corporation") and [Party Name], an individual resident in the state of [state] (hereinafter referred to as "Individual").

2. Description of the Consideration

Mutuality of consideration is the cornerstone of contract law; it’s the bargain to which the parties have agreed. The consideration being given by each side must be specifically described, including such terms as price, quantity, quality and time of performance. Also, any conditions the parties wish to impose on their performances must be specifically and clearly stated.

• When drafting the consideration clauses, you should remember to include the following elements:

• A complete description of the consideration specifically tailored to the subject matter of the contract:

  • For realty, use the legal description as it appears on the deed.

  • For money, specify the exact dollar amount.

  • For services, indicate the nature of the services to be performed.

  • For personalty, describe the items in detail.

• State the mutuality of the consideration being given by each party.

• Specify the terms of the performance (payment, contingency, installment sale, etc.).

• Detail any condition that may apply to the performance, such as late payment penalties, time-is-of- the-essence clauses, etc.

• Use simple language.

If the contract you are drafting is covered by the Uniform Commercial Code (UCC), determine whether a filing is necessary, or whether a specific form for the agreement exists or is required to be utilized.

Sample Clause: In consideration of Two Thousand Dollars ($2,000) this day paid, Seller agrees to sell to Buyer the following: One [model] computer.

3. Terminology

All contractual terms are construed according to their ordinary meanings unless the contract itself specifies otherwise. Therefore, all important terms in the agreement should be specifically defined in a terminology section. This is especially true for terms that are specific to a given industry. A well-drafted contract always includes a terminology section. This section usually appears at the beginning of the contract.

4. Title

Title indicates the ownership rights of interest, possession, transfer and the right to insure the property. Therefore, it’s important to state in a contract the moment at which the title to the subject property transfers from the seller to the buyer. Whoever has the title to the property bears the risk of loss if the property is damaged or destroyed and may have the property attached by his or her creditors.

Sample Clause: When the full sum mentioned above is fully paid, title to said property will vest in the Buyer, but until that time, title will remain in the Seller.

5. Duties and Termination

Every contract should specify the duties of the parties and indicate the grounds for which the parties may terminate the contract before the performance is completed without being in breach. The grounds for termination may be for specific causes or without cause, if the parties so agree.

In either an employment contract or a contract for personal services, each of the duties to be performed should be specified, including limits on the extent of any authority the employee may have with respect to obligating the employer to third persons. Also, the specifics of compensation and other benefits to which the employee will be eligible should be detailed, including the method of accounting to be employed if compensation is based on a percentage of income or revenue.

6. Security Agreement

If the parties have agreed that a security agreement will attach to the contract pursuant to Article IX of the UCC, make sure that the contract includes a clause that establishes the security agreement of the parties. Also, most contracts that provide for a security agreement as governed by Article IX of the UCC require some form of filing to perfect the security interest. Be sure to check with your state statute to determine whether such filing must be made and what the nature of the form is that is required by your state’s version of the UCC.

Sample Clause: [Corporation] hereby grants to [Individual] a security interest in all receivables, as defined above, all present and future instruments, documents, chattel paper and general intangibles (as defined by the UCC).

7. Warranties

If the contract is one for the sale of goods, under Article II of the UCC, certain warranties will attach. If the parties demand or anticipate specific guarantees with respect to the nature of the subject goods, include provisions covering these express warranties.

Sample Clause: Seller hereby warrants that the premises is habitable as is (Express Warranty of Habitability).

8. Risk of Loss

If the parties anticipate that there will be a delay in having the subject goods transferred from the seller to the buyer, either because of a conditional sales agreement or the transportation of the items, the contract should specify when the risk of loss of the goods transfers from the seller to the buyer. If the goods are lost or destroyed, the one who bears the risk bears the loss. Risk of loss terminology and considerations appear in Article II of the UCC. You should refer to that section of the UCC as adopted by your state to determine the appropriate clauses to insert when dealing with goods being transferred by means of an independent transfer agent.

Sample Clause: Risk of loss shall remain with the Seller until the good is transferred to the shipping agent, FOB.

9. Special Provisions

There are several boilerplate clauses that are included in many contracts. Such clauses include:
Covenants not to Compete

• Use of masculine or feminine pronouns in the agreement.

• Severability of the specific contract provisions.

• Rights and obligations of successors in interest.

• Confidentiality of trade secrets, client lists and work products.

