Contracts that Keep You Out of Court
Part
1 of 5
BY
T
HOMASH.
V
IDALRational businesspeople generally want to avoid
the courtroom. Litigation, as I regularly remind
my clients, is time‐consuming, expensive, and
risky. Because I primarily serve my clients in
resolving disputes through litigation, which
occur “ex post” (after the fact) rather than
addressing potential issues “ex ante” (before
the event), I do not get many opportunities to
share contract‐drafting tips that could help my
clients avoid having to visit me. I offer this
article to help businesspeople and their deal
lawyers to draft contracts that do not end up on
my desk.
This article is the first in a series of five articles
that will cover the major concepts of contract
drafting. This article addresses the anatomy of
a contract, the importance of “boilerplate”
provisions, and discusses risk allocation
provisions, such as representations and
warranties. Future articles will address (1)
covenants, rights, and declarations; (2)
assignments and delegations, conditions, and
discretionary authority; (3) term, termination,
defining the contract, and interpretative
provisions; and (4) drafting guidelines.
Introduction
In order to draft contracts that minimize the risk
of litigation, businesspeople must avoid the
temptation of treating a contract as a holy
artifact. Many clients—especially the ones who
document that says “contract” at the top, that
consists of no more than two pages, and that
has signatures at the bottom. But then these
same clients expect that contract to be “bullet‐
proof.” All this arrangement does is provide a
false sense of security to the client, which the
client will ultimately pay for through big
litigation bills.
Having a contract does
not protect a business;
having a well‐drafted
contract does, though.
Businesspeople must realize that effective
contract drafting takes time and a contract
must be custom‐drafted for each deal because
a contract is a blueprint. And just like a person
would not use a random set of blueprints to
build his or her dream house, he or she should
not use an “off‐the‐shelf” agreement to
document a business deal that is important
enough to warrant a contract in the first place.
According to Professor George W. Kuney,
“contract drafting is making a record of the
parties deal and creating the mechanisms to:
foster agreement; foster performance; and
provide for enforcement and dispute
resolution.”1
1 Tina L. Stark & George W. Kuney, T
Reusing an old form contract or a contract that
a business used on a prior “similar” deal often
gives businesspeople a false comfort because
that agreement was not likely crafted to
address the needs of the current deal. There is
nothing wrong with using a precedent form, but
it must be used cautiously and each provision
should be carefully evaluated in light of the
needs of the current deal. A contract that does
not address the specific issues of the deal may
be worthless when it is needed the most.
When is the contract
needed the most?
Well, typically, not until something goes wrong.
After a contract is signed, it usually gets filed in
a drawer (best case scenario) or left attached to
an email in one party’s inbox (worst case
scenario). No thought is given to the contract
until someone begins trying to break it or file a
lawsuit.
Having a contract does
not mean the other party
will do the right thing!
Another thing to keep in mind is that having a
contract in place does not mean that the other
party is going to do the right thing and abide by
the contract. Contracts, typically, are not “self‐
enforcing.” That is why an effectively drafted
contract provides specific remedies or risk‐
allocation provisions to provide mechanisms for
handling failures to perform. A contractual
right that does not have a related remedy for
non‐performance is ineffective and difficult to
enforce in court.
An effectively drafted
contract provides a
roadmap for enforcement.
As Professor Kuney admonishes: “[y]ou do not
want to have to sue for breach of contract. You
want to be able to sue to enforce the contract.
Your house, your rules, your remedies.”2 Suing
for breach of contract generally means seeking
to convince a judge or jury that the non‐
performing party should pay money or stop
doing something. A businessperson is in a
stronger position when he or she can enforce
the contract by persuading the court to grant
specific performance. How do you do that?
“You draft consequences into your contract.
You use your transactional tools….” to provide
“a road map for enforcement by the court and
there is nothing that a court likes better than a
contract that gives it that road map because it’s
an easy contract case to rule on.”3
The last introductory point to bear in mind is
that everything is negotiable. Every jot and
tittle of a contract can be negotiated—that
does not mean that the opposing party is going
to negotiate everything, but it means that a
contract is not set in stone and a
businessperson has an opportunity to negotiate
anything in the contract to make sure the
contract achieves his or her objectives.
Anatomy of a Contract
As mentioned above, a contract is not a holy
artifact. It is a blueprint, and blueprints come in
different styles but they all have the same basic
format. The same is true of contracts.
