BUILDING LAW FIRM CAPACITY TO SERVICE COMMERCIAL LAW TRANSACTIONS: WHAT LAW SCHOOL DID NOT TEACH YOU Presented by LEAD in co-sponsorship with ISLP and with the assistance of the Black Corporate and Commercial Attorneys Network (BCCAN) Session: Contract Structure And Effective Drafting Presenters: Linda Robinson, Osler, Hoskin & Harcourt LLP Johannesburg and Durban, October 2014 Legal_1:31852538

WHY DO WE DRAFT WRITTEN CONTRACTS AND NOT JUST SHAKE HANDS?

REASONS FOR CONTRACTS Confirmation: the intent of the parties (offer and acceptance) Clarity: to avoid later disputes and save costs Completeness: to ensure all essential and material issues are covered Enforcement: to obviate lack of trust and provide evidence of the agreement and its terms

PURPOSE OF A CONTRACT Contracts attempt to articulate: The rights and obligations of the parties Provisions for events or contingencies that while not expected, may occur Provisions that avoid any undesired default provisions of any applicable law Remedies and means of enforcing or avoiding the rights and obligations

REMEMBER THE BASIC PRINCIPLES OF CONTRACT LAW Mutual assent – a clear expression of the parties’ intent to contract Offer and acceptance Consideration – bargain for exchange

THE GOAL OF DRAFTING – A PRECISE DOCUMENT REFLECTING THE INTENT OF THE PARTIES Four elements of precision: Accuracy Completeness Exactness Able to withstand hostile, critical review

WHERE TO START?

The party with “the pen” PRELIMINARIES Identify: The law The parties The facts The client objectives The party with “the pen”

THE DRAFTING PROCESS Prepare initial drafts -- use precedents and templates where appropriate ↓ Circulate drafts for comment and revise Negotiate and memorialize the final definitive documents Execute the documents

SOME RULES ABOUT USING PRECEDENTS

USE THEM Do not be afraid to be a shameless plagiariser. Imitation is the sincerest form of flattery. Lawyers use other lawyer’s documents as precedents all the time. Never use anything that you do not understand or that does not belong in your transaction. Read every word of the precedent. Take forms and precedents as models to be corrected, modified and changed as you feel is necessary. Use your own good judgment and common sense.

THE FORM OF TRANSACTIONAL DOCUMENTS Title, date and introductory clause Description of parties Preambles/recitals Traditional recital of consideration Definitions or defined terms Core substantive provisions (purchase price; adjustment; delivery, closing) Representations, warranties Covenants, conditions indemnities, guarantees, releases

THE FORM OF TRANSACTIONAL DOCUMENTS (cont’d) Events of default and remedies Boilerplate (read it! do not assume its completeness, accuracy or relevance to your transaction) Signature block Exhibits and attachments

MAKE SURE YOU HAVE THE RIGHT PARTIES AND THEY ARE CLEARY IDENTIFIED

WHO SHOULD BE THE PARTIES Consider who should be the parties? Necessary – e.g. – The owners of the assets or shares being sold Desirable – e.g. – an entity or person who has net worth as guarantor or indemnitor

Person Company IDENTIFY THEM CLEARLY Usually identified by name and residential address – e.g.: Linda Robinson of Toronto, Ontario, Canada Company Great Expectations Limited, a limited liability company incorporated in ● with its registered office and principal place of business at ●

IDENTIFY THEM CLEARLY (cont’d) Partnership [Not a separate legal person] The partnership between Tembe Shanagaan (Identity Number 7206225043083) and Susan Links (Identity Number 74052942067082) called the “Surprise Partnership” formed by the partnership agreement dated 21 July 2014 having its principal place of business at ●

IDENTIFY THEM CLEARLY (cont’d) Trust [Not a separate legal person] The trustees for the time being of the Huge Family Trust, masters reference number IT 3181/1994, being Tom Hanks and Goldie Horn The Jade Trust acting by its trustee International Limited a company registered in the British Virgin islands with registered address ……

BE CAREFUL TO RECORD CAPACITY AND RELATIONSHIP CORRECTLY

CAPACITY Tom Jones acting in his capacity as agent for Jane Hills by virtue of the Power of Attorney dated 1 January 2014; Distinguish between: Principal Agent Trustee Contracting for the benefit of a third party (i.e. acting as principal but rights are in favour of a third party who can accept them) Guarantor or indemnitor

DRAFTING Is An Art And An Essential Skill

CHARACTERISTICS OF PLAIN ENGLISH DRAFTING Short sentences Definitive, concrete, everyday language Use the “active” voice Use tabular presentation Separate paragraphs and sections with headings for individual or different concepts Avoid the use of “legal jargon,” Latin or other foreign terms Avoid the use of double negatives

LEGAL WRITING – GENERAL ORGANIZATIONAL RULES General provisions before specific ones Important, central provisions before others Rules before exceptions Separate provisions or sub-sections for each concept Technical, boilerplate, housekeeping and miscellaneous provisions located last, before signature blocks