You can find the standard phrasing used to cover these provisions in most form books and former contracts used by the parties. They should be included where appropriate.

10. Waivers

A waiver acts to relieve a contracting party from his or her contractual obligations. Most contracts should include a clause covering the effect of a waiver of one or more provisions on the remaining contractual obligations or rights of the parties.

Sample Clause: No delay or failure on the part of [party] to fulfill any of these provisions will operate as a waiver of such provision or any other right, and no waiver will be valid unless in writing, signed by the parties, and only to the extent specified in that writing.

11. Assignment and Delegation

Although most contracts are assignable, the parties may want to agree to the specific methods of effectuating the assignment or decide that the particular contract in question is non-assignable. The contract should therefore include a statement with respect to the assignability of the contract rights, either specifying that the contract is non-assignable or, if it is assignable, any conditions that attach to effectuate the assignment of the contract.

The obligations of the parties to a contract may usually be delegated unless the contract involves personal services or confidence. If the parties contemplate a delegation of responsibilities, a clause should be inserted in the contract to cover the manner and extent of such delegation.

Sample Clause: This contract may not be assigned or delegated by the parties.

12. Remedies

A contract should contain some provisions with respect to the remedies available to the innocent party in case of a breach of the contract’s provisions. The parties may specify liquidated damages or a limitation of damages and can agree in advance as to the responsibility of bearing any legal costs incurred in enforcing the contractual provisions.

Also, if the contract is covered by Article II of the UCC, specific remedies are afforded to the buyers and sellers of sales contracts. These remedies should be included in the provisions of the contract.

You should also be sure to check your state’s version of the UCC to determine the remedies and phrasing appropriate to your jurisdiction.

Sample Clause: Damages for breach of any provision in this agreement shall be limited to the amount of [dollar amount].

13. Arbitration

In order to avoid the time and expense of judicial litigation for solving problems arising out of a contract dispute, the parties may insert an arbitration provision by which they agree to submit the dispute to arbitration. The parties may also specify how and where the arbitration shall be conducted as well as who shall pay costs and attorneys’ fees arising out of any dispute.

Sample Clause: All disputes, differences and controversies arising under or in connection with this agreement shall be settled by binding arbitration according to the rules of the American Arbitration Association (AAA) in force at the time of such dispute, difference or controversy. In the event that such binding arbitration becomes necessary, both parties agree to hold the arbitration in [city, state]. The parties may agree on a retired judge from the AAA panel. If they are unable to agree, AAA will provide a list of three available judges, and each party may strike one. The remaining judge shall serve as the arbitrator. Each party agrees to bear its own attorneys’ fees and costs incurred in connection with any dispute arising under the contract, unless as otherwise specifically provided.

14. Choice of Law

Contracts will generally specify the state law that will govern its provisions and application.

Sample Clause: This contract will be governed by the laws of the state of [state].

15. Submission to Jurisdiction

To avoid possible problems with respect to the court acquiring appropriate jurisdiction over the parties to the agreement, many contracts should include a clause in which the parties agree in advance to submit to the jurisdiction of a particular court.

Sample Clause: The parties hereby agree to submit to the jurisdiction of the courts of the state of [state] to settle any disputes arising out of or under this contract.

16. Signatures

The final part of every contract is the signatures of the parties. Space should be provided for the parties to sign their names above their typewritten names, and if the parties are signing in a representative capacity, the formal name of the organization should appear along with the signatory’s title and authority to sign the agreement.

If there are numerous parties to the contract, you may also want to include certain language that would allow the parties to sign the contract in counterpart, meaning that all parties’ original signatures don’t need to be on the same page. In other words, each party to the contract may sign a separate page and then the multiple pages, each with its own original signature, may be collated together at the end of the contract and comprise the "signature page." If a party to the contract is a corporation, the corporate seal may be affixed as well. (Note: contracts are not notarized.)

Although the preceding checklist of contractual clauses represents some of the more frequently encountered provisions found in the majority of contracts, it’s also important to remember that each contract is individual to the specific client and the specific industry, and there are many additional provisions that apply under any given set of circumstances. It is advisable to always check your state statutes for any particular clauses that your state may require for certain types of contracts.

JEFFREY A. HELEWITZ currently teaches at several paralegal institutions in the New York City area and is an adjunct professor of law at C.U.N.Y. School of Law and Touro College Law Center. Helewitz has also authored numerous legal texts designed for legal assistants.