Courtesy of Wikimedia Commons

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So far in our Contracts 101 series, we’ve covered how to understand contract preambles and parties (see here, and here).

Today we’re going to take on a new concept that seems to flummox most people the first time they look at a contract: those every so scary definitions (cue spooky music)!

Always remember, the entire goal of a contract is to remove ambiguity, to make everything crystal clear, to set down in written words the story of the deal in an indisputable manner.  Why?  So that when you and the other side might have any confusion, discussion, or disagreement over a key deal point, you can both take out the contract, read it, and instantly agree as to what must be done.  When you draft a contract, you are really writing it for that moment, so that people in the future working at the companies who signed the deal will remain in agreement as long as the deal lasts, and prevent the tremendous frustration that comes with an unresolved dispute.  You are drafting the contract for a wide audience: for the person you are negotiating with, for their successor, for their supervisors and subordinates, for their lawyers, and (hopefully not), for a mediator, arbitrator, judge or jury that needs to rule on what the contract says in a lawsuit.

If you’ve done your job right, then litigation should be prevented.  And doing your job right means being completely accurate in describing the deal.  You’ll never totally get there, after all, the very act of documenting anything always involves you injecting your own world view and agenda into whatever you write, but the more you understand basic contract concepts and use best in class contract language, the more effective you can be at shaping future behavior.

When pilots can see everything in front of them for miles and miles, they describe their visibility as “severe clear“.  Use this term as a metaphor when you draft your contracts; do it extremely, superbly, and severely clear.

Okay, so now you’re thinking, “Fine, enough already, tell me how!”  Let’s do it.  Think for a second about the goal of drafting crystal clear contracts.  To do this, you might surmise that you need a lot of words to provide a really solid description of what’s going on.  And you’d be right.  For instance, if you’re selling a used car, a good sales contract is going to have a terrific description of the car, something like:

“A 1998 Toyota Corolla, model LE, manual transmission, maroon outside color, beige inside color, 4 doors, 113,000 miles, never been in an accident, new timing belt used for only 11,000 miles, and new tires used for only 500 miles.”

On top of that, when you’re describing a deal, you might need to refer to the same thing a few times.  The contract might talk about the fee for the car, and the warranty for the car, and the performance of the car.

Okay, I know, I know, now you’re wondering, “But . . . wait . . . what are you doing to me?  If I refer to the car several times in the contract, I’ve got to use all of these words every time?  Do you know how long that will take?  How many pages could that be?  Should I just go chop down a whole forest now or buy a controlling interest in Dunder-Mifflin?

Luckily, no.  There is a solution, and that solution is the all important contract definition.  The way it works is you only have to use the lengthy description once, assign a word or two as being defined by that description, and . . . voila!  You’ve done it.  Now, whenever you use that word(s), everyone knows that you don’t just mean that lonely little world, but the whole kibosh instead.

What does a definition look like?  All you have to do is make the very first section of your contract after the preamble the definitions section, and spell out each of the defined terms.  Let’s go back to our car example to get a sense of this:

1. DEFINITIONS.

(a) “Car” means a 1998 Toyota Corolla, model LE, manual transmission, maroon outside color, beige inside color, 4 doors, 113,000 miles, never been in an accident, new timing belt used for only 11,000 miles, and new tires used for only 500 miles.

That’s how you create defined terms.  In this case, we now know that every time we see the defined term “Car” throughout the contract, whether in the fee, warranty, or performance sections, “Car” always has the same definition noted above.  This gives your contract internal consistency and makes it completely clear as to what you mean every time you say “Car” throughout the agreement.

Alright, you’ve now got the top of the contract under your belt, getting a grip on preambles, parties, and definitions.  Next time we’ll dive into actual contract clauses that require the parties to do things.  Can’t wait, right?  Tune in tomorrow.

Happy drafting.

You Should Try WhichDraft.com Here.

Courtesy of Wikimedia Commons, Mr. Bill Shakespeare

You Should Try WhichDraft.com Here.