COMMON DRAFTING RULES

CLEAR WRITING BEGINS WITH CLEAR THINKING If you find yourself having trouble drafting a provision you probably don’t understand why you are drafting it. So: Know the subject matter Research Understand the objectives of the parties Analyze the implications of each contractual term Use simple, clear language

“SHALL”, “MUST” “MAY” AND “WILL” “Shall” and “must” are imperatives and cause a legal obligation to be imposed “May” is permissive or discretionary “Will” is predictive Avoid the use of “should” because it can mean both ‘must’ and ‘would be desirable’

ACTIVE VERSUS PASSIVE LANGUAGE Active voice is more precise than the passive voice e.g. : The rent shall be paid on the first day of the month OR Tenant shall pay the rent on the first day of the month

AFFIRMATIVE VERSUS NEGATIVE LANGUAGE Where possible, use affirmative language Example: The failure of Tenant to pay the rent on the first day of each month shall not be an incurable event of default The Tenant may cure an event of default caused by its failure to pay the rent when due

USE OF “AND” AND “OR” Items connected by “and” will be treated the same or in the conjunctive Items connected by “or” will be treated alternatively or in the disjunctive Avoid the use of “and/or” when referring to more than two items or parties Example: The purchase price shall be paid to John Smith and Peter Jones or his attorney Who gets the purchase price?

OTHER GENERAL RULES Use the number of days rather than months or years. 3 months is different than 90 days Specify whether the number of days are calendar days or business days (and if business, define what that means) Avoid legal doublets and triplets unless they are necessary e.g. null and void; swear and affirm; right, title and interest Omit needless words – overdressing your drafting makes it more difficult to understand e.g. “At that point in time” = “then” Remember the rules of grammar

COMMON ERRORS AND ISSUES An agreement to agree “The seller will deliver the car in the colour and make to be agreed upon” Drafting an obligation without identifying who has to perform “The car will be washed on Wednesday” Unclear and circular definitions Options without providing the terms applicable to the exercised option

AGREEMENTS TO AGREE ARE NOT AGREEMENTS

BUT WHAT IF PARTIES DON’T KNOW THE DETAILS YET For example – what if an IT company is going to do a needs analysis and design a computer programme but the parties don’t know what functionality the program will have at the date of signature Generally unenforceable if you can’t tell or know what the deliverable is Generally unenforceable if essential terms are to be determined unilaterally by one party in its unfettered discretion

A DETERMINING MECHANISM Can be subject to future agreement but need a determining mechanism in the event of the parties failing to reach agreement Remedies – e.g.: Have the parties refer the matter to a third party for determination – e.g. you have an option to buy the house at the fair market price, as determined by XYZ estate agent, on the date of exercise of the option

CIRCULAR DEFINITIONS Examples “Sale Cars” means all the cars owned by Fred except the Excluded Cars “Excluded Cars” means all the cars owned by Fred except the Sale Cars

OPTIONS WITHOUT TERMS OR DETAIL For example: The tenant has an option to purchase the property Enforceable?

OPTIONS WITHOUT PROVIDING THE TERMS Always ask HOW, WHEN, WHERE and WHAT? The Landlord grants the Tenant an option at any time prior to 1 January 2015, to purchase the Great Property on the terms and conditions set out below. The option may be exercised by the Tenant delivering a notice of exercise to the Landlord at any time prior to 1 January 2015, failing which, the option will lapse. If the option is exercised by the Tenant, then the Great Property shall be sold by the Landlord to the Tenant on the following terms: [Deal with price, delivery date, warranties, etc.].

COMPLEX FORMULAS AND SCENARIOS If the Earnings (Sales less the Costs of Sales) exceed R5 million then Seller shall be entitled to an earn-out payment equal to 10% of the amount of Earnings in excess of R50 million but less than R6 million and to 20% of all Earnings in excess of R6 million, less 10% of the increase in the Cost of Sales since the Closing Date. Use a table and formulae rather than words alone and consider attaching examples – you want to be as clear as possible and the English language is often ambiguous or imprecise. Use language to explain what the formula will do.

REVIEWING WHAT YOU HAVE DRAFTED

TEN POINT CHECKLIST FOR REVIEWING DOCUMENTS Check parties, dates, dollar amounts, and interest rates. Does the overall structure of the document suit your client’s needs? Does the document contain clear mandatory duty provisions regarding all performances by the other parties due to your client. Watch for the use of “shall”, “must”, and “may”. Review representations and warranties. What happens if they prove to be false? What are the remedies? Internal and external consistency. If there is more than one document, is the boiler plate consistent across all documents? Are defined terms used in a consistent manner? Do you have a substantive understanding of each provision and how they interact with each other? Hypothesize performance by thinking through each scenario during the life of the transaction. Hypothesize non-performance. What happens if one or both parties fail to perform all or part of the agreement? Goal is to resolve all issues at the drafting stage. Analyze what will happen if one of the parties files a bankruptcy petition or becomes subject to a receivership. Consider the worst case scenario where the parties have become hostile to each other. Will the document provide sufficient guidance of the parties or the Court?

RESOURCES Charles Fox – Working with Contracts is one of the best resources for developing drafting skills