Contract Drafting Fundamentals

PRESENTED BY

WILL MARSHALL
UBM LAW GROUP, LLP
JULY 23, 2020
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 Will Marshall is a co-founder of UBM Law Group. He has substantial
experience in drafting and negotiation of a wide range of commercial
contracts, including SaaS and traditional software licensing
agreements, supply, distribution, and broker agreements,
confidentiality agreements, and shareholders’ agreements. Mr.
Marshall also advises clients on compliance with the California
Consumer Privacy Act (CCPA) and the EU's General Data Protection
Regulation (GDPR). He is CIPP/E certified with the International
Association of Privacy Professionals (IAPP) in EU data protection. Prior
to co-founding UBM Law Group, Mr. Marshall served as General
Counsel and SEVP of Operations of Javo Beverage Company, a publicly
traded manufacturing company in Vista, California. As one of the
founding executives of Javo, he was integral in leading the ground-up

Will Marshall capitalization and commercialization of the company over the course
of a decade and has a deep understanding of the business challenges
Partner and concerns facing startup, micro- and small-cap companies.
Education: University of California, Los Angeles, JD; University of
California, Santa Barbara, BA, Eng. Lit.
Overview
• Resources
• Outside the Contract
• Anatomy of a Contract
• Categories of Language
• Ambiguity
• General Tips
 Resources
• Kenneth A. Adams
• A Manual of Style of Contract Drafting (Fourth Edition), Kenneth A. Adams (2018)
• Blog (www.adamsdrafting.com/blog)

• Bryan A. Garner
• (Black’s Law Dictionary, The Elements of Legal Style)
• Lawprose.org

• Vincent Martorana
• CLE presentation decks - search for “Vincent Martorana” + “drafting.”
• Guide to Contract Interpretation (2014) - also available on the internet.

• Negotiating and Drafting Contract Boilerplate, Tina L. Stark (2003)

• Contract Boilerplate for Non-Lawyers, Will Marshall https://ubmlaw.com/contract-boilerplate-for-non-lawyers/

• Working With Contracts: What Law School Doesn’t Teach You, (Second Edition), Charles M. Fox (2008)
 Resources
• IP Draughts - Mark Anderson (https://ipdraughts.wordpress.com/) - English law –
drafting resources
• Redline.net –forum for licensed attorneys to discuss contract drafting issues
• On Contracts – D.C. Toedt (www.oncontracts.com) – see choice of law cheat sheets
• The Contracts Guy – Brian Rogers (www.thecontractsguy.net)
• Transactional Skills Training: Contract Drafting – The Basics, Stark, Kuney
http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1162&context=transactions

• Transactional Skills Training: Contract Drafting – Beyond the Basics, Burnham et. al.
http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1167&context=transactions

• Contractcollective.com – to be launched marketplace for attorneys to buy/sell contract

templates and resources.
• Keith Bishop Blog (www.calcorporatelaw.com) (not contracts oriented, but great
corporate information for California, Delaware, and Nevada)
Goals of Good Drafting
• Be concise. Avoid redundancy and needless elaboration.
• Be precise. Avoid ambiguity.
• Be direct.
• Be consistent.
• Be literal. Don’t rely on common sense assumptions.
• Be complete (to an appropriate degree).
• Use plain English. Avoid archaisms.
• Make user friendly.
• Balance above with practical constraints.
 Factors Affecting Drafting
◦ Relative leverage of the parties ◦ Client acceptance of the importance of
◦ Client cost sensitivity written contracts

◦ Time constraints ◦ Client sophistication

◦ Over-reliance on samples and forms ◦ Client sacred cows

◦ Fear of deviating from common practice ◦ Term/type of contract (full performance

at execution vs. long term relationship)
◦ Value or importance of transaction
◦ Preparing first draft or reviewing
◦ Magnitude of risk
counterparty’s draft (and drafting
◦ Likelihood of risk subsequent changes) – has cost
implications for your client
◦ Client tolerance for risk
◦ Other side has same considerations
◦ Client tolerance for lengthy contracts
Opportunities to implement
best practices?
• Most your most-used forms drafted on your own time.
• Medium you produce first draft.
• Least counterparty produces first draft.

