Contract Drafting Outline - Main.doc

Contract Drafting Outline (Main) I.Contract Structure3II.Dates3III.Recitals3IV.Defined Terms4V.Term4A.Sample Long Clause5VI.Representations and Warranties5A.Sample Clause5VII.Indemnity6A.Sample Clause6VIII.Limited Liability7IX.Confidentiality8A.Sample Short Clause8B.Sample Medium Clause8C.Sample Long Clause8D.Sample Separate Form References10E.Sample Separate Form10X.Ownership11A.Sample Short Clause11B.Sample Long Clause11XI.Miscellaneous clauses that should appear in any contract11A.Entire Agreement11B.Severability12C.Amendment and Waiver12D.Survival13E.Assignment13F.Successors and Assigns13G.Governing Law and Venue14H.Notice141.Sample Long Clause15XII.Other Miscellaneous Clauses15A.Order of Precedence15B.Third Party Beneficiaries16C.Announcements and Press Releases16D.Force Majeure16E.Independent Contractor17F.Attorneys Fees17G.Arbitration181.Sample Short Clause182.Sample Long Clause18H.Other Sample Clauses19XIII.Signature Block20A.Sample Block for Individual20B.Sample Block for Known Entity Representative20C.Sample Block for Unknown Entity Representative20XIV.Letter of Intent and Term Sheet20A.Sample Letter21B.Sample Sheet22XV.Leases23A.Sample Form23B.Alternative Language for Gross Leases28XVI.Amendment & Restatement28A.Sample Amendment Form28B.Sample Restatement Form29XVII.Miscellaneous Considerations29A.Checklist for Sale of Business via Sale of Assets29B.Checklist for Merger & Acquisition30I. Contract StructureA contract generally has the following structure: Factual Basis of Contracto Effective Dateo Partieso Recitals Definitions Operative Provisionso Serviceso Staffingo Paymento Term Representations and warranties Risk allocationo Indemnityo Limitation of Liabilityo Insurance IP issueso Confidentialityo Ownership Miscellaneous clauses that should appear in any contracto Entire Agreemento Severabilityo Amendment and Waivero Survivalo Assignmento Successors and Assignso Governing Law and Venueo Notice Other miscellaneous clauseso Order of Precedenceo Third Party Beneficiarieso Announcements and Press Releaseso Force Majeureo Independent Contractoro Attorneys Feeso Arbitration Signature blocksII. DatesBe clear about dates: Business days or calendar days? “Within X days of” v. “within X days after.” “Date of termination” v. “effective date of termination.”Dont use a word processors automatic “date” field it may update itself when you dont want it to.Should the term end on the required completion date, or the date the work is actually completed?A corporate client may need an invoice and 30-60 days before it can pay.III. RecitalsRecitals are found in lettered or bulleted paragraphs at the beginning of a contract, sometimes starting with the word “Whereas.” They provide historical background for the transaction and help to put the transaction into proper perspective. Recitals are useful for third parties who may have to interpret the agreement later without being specifically acquainted with the history of the parties or the transactions contemplated by the agreement. There is no legal requirement for the inclusion of recitals they are for the convenience of the parties and for later readers of the contract.The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration. California Evidence Code 622.If the operative words of a grant are doubtful, recourse may be had to its recitals to assist the construction. California Civil Code 1068.Therefore, beware of: Recitals that should be representations and warranties delete or move Recitals that should be operative provisions in the body of the agreement delete or move Recitals that are inconsistent with the body of the agreement delete Opposing counsel using the recitals to create damaging admissions deleteYou should be able to delete all the recitals and the agreement should stand on its own. Stick to the basic facts. Shorter is better.Sample recitals:WHEREAS, Smith and Co. is a provider of trucking and logistics services in the State of California;WHEREAS, Customer is in the business of providing supplies to hospitals in California and desires to engage Smith and Co. for the provision of trucking and logistics services on the terms and conditions contained herein; WHEREAS, Smith and Co. desires to provide such services on the terms and conditions contained herein.NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:NOW, THEREFORE, in consideration of the mutual agreements and covenants herein contained, the parties hereto agree as follows:IV. Defined TermsDefined terms are a useful tool in contract drafting to “short hand” more complex or wordy concepts to make your document more readable. There are two methods of incorporating defined terms into your agreement:o The “define as you go” method inserts the definition at the first instance the term is used. After the phrase or concept you want to define, insert the defined term. It must appear in the first instance in quotes and parentheses. Thereafter you can use the term without quotes or parentheses. Example: Really Big International, Inc. (“RBI”) It is bad form to have the definition appear later in the document than the first use it confuses your reader.o Defined terms can be gathered into a Definitions section at the beginning of the document. This should be in alphabetical order, and include all definitions. This section should omit parenthesis but keep quotes. Definitions can be explained here, or can reference inline definitions elsewhere. Usually at the beginning, but can be at the end or in an exhibit. Defined terms