Believe it or not, one of the most confusing things to figure out in any contract is the parties: the persons actually agreeing to the deal.  If you remember nothing else about this post, then focus on these two key questions that you need to ask to know who the parties are:

1. Type of Person: Individual or corporate?
2. Name: Trademark, department, division or corporate name?

Let me tell you a story from my days as a practicing lawyer.  I represented a client that was a Fortune 500 corporation (let’s call it “ABC Corporation“).  One of their senior marketing executives called me up one day (let’s call him “Bob“).  Bob asked me to draft a contract with a consulting company that he planned to use (let’s say Bob called the company “J. Strange“).  He told me that J. Strange was going to help him plan out his entire marketing strategy for a killer new magic trick product they were about to launch in the magic marketplace (let’s call it the “Killer Product“), and, as a result, would have wide ranging access to ABC Corporation’s proprietary information.  Bob said that the most important issue in the whole consulting deal was making sure that J. Strange did not use this information to build its own product and compete with Bob’s company.

You can put a variety of protections in a contract to prevent this kind of behavior, including a confidentiality clause.  But what Bob really wanted was called a “covenant not to compete” which would say that J. Strange could not start selling any products that compete with the Killer Product (Doesn’t “Killer Product” sound funny?  It makes me think of some weird malfunctioning giant robot out of Robocop 2!).  Also, J. Strange couldn’t work with others to compete with Bob’s company.

So, upon receiving this kind of request from a client, what’s the first question a good attorney should ask?  I hope you guessed it: “For this consulting contract, who are the parties?  Who is going to sign this deal?”  Easy, right?  If this were a test, you’d confidently type into your computer: “ABC Corporation and J. Strange are the parties.”  Problem solved!  Hazzah!  Gold star, 4.0, A+ action, baby! Sadly, no, not so fast.  You’re definitely right about one of the parties, which is Bob’s employer, the ABC Corporation.

But what about the other?  J. Strange?  Well, let’s start with the first key question:

Type of Person: Individual or corporate?

In the legal world, we refer to the parties that sign contracts as persons.  Now, you might have the quite reasonable idea that a person is . . . well . . . a person, right?  An individual?  You, me, and the lady down the street, no?  Oddly enough, under the law there actually is another kind of person, a corporate person.  An individual person is created by being born.  How is a corporate person created?  Well, a group of people get together, decide that they want to start an organization, and apply to a U.S. state to receive a charter, which is a document that says that the organization now exists as a separate, unique, fully able to sign contracts corporate person.

This organization, this corporate person, can take a wide variety of forms, including:

Corporation

Not for profit corporation

Partnership

Limited Liability Company

Most states require a corporate person to identify its existence as one of the particular types listed above by adding the following at the end of their name (if you don’t see this at the end of the name, then it’s a tipoff that you should ask the party what their actual corporate name is, as it appears on their corporate charter):

Corporation

Corp.

Incorporated

Inc.

LLC

So, when Bob calls you up and tells you the name of the other party is “J. Strange”, the first thing you want to know is whether or not J. Strange is an individual or a corporate person, to which Bob responds, “What are you talking about?  They’re a company, I guess, right?”  At which point you would look them up online or via a corporate research service, and find out or not whether they have a charter and exist as a corporate person.  Let’s say that we discover that there is a “J. Strange, Inc.” which is a Delaware corporation.  Now we’ve hopefully answered the first key question!  We’re dealing with a corporate person here, not an individual.

What’s the second question?  Remember to ask:

Name: Trademark, department, division or corporate name?

“What’s in a name? That which we call a rose by any other name would smell as sweet.”

Now, a name may not have been a big deal to Bill Shakespeare, but it’s hugely important in the contracts world.  If you don’t have the right name, you have know idea which corporate person you have a deal with.  What if J. Strange, Inc. is one of a variety of companies?  What if J. Strange, Inc. owns J. Strange, LLC (which handles its consulting business) and J. Strange Corp. (which sells software)?  What if you put in the contract that J. Strange, Inc. will not compete with the ABC Corporation, but J. Strange, Inc. is not the name of the company that’s getting the proprietary information?  What if J. Strange, Inc. is actually concrete manufacturer and has nothing to do with your consultant?  What if your consultant, J. Strange, is actually a department or a division that is part of a corporate person called the Norrell Corporation?  Or a trademark?  What if I ask you seven straight questions?  Ultimately, you now know you want to change the contract to say that it is between ABC Corporation and the consulting company, let’s say: J. Strange, LLC.