Opportunities to develop drafting skills are not as frequent as

one might think.

Producing the first draft can provide a negotiating advantage

as well as a greater opportunity to hone drafting skills.
 Types of Review
Business terms - Making sure you’ve captured the deal points.
What’s missing - Discerning what’s missing vs. reacting to what’s there.
Land mine - Expedited review looking for major issues and risk.

Remedies - Calling breach is a blunt remedy. Tailored consequences/remedies?

Opposing party - Reviewing from the opposing party’s perspective.
Obtuse - Eliminating the unconscious use of common sense to fill in blanks.
Pure drafting - Evaluating for clarity, concision, precision (ambiguity), etc.
Fresh eyes - Getting away from the draft. You will see things you missed.
Polishing/proofing - Punctuation, formatting, cross-references, orphaned defined terms, etc.

https://blawg401.com/modes-of-contract-review/
 Anatomy of a Contract
◦ Introductory Clause
◦ Recitals
◦ Opening Statement
◦ Business Terms
◦ Representations and Warranties
◦ Covenants
◦ Conditions
◦ Risk Allocation
◦ Carveouts, Baskets, and Caps
◦ Definitions; Defined Terms
◦ Boilerplate
◦ Closing Statements; Signatures
 Introductory Clause (Preamble)
Identifies title of agreement, agreement date, and the parties, including
defined terms for the parties
Examples:
Don’t: This Securities Purchase Agreement (this “Agreement”), dated as of the 1st day of July, 2020, is
made by and between Giant Co., a Nevada corporation, and its affiliates (“Giant”) and Investor,
LLC, a California limited liability company (“Investor”). The parties may sometimes also be
referred to in this Agreement individually as a “Party” and together as the “Parties.”

Do: This Services Agreement is dated July 1, 2020, (the “Effective Date”) and is between Giant Co.,
a Nevada corporation, (“Giant”), Tiny, LLC, a Delaware limited liability company, (“Tiny” and
with Giant, the “Giant Parties”) and John Doe, an individual, (“Customer”).

Do: This Securities Purchase Agreement (this “Agreement”) is effective on the date of the latest
signature below (the “Effective Date”) and is between Giant Co., a Nevada corporation
(“Giant”) and John Smith, an individual, (“Investor”).
 Introductory Clause: Dating
Issues
◦ State a date in the preamble or have the signatories date their signatures, but not both.

◦ Use a fixed date on larger transactions with multiple related documents where signatures will
be collected and held on different days, but a specific closing date is desired. Also, where
continuity is important (e.g. Software as a service subscription renewal).

◦ “dated as of” is supposed to indicate date shifting, but is inconsistently used that way.

◦ Be careful when backdating or forward dating. It can be harmless. It can create unintended
consequences. It can be fraudulent.

◦ If the contract has significant disconnect between the desired date of the contract and date of
the signatures, consider directly addressing rather than just backdating or forward dating.

◦ See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1112845 for an article on backdating

agreements.
Recitals
◦ Use to provide background or context that would be helpful to a later
reader of the contract.
◦ Do not include recitals that contribute nothing.
◦ Do not include operative contract language (but ok to define terms).
◦ Don’t incorporate recitals into the “Agreement” by reference or affirm
that the recitals are accurate. Recitals are not the place for material
statements of fact. Instead include as representations.
◦ Do not use “WHEREAS.” List as 1,2,3/A,B,C or without enumeration.
Opening Statement
Don’t:
WITNESSETH
“NOW, THEREFORE, in consideration of the mutual obligations hereinafter set forth and for other
good and valuable consideration the sufficiency of which is hereby acknowledged, the parties to
this Agreement hereby agree as follows:”

Do:
Without Recitals: “The parties agree as follows:”
With Recitals: “The parties therefore agree as follows:”

“Agree” should only appear in the opening statement.