2 Id. at 156. 3 Id.
Most contracts have the following sections:
1) Title
2) Exordium (an overly fancy word for
“introduction”)
3) Recitals
4) Key Deal Points (the provisions that
address the substance of the deal, e.g.,
purchase price, services, delivery, and
the like)4
5) Governing Provisions / Boilerplate
a) parties, assignees, and third party
beneficiaries
b) events of default, dispute resolution,
and remedies
c) financial and risk allocation (e.g.,
representations and warranties,
insurance requirements, and
indemnity provisions)
d) communication between the parties
and the outside world (e.g., notice
provisions, and publicity restrictions)
e) defining the contract (e.g.,
provisions that require modifications
be in writing, and “integration and
merger” clauses)
f) interpretive provisions (e.g.,
severability clauses, and governing
law)
6) Definitions;
7) Signature Blocks; and
8) Exhibits, Attachments, Schedules,
“Standard Terms,” Etc.
4 Selecting the perfect term to describe these heart‐
of‐the‐deal provisions is an exercise in futility. In any
given deal, any provision could be a “key deal point,”
(such as a particular representation or warranty).
Please forgive the lack of precision.
Some drafters like to put the definitions at the
beginning of the contract; others prefer them at
the end. There is no cookie‐cutter way to
organize the sections of a contract and no
“legally required” way. There is what can be
considered “best practices,” and I believe that
the best practices include (i) structuring the
document so that “key deal points” come
before the governing provisions/boilerplate, (ii)
keeping related provisions close to each other,
and (iii) ensuring that the document flows as a
coherent whole from beginning to end.
By the way, one does not need to be a lawyer to
draft a contract. I almost invariably recommend
that a client retain counsel to negotiate and
draft the contract, but there is no law requiring
it.
Boilerplate Matters
I am not a fan of the use of the phrase
“boilerplate” to describe the material that
generally comes at the end of the contract.
Unfortunately the term is here to stay, so I will
use it. Boilerplate has a negative connotation— commentators deride the legal profession for
the use of boilerplate; businesspeople consider
boilerplate unimportant verbiage in the
contract that justifies lawyers charging
outrageous fees; and young lawyers frequently
copy‐and‐paste it from one contract to the next
without any thought.
In actual practice, it is
often the so‐called
boilerplate that contains
the key provisions that
impact who wins and who
One scholar defines boilerplate provisions as a
“road map, telling the parties how to govern
their relationship and administer the contract.”5
Boilerplate provisions come in a variety of
categories, including those that address the
following issues: (i) parties, assignees, and third
party beneficiaries; (ii) dispute resolution and
remedies; (iii) financial and risk allocation; (iv)
communication between the parties and the
outside world; (v) identifying what constitutes
the contract; (vi) interpretive provisions; and
(vii) others.6 In my view several of the
categories that Professor Stark describes as
“boilerplate,” I would prefer to classify as a
“governing provision.”
Financial & Risk Allocation
One reason parties enter contracts is to manage risk. According to one definition, risk
management “refers to the art of identifying,
analyzing, responding to, and controlling
project risk factors in a manner [that] best
achieves the objectives of all” parties to the
contract.7 Risk allocation in a contract is a form
of risk management. The point is not to
inequitably shift risk to one party, but instead to
place “risk upon parties according to their
ability to control and insure against risk.”8
In an entertainment contract for example, a film
producer will often seek to obtain a warranty
from the screenwriter that the screenplay is
wholly original and that exploitation of the
5
Tina Stark, NEGOTIATING AND DRAFTING CONTRACT BOILERPLATE, § 1.01 (2002).
6 Id. 7
Gerald I. Katz, CONTRACT RISK ALLOCATION at 7
(October 29, 2001), available at
http://tinyurl.com/6549mzy.
8 Id.
screenplay will not infringe upon the rights of a
third‐party. By making this provision a
“warranty” (as described below), the producer
has shifted the risk to the screenwriter.
Why is this reasonable? Because the
screenwriter is in the better position to control
the risk—he or she wrote the screenplay and
knows, for example, whether any of the
material contained in it was copied from
another source (which could infringe a third‐
party’s copyright), or makes untrue statements
about a real person (which could be
defamatory). There are several types of
financial risk allocation provisions—
representations, warranties, indemnity,
mandating one party obtain insurance, and
others. We will take a look at representations
and warranties and indemnity provisions.
A.
Representations
&
Warranties
The “Reps & Warranties” section of a contract is
frequently one of the most important sections
when a dispute arises. It is one of the sections I
review first when a client comes to me with a
contract dispute.