always have their first letter capitalized. This signals to the reader that the term has special meaning. Other things (besides proper nouns) should not be capitalized. Keep your defined term descriptive, logical and short. Once you define a term you must use it consistently.o You should not use both the long form of the phrase and the short form defined term in your agreement.o Dont define multiple terms for one thing.o Definitions can allow plurals. Example: Deliverables listed in Exhibit A (each a “Deliverable” and collectively the “Deliverables”).o If youre only going to use the concept once, dont give it a definition.Sample header:Certain Definitions. As used herein, the following terms have the meaning specified below:V. TermEvery contract should describe how long it lasts. The term should not be excessive, or a judge might reduce it.Sample Short Clauses: Upon execution of this letter of intent, the parties agree to negotiate in good faith toward the execution of the Definitive Agreement. This letter of intent will terminate upon the earliest to occur of: (i) _ (_) days from the date of this letter, or such longer time as the parties may mutually agree in writing, (ii) the execution of the Definitive Agreement, or (iii) the date a party provides the other party with written notice of its desire to terminate this letter of intent. The term of this lease shall be a period of five (5) years commencing at 12:01 A.M. on October 15, 2006, and ending at 12:01 AM on October 14, 2011, unless terminated earlier as provided herein (the “Initial Term”). Tenant shall have the option, in its discretion, to extend the Initial Term for a period of three (3) years (expiring at 12:01 AM on October 14, 2014) upon written notice delivered to Landlord within sixty (60) days prior to the expiration of the Initial Term. The basic rent payable with respect to such term extension will be the then-prevailing market rate in effect at the expiration of the Initial Term for substantially similar office space in similar multi-story office buildings in Century City, Los Angeles; however, in no event shall the basic rent increase more than 5% over the rental rate in force under this lease on the last day of the Initial Term.”A. Sample Long ClauseX. Term and Termination.X.1. This Agreement shall commence as of the Effective Date and continue in effect until _, 20_ (the “Term”), unless earlier terminated pursuant to this Agreement.X.2. This Agreement may be terminated by either Party if the other Party has materially breached this Agreement and has failed to cure such breach within thirty (30) days after receipt of written notice thereof.X.3. This Agreement may be terminated by Company at any time in its discretion upon providing Contractor with written notice designating the termination date and paying to Contractor either: (i) in the case of Services to be performed hereunder on a time and materials basis, the unpaid time and materials charges for work performed by Contractor prior to the effective date of termination; or (ii) in the case of Services to be performed on a fixed-fee or milestone basis, (a) the unpaid amounts due for completed Deliverables (or subparts thereof) accepted by Company prior to the effective date of termination, and/or (b) unpaid time and materials charges (to be calculated at the rates set forth in Exhibit B) for work performed by Contractor for Deliverables (or subparts thereof) that are uncompleted and/or which have not been accepted by Company prior to the effective date of termination.X.4. Company may terminate this Agreement in its entirety if Contractor (a) becomes insolvent or is unable to meet its debts as they mature, (b) files a voluntary petition in bankruptcy or seeks reorganization or to effect a plan or other arrangement with creditors, (c) files an answer or other pleading admitting, or fails to deny or contest, the material allegations of an involuntary petition filed against it pursuant to any applicable statute relating to bankruptcy, arrangement or reorganization, (d) shall be adjudicated a bankrupt or shall make an assignment for the benefit of its creditors generally, (e) shall apply for, consent to or acquiesce in the appointment of any receiver or trustee for all or a substantial part of its property, or (f) any such receiver or trustee shall be appointed and shall not be discharged within thirty (30) days after the date of such appointment.X.5. Termination of this Agreement for any reason under this Section shall not affect (a) any liabilities or obligations of either Party arising before such termination or out of the events causing such termination, or (b) any damages or other remedies to which a Party may be entitled under this Agreement, at law or in equity, arising from any breaches of such liabilities or obligations.VI. Representations and WarrantiesRepresentations and warranties are statements made by a party in a contract that confirm past or present facts that are important to the contract. These are statements upon which the other party can rely in agreeing to enter into the contract or in setting the price paid, etc. A representation is a statement of fact. If a representation is intentionally false, a plaintiff can make a common law claim of deceit (a tort) and allege fraudulent misrepresentation. A warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. The warrantys purpose is to relieve a promisee from the obligation of determining a facts truthfulness.Representations and warranties often survive the termination of the