Business Terms
These express the basic business terms.
“Joe shall provide the Services to Bob. Bob shall pay Joe a fee of $40.”

This is often the total focus for clients.

• They express the commercial “deal” by which benefit is gained.
• It’s often good to aggregate these terms into an exhibit, order form, or SOW
where business people can view the deal terms one place.
Representations and
Warranties
Representation
• A statement of a past or present fact made to induce someone to enter into a contract.
• Used as an alternative or supplement to due diligence or to otherwise risk shift. If I cannot
know or practically investigate whether an important thing is accurate, I can force the other
party to state that it’s accurate at their risk of being liable if it’s not.
• can be structured in various ways as to timing when made, period covered, whether
knowledge qualified, how multiple parties making them are doing so (separately, jointly,
etc.). Be careful.

Warranty
• A term or promise in a contract, breach of which entitles the innocent party to damages or
other specific remedy but not to treat the contract as discharged by breach.
• A promise that something in furtherance of the contract is guaranteed by one of the parties,
especially a party's promise that the thing being sold is as promised.
 Representations and
Warranties
“represents and warrants”
◦ Ken Adams argues that the phrase “represents and warrants” is a pointless
redundancy and that one should say “states” or, for a series of statements, “states that
the following facts are accurate:”

◦ See Adams’ MSCD and posts such as https://www.adamsdrafting.com/the-semantics-

fallacy-underlying-represents-and-warrants/ for debate on “represents and warrants”

◦ Don’t: Company represents, warrants, covenants, and/or agrees . . .

Covenants
A covenant is a continuing promise to do or refrain from doing something.
Ancillary obligations to mitigate risk, protect a party’s interests, help ensure
performance, etc. as distinguished from central obligations.

Some types of covenants:

◦ Financial covenant – Maintain a financial state – e.g., a liquidity ratio
◦ Operating covenant – Maintain a business operations state – e.g., have at least 100
restaurant locations.

Common in debt and equity financing arrangements and in merger and

acquisition transactions.
Conditions
An uncertainty the outcome of which determines the applicability of certain
contract provisions.
Condition Precedent: X must occur or be satisfied before I am obligated to do Y.
Condition Subsequent: If X happens, then my obligation to do Y will cease.

Examples:
◦ If the audit shows an underpayment exceeding 5% of the aggregate payments during the
preceding 12 months, Licensee shall pay . . .
◦ If Big Co. fails to procure insurance, Newco may purchase insurance at Big Co.’s
expense.
◦ This agreement will terminate upon Big Co. filing bankruptcy.
 Conditions
If the closing conditions are not satisfied, Buyer is not obligated to purchase Newco.
Conditional clause (the uncertainty) If the closing conditions are not satisfied
Subordinator if (so long as, until, unless)
Matrix clause (provision triggered) Buyer is not obligated to purchase Newco.

The proviso, “provided that” or “provided, however, that” is often used as a

subordinator to mean “on condition that.” However, it can have multiple other
meanings – limitation, addition, exception. Use more precise wording.
◦ “except that”
◦ “on condition that”
◦ “in any event”
Conditions
Don’t use “shall” in a conditional clause.

Don’t: “Seller’s landlord shall have consented to the lease assignment. . . “

Do: “Seller’s landlord has consented to the lease assignment . . .”

“to the extent that” as a subordinator

Company shall indemnify Customer unless the Claim resulted from Customer negligence.
Company shall indemnify Customer except to the extent the Claim is due to Customer
negligence.

The first is binary. The second indicates proportionality.

 Risk Allocation
Indemnification – a promise by one party (indemnitor) to compensate another party (indemnitee) for specified
claims, liabilities, and losses, usually in relation to a third party (although not in M&A). It is a means of shifting or
allocating risk to a particular party.