A warranty is a promise that a particular
statement is true. For example, one contracting
party may represent and warrant that the party
“is not subject to any conflicting obligation or
any disability that will or might prevent it from,
or materially interfere with, the execution and
performance of this Agreement.” If the
warranty turns out not to be true, the maker of
the statement will be forced to pay damages to
the recipient (if the recipient suffered damage
A representation, on the other hand, is a
“statement of fact as of a moment in time
intended to induce reliance.”9 According to
Professor Stark, the truthfulness of a
representation is measured “by going back in
time to when the representation was made and
comparing it to the facts at that time.”10 If the
representation was untrue at the time made,
and the other contracting party relied on the
representation, that party can sue for
misrepresentation. Of course, that party must
prove that he or she justifiably relied on the
representation. (A warranty, by contrast, does
not require reliance.)
What is the point of all of
these representations and
warranties?
Representations and warranties allocate risk
between the parties. When negotiating
representations and warranties, a
businessperson must realize that, while he or
she is not “negotiating a provision that includes
a dollar sign, in fact, they are negotiating money
because they are negotiating the likelihood of
being sued or being able to sue.”11
The contracting parties control the level of risk
allocation by how qualified the representation
is. An unequivocal representation (also known
as a “flat rep”) is the most risky to the party
making the representation and offers the most
protection to the party receiving the
representation. The more qualification
involved, the less risky/beneficial the
representation may be. Qualifying a
9
Id. at 162.
10 Id. 11 Id. at 168.
representation changes the standard of
liability.12
There are lots of different qualifiers. Take the
example above where the screenwriter has
represented that exploitation of the screenplay
will not infringe any third party’s rights. That is
an unequivocal representation. The
screenwriter could reduce his or her risk, for
example, by qualifying the representation “to
the best of his or her knowledge.”
B.
Indemnity
Indemnity, a scary sounding word, is an
agreement by one party to hold the other party
harmless. “It may be defined as the obligation
of one party (the indemnitor) to reimburse
another party (the indemnitee) for losses the
indemnitee incurs or the damage for which it
may be held liable.”13
Even if a businessperson does not include an
indemnity clause in his or her contract, the law
may provide one automatically. This type of
indemnity is known as eqitable indemnity.
When an indemnity provision is specifically
drafted in a contract it is referred to as
“express” indemnity.
Equitable indemnity will arise to protect one
party against the negligence of the other.
Express indemnity transfers risk from one party
to another regardless of fault.
In drafting express indemnity provisions, the
parties control the level of risk allocation by the
language they use to create the indemnity
obligation. For example, with a “broad form”
indemnity clause, the indemnitor assumes any
12 Id. at 166.
and all liability regardless of fault.14 On the
other hand, with an “intermediate form”
indemnity provision, the indemnitor assumes
any and all liability except that resulting from
the indemnitee’s sole fault.15 Finally, in a
“limited form” indemnity agreement, the
indemnitor assumes liability only to the extent
of his or her own fault or negligence.16 A
limited form essentially provides the same
rights granted under equitable indemnity.
Conclusion
As readers can readily see, there are a lot of
important provisions to consider in a contract
that go beyond the key deal points. These are
not secondary provisions; they are vital
components of a contract that will help a
business avoid the courtroom—or maximize the
likelihood of enforcement if the contract does
end up in court.
In the next article, we will discuss the important
concepts of covenants, rights, and declarations.
How Can AGMB Help You?
AGMB is a full‐service law firm that represents
clients in structuring, negotiating, and drafting
deals, as well as litigating contract and other
business disputes.
At AGMB we strive to deliver excellent results
efficiently. We do not offer “cut‐rate” services,
but we do respect our clients’ hard‐earned
dollars and do our best to keep costs down.
When you or your company is faced with a
complex dispute, or “bet the company”
litigation, we can provide the legal acumen,
14
Id. at 11.
15 Id. at 12‐13. 16 Id. at 14.
judgment, and skill necessary to help you
through it. Delivering top‐notch legal services is
our number one priority. Nevertheless, we
ensure that every dollar our clients spend
advances their case forward and achieves some
measurable goal in relation to case preparation.
Abrams Garfinkel Margolis Bergson, LLP
Web: www.agmblaw.com
5900 Wilshire Boulevard, Suite 2250
Los Angeles, California 90036
(310) 300‐2900 (tel.) / (310) 300‐2001 (fax)
237 West 35th Street, Fourth Floor New York, New York 10001
(212) 201-1170 (tel.) / (212) 201-1171 (fax) For a litigation consultation, please contact: Thomas H. Vidal at [email protected].
For a consultation about negotiating or drafting deals, please contact:
William L. Abrams at [email protected].
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informational and promotional purposes only
and does not constitute legal advice. You should
not act or refrain from acting on the basis of
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