agreement.Issues to consider: Survival period Knowledge qualifiero Best knowledgeo Actual knowledgeo Whose knowledge?A. Sample Long ClauseX. Representations, Warranties and Covenants. Contractor represents, warrants and covenants to Company that:X.1. Contractor is not a party to any contract or agreement with any third party that would preclude Contractor from performing its obligations under this Agreement, or would impose any cost, penalty, fine or other obligation on Contractor or Company.X.2. The Deliverables do not include any materials owned by or licensed from third parties, unless disclosed on Exhibit A or otherwise consented to in advance by Company in writing.X.3. No information or materials developed or used by Contractor pursuant to this Agreement, and no advice provided by Contractor to Company, shall infringe, misappropriate or otherwise violate any confidential or proprietary information, any trade secret or any intellectual property right belonging to any third party.X.4. The Services and Deliverables provided to Company under this Agreement and use thereof by Company do not infringe or otherwise violate any third partys patent, copyright, trade secret, trademark or other intellectual property or proprietary right.X.5. At all times during the Term, Contractor shall comply with all applicable federal, state, and local laws and regulations.X.6. There is no action, suit, proceeding, or material claim or investigation pending or threatened against it in any court, or by or before any federal, state, municipal, or other governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, or before any arbitrator of any kind, that, if adversely determined, might adversely affect any Deliverable or Services or restrict Contractors ability to complete the transactions contemplated by this Agreement. Contractor knows of no basis for any such action, suit, claim, investigation, or proceeding.VII. IndemnityIndemnification is the right of one party who is legally responsible for a loss (the “indemnitee”) to shift that loss to another party (the “indemnitor”). (This is different from a guarantee, in which the guarantor is directly obligated to the 3rd party.) Indemnities often survive the termination of the agreement.What if there is no indemnity clause? Indemnification obligations do exist under common law for breach of contract, fraud, and other business torts. Lack of a contractual provision does not necessarily mean that indemnification is unavailable. However, having a contractual indemnity provides more certainty.Indemnification for attorneys fees might be reimbursement years later, or might be simply handing over the entire legal defense. A small company doesnt want to wait years for reimbursement, but a large company has the best lawyers and doesnt trust others.Short-term indemnification is sometimes accomplished by holding back part of the purchase price as escrow. Beware, though: large corporations have entire departments of creative accountants who never give back a penny of escrow.California Civil Code 3300:For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.Key components: Duty to Indemnify: pay damages on behalf of the indemnified party Duty to Defend: assume the legal defense of the indemnified party Carve-Outs: what actions (if any) will cause a party to lose its right to receive defense/indemnification? Any losses exempted? Process: when a claim arises, what are steps the indemnified party must take in order to obtain the benefits of this clause?Elements of an indemnification provision: Who is the indemnitor? If there is more than one, should liability be joint and several? Consider the creditworthiness of your indemnitor is it a subsidiary entity? Is it underfunded? If another entity is joined in the indemnity, make sure they sign onto the provision or they may not be bound. Who is the indemnitee? Should the provision be mutual or one way? Should you include a duty to defend? (You only want a duty to defend if you have confidence that the other guy is capable of defense.) What is the scope of the indemnification what does it cover? Everything that happens? Everything that happens as a result of the indemnitors act or omission? Everything that happens as a result of the indemnitors negligence? Wilfull misconduct? Only specific matters like environmental claims? Only third party claims? Does the obligation cover attorneys fees and costs? How long will the indemnification obligation last? Is there a maximum amount or “cap” on the total amount of the indemnification obligation? Does the cap apply to only specific things or all indemnity obligations?o Should you carve anything out of the cap? Willful misconduct? Violation of law? Breach of confidentiality agreement? Breach of other provisions that are of great concern such as maybe environmental representations or representations regarding other legal compliance issues or income tax or sales tax payments? Is there a minimum amount that must be reached before indemnification kicks in (a “basket”)? Is that minimum amount like a deductible and not subject to payment by the indemnitor (a “bucket”)? Is the indemnity the exclusive remedy for the claim or can parties also pursue their common law rights? Double dipping or double recovery on a claim is generally not permitted but if there are special provisions regarding allocation of risk like a cap, then in order for those provisions to have meaning the indemnification provision needs to be exclusive. Process for notice and proceeding with the indemnity. N