Seller shall indemnify, defend, and hold harmless, Buyer from and against all third party demands, claims,
losses, liabilities, damages, judgments, costs, fees (including reasonable attorneys’ fees and costs) arising out
of or relating to the actual or alleged infringement or misappropriation by the Products of a third party’s
Intellectual Property Rights. The foregoing obligation in conditioned upon Buyer promptly providing Seller
with written notice of the claim. Seller may assume control of the defense of the claim and may settle the
claim without the consent of Buyer if the settlement includes a final release of all claims against and does not
impose any obligations on Buyer.

“indemnify” to pay or compensate other party for its own liabilities/losses

“defend” creates duty to defend (hire attorneys and litigate) on behalf of indemnitee.

“hold harmless” conflicts as to meaning. Some say synonymous with indemnify. Some say confusing jargon.
Others say it is a release by indemnitor of claims against indemnitee.
Risk Allocation
An indemnity is like a mini insurance policy.
◦ Consider the solvency of the indemnitor as the “insurer.”
◦ Consider the capacity and likelihood of the “insurer” to resist
indemnifying.
◦ Consider all the procedures needed for “coverage” that aren’t always
addressed in an indemnity provision, such as notice of the claim and
right to control the defense and settled claims.
◦ Consider the above whether you represent indemnitee or
indemnitor.
 Risk Allocation
Limitations of Liability – Provisions that limit types and amounts of damages and liability of a party.
Sample: In no event will either party be liable to the other party or any third party for consequential, special,
indirect, incidental, or punitive damages arising out of this agreement.
Company’s aggregate liability under or relating to this agreement, regardless of the form of action
(whether contract, tort or otherwise), is limited to an amount equal to the lesser of (i) aggregate paid
sales of product hereunder during the six months preceding the date on which the claim first accrued (as
indicated by invoice date) and (ii) $100,000.

Both are often subject to certain exceptions such as breach of confidentiality and intellectual property ownership.

Certain risks like data breach are often made subject to super-caps as a compromise.

Terms like “consequential” and “incidental” damages are often misunderstood in this context. Be careful when
excluding these damages and things like “lost profits” and “diminution in value damages”, particularly in the
mergers and acquisition context! You might be cutting off expected, recoverable damages.
See: https://www.adamsdrafting.com/excluding-consequential-damages-is-a-bad-idea/
https://www.adamsdrafting.com/follow-up-on-consequential-damages/
https://www.weil.com/~/media/files/pdfs/Bus_Lawyer_May_08_West.pdf
Carveouts, Baskets, Caps
Provisions can have exceptions and limits of different types.

◦ Carveout – a permitted exception

◦ The Issuer shall not incur any Indebtedness, except in form of trade debt incurred in the ordinary
course of business.

◦ Basket – an exception permitted up to some specified amount (usu. in dollars).

◦ The Issuer shall not incur any Indebtedness, except for Indebtedness in an aggregate amount not
exceeding $10,000 at any one time.
Carveouts, Baskets, Caps
Different types of exceptions and limits.
◦ Deductible Basket – A party must indemnify the other party for claims/losses over a certain
threshold.

◦ The Indemnifying Party will not be liable to the Indemnified Party for indemnification under Section 8.02 until
the aggregate amount of all Losses in respect of indemnification under Section 8.02 exceeds $50,000 (the
“Deductible”), in which event the Indemnifying Party will only be liable for Losses in excess of the Deductible.

◦ Tipping Basket – Once an amount exceeds a threshold, then party must indemnify from the first
dollar.

◦ Buyer will not be liable to the Seller for indemnification under Section 8.02 until the aggregate amount of all
Losses in respect of indemnification under Section 8.02 exceeds 1% of the Purchase Price, in which event Buyer
will be liable for all the Losses from the first dollar.

