1. 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
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2. WHY DO WE DRAFT WRITTEN CONTRACTS AND NOT JUST SHAKE HANDS?

3. 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

4. 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

5. 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

6. 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

7. WHERE TO START?

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

9. 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

10. SOME RULES ABOUT USING PRECEDENTS

11. 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.

12. 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

13. 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

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

15. 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

16. 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 ●

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

18. 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 ……

19. BE CAREFUL TO RECORD CAPACITY AND RELATIONSHIP CORRECTLY

20. 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

21. DRAFTING Is An Art And An Essential Skill

22. 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

23. 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

24. COMMON DRAFTING RULES

25. 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

26. “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’

27. 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

28. 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

29. 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?

30. 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

31. 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

32. AGREEMENTS TO AGREE ARE NOT AGREEMENTS

33. 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

34. 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

35. 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

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

37. 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.].

38. 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.

39. REVIEWING WHAT YOU
HAVE DRAFTED

40. 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?

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