The bottom line is that if you don’t know who your deal is with, it’s really not of much value, especially if you end up in a big dispute and have to go to court to get a judge to rule in your favor.  The whole point of a contract is to create trust between the parties so there can be a smooth working relationship, not open yourself up to a huge fight down the line.  Good contracts prevent disputes from ever happening, bad contracts engender friction.  And what can be more annoying than not even getting a party’s name right at the start (besides getting attacked by the Killer Product)?

Congratulations!  Now, when you are drafting a contract, you know the two key questions you always want to ask so you can figure out who the parties are.

Happy drafting.

You Should Try WhichDraft.com Here.

Courtesy of WikiMedia Commons

You Should Try WhichDraft.com Here.

Welcome to the first post in our new Contracts 101 series, designed to get you up to speed on the basics of contract drafting.  Today’s post will explain the gobbledygook you see in the first paragraph of a contract, which we in the contract drafting game refer to as the “preamble“.  Most attorneys will tell you that the preamble is obvious and will skip over it when explaining contracts, but I believe in starting with fundamentals (as that’s how I like to learn a new subject), so let’s get you started with a metaphor from the sports world to help you read and understand contract preambles.

I’m a big fan of the St. Louis Cardinals.  Back in the day that could have meant two different things, either the football or baseball team, but, alas, the football team abandoned us long ago in the Gateway City.  Luckily, we could console ourselves by the fact that we had the most successful baseball team in National League history.  Now that I live in New Jersey, I still follow the Cards from afar, and regularly scan the scoreboards to see how they’re performing.

One day, I was teaching a course on health privacy law contracts, and I noticed that a scoreboard is a great metaphor for understanding the preamble to a contract.  I mentioned this to the class, and they liked it a lot.  So let’s use this metaphor and take a look at a typical baseball scoreboard result:

So, with one quick glance we learned some important information.  We learned:

1. Game: Yup, there was a baseball game.
2. Date: The game was played on September 18, 2009.
3. Teams: There were two teams that played this game, the St. Louis Cardinals and the Chicago Cubs.
4. Place: The game was played in a particular place, in St. Louis, Missouri, at the Cardinals home field, Busch Stadium.
5. Winner: Well, that would be the Cards, of course!

Alright, at this point you’re probably thinking, what on earth does this have to do with contracts?  Well, let’s take a gander at a typical contract preamble, that first paragraph at the start of most contracts that often flummoxes non-lawyers right off the bat (pun intended):

This Sales Agreement (“Agreement“) is made as of September 18, 2009 (the “Effective Date“) between Jason Mark Anderman, an individual with an address at 123 Delmar Avenue, St. Louis, Missouri  (“Party-1“), and Geoffrey Anderman, an individual with an address at 456 Michigan Avenue, Chicago, Illinois (“Party-2“).

This, my friends, is just like a scoreboard!  With one quick glance we learned the same important information.  We learned:

1. Game/Contract: The name of the game here, the contract between us, is called a “Sales Agreement”.
2. Date/Effective Date: The Sales Agreement starts on September 18, 2009.
3. Teams/Parties: There are two parties to this contract, Jason Mark Anderman (me) and Geoffrey Anderman (who also happens to be the co-founder of WhichDraft.com and my brother).
4. Place/Address: Each of us have an address, one in St. Louis, the other in Chicago.
5. Winner: In the contracts world, hopefully both sides win, as your goal is to have a deal that puts the parties in a good business relationship with each other.

Take a second now and grab any contract you have, or just fill one out on our site here.  Look at the first paragraph at the top of the contract, just under the title.  Think about the name of the game, the date, the teams, and the place, and use that to quickly pick up on the type of contract, the effective date, the parties, and the address.  Now you’re ready to get started, you understand a typical contract preamble, and have no need to be intimidated anymore.

Next time, we’ll dive into the concept of contract parties, so you can understand who actually signs and has to comply with contracts.

Happy drafting.

You Should Try WhichDraft.com Here.