◦ Mini Basket - A small threshold below which the amount will not even be counted toward a
general basket to avoid bothering a party over immaterial amounts.
 Definitions; Defined Terms
Create appropriate and helpful defined terms

Don’t: “Pink Bunny” means a shareholder selling Shares pursuant to Section 4.

Do: “Selling Shareholder” means a shareholder selling Shares pursuant to Section 4.

Don’t use “shall mean”

Don’t: “Selling Shareholder” shall mean a shareholder selling Shares pursuant to Section 4.

Do: “Selling Shareholder” means a shareholder selling Shares pursuant to Section 4.

Don’t embed operative provisions in a definition.

Don’t: “Indebtedness” means trade debt, bank debt, and lease obligations, which Company shall not
incur in an amount in excess of $10,000 following the Closing Date.

Don’t draft circular definitions.

Don’t: “Procedure” means the procedure Vendor shall follow.

 Definitions; Defined Terms
Don’t overuse defined terms.

Be careful when using defined terms. They are very powerful and can have unintended consequences. Do a ‘find’ on
the term to review each use of it and make sure the definition is appropriate.

They can be inline in the text of the contract, placed in a separate definitions section, or both.

When defining inline, make sure the defined term encompasses the desired definition.

trademarks, patents, and copyrights (“Intellectual Property”) owned by Seller

trademarks, patents, and copyrights owned by Seller (“Intellectual Property”)
Placement of defined term can cause ambiguity.
A blue ball and a teddy bear (a “Toy”) . . . (is Toy only a teddy bear or also a blue ball?)
A blue ball and a teddy bear (each, a “Toy”) . . .

Don’t: The agreement (this “Agreement”) dated June 5, 2020, between Bigco Inc. (“Bigco”) and Tinyco Inc.
(“Tinyco”).
 Boilerplate
See article Contract Boilerplate for Non-Lawyers, by Will Marshall available at
https://ubmlaw.com/contract-boilerplate-for-non-lawyers/ for more information.
Successors and assigns - Provides that a non-assigning party is bound to treat assignee
as they would the assigning party. Often misunderstood and
subject to varied court interpretation.

Force Majeure - Excuses performance for unforeseen events that make

performance not practicable or possible. Use care in using
this clause. Sometimes you expect the other party to plan for
events that might be accidentally excused by a typical FM
clause (e.g. a power outage for a hosting provider).

Severability - Where a provision in a contract is deemed unenforceable, this

provision attempts to tip the court in favor of enforcing the
remainder of the agreement instead of deeming the entire
contract unenforceable. Make sure if provisions of
questionable enforceability were not enforced that you would
still want the rest of the contract enforced.
 Boilerplate
See article Contract Boilerplate for Non-Lawyers, by Will Marshall available at
https://ubmlaw.com/contract-boilerplate-for-non-lawyers/ for more information.

Integration clause - States that the contract is the entire agreement in order to
avoid a claim that external representations or other terms
not in the contract were nevertheless enforceable parts of
the contract. Make sure not to inadvertently supersede
existing or ancillary agreements.

Time is of the essence - Often overlooked clause. Allows buyer/customer to treat

what would otherwise be usually deemed immaterial
performance delays as material breach or grounds for
termination. To be enforceable, must be used deliberately
as to specific performance obligations and not purport to
apply to the entire agreement. Some argue it has no
predictable meaning in practice. Time sensitivity is better
expressed more directly.
Closing Statements; Signatures
The closing statement or concluding clause can reference either the date at the beginning
or dates entered by the signatories.
The closing statement is not legally necessary.
Examples:
Don’t: IN WITNESS WHEREOF, the parties hereto have caused this Licensing Agreement to be executed as of
[the date first written above][the Effective Date][the latest date entered below] by their respective officers
thereunto duly authorized.

Do: The parties are signing this Purchase Agreement on the date stated in the introductory clause.

Avoid archaisms like “In Witness Whereof.”

Where there are multiple related transaction documents, insert a section break before the
signature page (to be able to omit a page number on the sig page) and consider making a
reference to the agreement title (e.g. this Security Agreement) so that it can be
appropriately married with the correct agreement.
Closing Statements; Signatures
Signature Block Examples

For a natural person:

__________________________
Sally Smith

For an entity:

ACME CORPORATION:

By:___________________
Name:_________________
Title:__________________
Closing Statements; Signatures
Nested Signature – go until you reach an authorized human.

GET RICH PARTNERS, LP

By: Venture Fund IV, LP

its general partner

By: Venture Corp.,

its general partner

By: __________________
Name: Sally Smith
Title: President
Categories of Contract Language
• Agreement
• Performance
• Obligation (Prohibition)
• Discretion
• Declaration
• Policy
• Intention
Language of Agreement
Indicates agreement to the contract language generally.
Should appear only in the opening statement.

Do: The parties agree as follows:

Don’t: Company agrees that it will deliver the Performance Report.

Don’t: The parties agree they will negotiate a security agreement.
Don’t: The parties hereby agree as follows.
Language of Performance
Where performance is accomplished by entering into the agreement.
Indicated by appropriateness of “hereby” – (“hereby” means “by the
language in this agreement, I perform”)
Use active voice and present tense.
Do: Big Co. hereby grants Acme Co. a license to . . .

Don’t: Big Co. agrees to assign . . .

Don’t: Big Co. does hereby license . . .
Language of Obligation (or Prohibition)
Indicates a duty or obligation to do something (or refrain from doing something).

Use “shall” or “shall not.” But can also be expressed by “will” or “must”. However, “will” is
better used to express futurity. “Must” is better used to express a condition or separate duty or
requirement.
If the Business must obtain a license, then I shall notify you.

Test for language of obligation and appropriate use of “shall” by mentally replacing “shall” with
“has a duty to.”

Do: Company shall [has a duty to] deliver the Product on the Delivery Date.

Don’t: Company must deliver the Product on the Delivery Date.

Don’t: Company agrees to deliver the Product on the Delivery Date.
Don’t: The Product shall be delivered by Company on the Delivery Date.
Don’t: Company undertakes to deliver the Product on the Delivery Date.
Language of Obligation (or Prohibition)
Don’t purport to impose an obligation on a non-party.
Don’t: Company’s accounting firm shall deliver the Financials to Big Co. on
or before . . .
Do: Company shall cause its accounting firm to deliver the Financials to
Big Co. on or before . . .

Don’t create obligations that are not in the party’s control.

Don’t: Big Co. shall obtain the consent of Landlord.
Do: Big Co. shall use reasonable efforts to obtain the consent of Landlord.
Language of Obligation (or Prohibition)
“Shall” is frequently misused – so much so that Garner advocates not using it at all.
It is often (improperly) used to communicate, “I mean it!”

Don’t: This agreement shall be governed by the laws of California.

Don’t: The Licensor shall be in breach if . . .
Don’t: Supplier’s liability shall be limited to $100.
Don’t: Affiliate shall mean an entity that owns or is owned by a party.
Don’t: In no event shall Customer be obligated to disclose . . .
Language of Discretion
Indicates that a party is permitted to do or not do something.
Can be expressed with “may” or “is permitted to.”
Indicating permission to do one thing can imply prohibition against doing other
things. This is referred to as “naked discretion.”
e.g., You may go to the store on Tuesday.

Implies that I am not allowed to go to the store on other days or perhaps at all.
Thus, discretion should be used only as an exception to an
obligation/prohibition - not by itself.
Do: Big Co. shall not grant a License, except Big Co. may grant a License to Acme
Co.

Don’t: Big Co. may grant a License to Acme Co. (naked discretion)
 Language of Discretion
Don’t use language of discretion to impose an obligation.

Don’t: Company may solely purchase Company’s requirements for the Goods exclusively from
Supplier during the term.

This could mean Company has the option (discretion) to buy only from Supplier or to not
buy only from Supplier.

Do: Company shall purchase Company’s requirements for the Goods exclusively from
Supplier during the term.

See https://www.adamsdrafting.com/shall-not-unless-versus-may-only-if/ for Adams, Stark,

Martorana, and others debating approaches to conveying discretion.
Language of Declaration
A statement as to the accuracy of (or acknowledging) a fact.

Examples:
◦ Company represents that . . .
◦ Purchaser acknowledges it has received a copy of the Shareholders’ Agreement.

Language of declaration is akin to language of performance in that the

words themselves have the effect.

Don’t include extraneous adverbs. E.g., “Company unconditionally

represents and warrants” or “Company expressly acknowledges”

Don’t say a party “acknowledges and agrees”

Language of Policy
States rules for one or more parties (other than an express obligation or
prohibition), or for interpretation or structure of the agreement.

Examples:
◦ Any attempted assignment of Consultant’s obligations is void.
◦ The term of this Agreement commences on the Effective Date and expires on July 4,
2021.
◦ “End User” means an individual authorized pursuant to Section 4 to use the System.
◦ The internal laws of the state of California govern all matters arising out of this
Agreement.
Language of Policy
Use present tense for policies that apply upon effectiveness or express
something that will occur at a specific time in the future.

The Transition Period terminates on May 22, 2017.

Use “will” for future events that may or may not occur or will occur at
an uncertain time.
Period will terminate upon a Significant Corporate Transaction.
Language of Intention
A statement expressing what the parties intend but cannot necessarily
make so through the agreement.

Examples:
◦ The parties intend for this Incentive Plan to be exempt from Rule 409A.
◦ The parties intend that Contractor will be an independent contractor of the
Company.
Language of Intention
Often drafters state intention in the form of declaration notwithstanding
the uncertainty.

Example:
◦ Contractor is an independent contractor of the Company.

As a related matter, magic words and phrases are often used to try to make
a thing so. Saying it doesn’t make it so.
◦ “coupled with an interest”
◦ “signed by the party’s duly authorized agent”
◦ “for good and sufficient consideration”
Ambiguity with “And”
“And” – a set in its totality.
Subject Ambiguity
Example:
⸰ Parent Co and Sub Co shall notify Shareholder.

This could mean:

◦ Parent Co shall notify Shareholder and separately Sub Co shall notify Shareholder.

◦ Parent Co and Sub Co, acting collectively, shall notify Shareholder.

◦ Parent and Sub, collectively or separately, shall notify Shareholder.

Consider whether “and” means collectively or separately or both.

Ambiguity with “And”
“And” – a set in its totality.
Modifier or Distributive Ambiguity

Example:
◦ Transfers and Assignments by Contractor prohibited by this Agreement are void.

This could mean:

◦ Transfers prohibited by this Agreement are void and Assignments by Contractor prohibited by
this Agreement are void.
◦ Transfers by Contractor prohibited by this Agreement are void and Assignments by Contractor
prohibited by this Agreement are void.
◦ Transfers are void and Assignments by Contractor prohibited by this Agreement are void.

It can be unclear what a modifier is intended to modify – A & B or just B.

Ambiguity with “Or”
“Or” – a choice among members of a set.
Inclusive/Exclusive Ambiguity
◦ Company may blacklist any facility that (i) has a Recall or (ii) fails an Inspection.

This could mean:

◦ Company may blacklist any facility that (i) has a Recall or (ii) fails an Inspection or both (i) and (ii).

◦ Company may blacklist any facility that (i) has a Recall or (ii) fails an Inspection, but not both.

Consider whether the “or” is meant to be inclusive (first meaning) or exclusive

(second meaning) and revise accordingly.
◦ Company may blacklist any facility that (i) has a Recall or (ii) fails an Inspection or both (i) and (ii).

There is not always ambiguity with an “or” set. E.g. “Bigco, Smallco, or Midco shall
pay the fee.” (As soon as one pays, the obligation is performed.)
Ambiguity with “and/or”; Final Thoughts
“And/or”
◦ A and/or B means A or B or both A and B.
◦ Saying “A or B or both” or “one or both of A and B” is better.
◦ Saying “A, B, and/or C” could mean “one or all” or “one or more” of them.
◦ Saying “A and/or B shall do X” is ambiguous. Do both need to do it or will one suffice?
◦ Many use “and/or” when they really mean “or” or “and.”
◦ See this from Garner: https://www.lawprose.org/lawprose-lesson-209-ban-andor/

Try to become attuned to this type of ambiguity and then restructure (usually
requiring extra words) to eliminate the ambiguity.
Read chapters in Adams’ MSCD on ambiguity and Transactional Skills Training:
Contract Drafting – Beyond the Basics, Burnham on ambiguity (see discussion of
“and” “or” on pg. 258)
◦ http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1167&context=transactions
General Tips
“That” vs. “Which”
“that” introduces essential information. Limits it to what follows “that.”

“which” is preceded by a comma and simply adds extraneous description. Nonrestrictive.

Example: I have 10 apples in a basket. Four have worms and six do not.
Do: “Let’s eat the apples in the basket that have no worms in them.”
– refers to 6 apples.
Do: “Let’s eat the apples in the basket, which have some worms in them.”
– refers to all 10 apples.

Don’t: “Let’s eat the apples in the basket which have worms in them.”
- ???

“Which” is overused and usually incorrectly. It generally does not belong in a contract, which
is not a place for extraneous information. (Note, England follows different rules on this.)
General Tips
Avoid the inadvertently overbroad statement.
◦ Shareholder has no voting rights in Acme Corp.
◦ Shareholder has no voting rights in Acme Corp. on account of its preferred shares.

Know the value of generating (“controlling”) the initial draft of a contract or of

having the pen in drafting later agreed changes. But also appreciate that your
client may not be able to afford that.

In negotiating, whenever asking for something that is often drafted as a mutual

provision (e.g., a limitation of liability), if you ask for it unilaterally in your favor
be prepared for the other side to ask to make it mutual in which case you may
have to be on the receiving end of your own language.
General Tips
Use brackets “[]” around language that is rough, needs to be later completed,
and around inline comments. You can use the “find” function to quickly look for
them later when cleaning up the document.
Use yellow highlighting for items you wish the client to see. They will not see
brackets. They will also always leave in brackets.
Provide comments in an email in a numbered list. This allows easier tracking of
counter-comments.
Be careful to distinguish comments (in and out of the contract) meant for your
client only and those that can be shared with the counterparty. Some clients
are not sensitive to this and forward internal comments to the other side.
Subsection enumerations in the form of ( i), (ii), etc. are called romanettes as in
“refer to romanette (iv) of Section 5.”
 General Tips
Document file management and Microsoft Word tips:
• Invest in a good document comparison program. I use Change-Pro by Litera. Don’t rely
on the other side’s redlines being accurate. Check for unmarked edits. Use to compare
different drafts to orient yourself.
• Develop a sound file naming convention to indicate who marked up the draft and its
position in the various versions. Some use dates, however, since I can turn multiple
versions on a single date, I mark the end of the file with my initials in parentheses (WM)
and then v2, v3 etc. as in “Purchase Agreement(WM).v3.docx”
• I advance the version (e.g., v2 to v3) whenever I have sent the document to anyone or if
I want to preserve a version because I’m going to make significant global changes (trying
to fix formatting) or if I haven’t worked on the document for a significant period and
want to preserve the draft in its form when I last worked on it.
• Read my article on Microsoft Word tips here:
https://www.sdcba.org/index.cfm?pg=BusinessandCorporate20170221
CLE Code

2327
cle@litigationconferences.com
Contract Drafting Fundamentals

Questions?

WILL MARSHALL
UBM LAW GROUP, LLP
WWW.UBMLAW.COM
WMARSHALL@UBMLAW.COM