DRAFTING CONTRACTS:
TIPS FROM A COUPLE OF BUSINESS LITIGATORS
Fulkerson Lotz LLP
Thomas M. Fulkerson
Kelly J. Kirkland
Fulkerson Lotz LLP
700 Louisiana, 52nd Floor
Houston, Texas 77002
(713) 654-5800
“Businessmen habitually adventure large sums of money
on contracts which, for purposes of defining legal
obligations, are a mere jumble of words.”
Phoenix Ins. Co. of Hartford v. De Monchy, 141 L.T.R. 439, 445 (H.L. 1929) (Lord Atkin).
Background: Statute of Frauds – England, 1677
Background: Statute of Frauds – England, 1677
• Juries were still settling into their new
role as neutral deciders of fact on the
basis of testimony from witnesses.
• Perjured testimony -- there was a highly
developed underground industry devoted
to manufacturing perjured testimony.
Breach Of Contract Litigation: Two Common Scenarios
The Misunderstanding:
Both parties thought about the issue in question
when the contract was negotiated but have
different understandings about how it was
resolved.
The Unforeseen Situation:
Neither party thought about the issue in question
when the contract was negotiated.
The Misunderstanding
Problem: The contract speaks to the issue in
question but not clearly.
Solution: Avoid ambiguity when drafting.
“A word is not a crystal, transparent and
unchanged; it is the skin of a living thought
and may vary greatly in color and content
according to the circumstances and the time in
which it is used.”
Towne v. Eisner, 245 U.S. 418, 425 (1918) (J. Holmes)
“ambiguous”
contract language is ambiguous when it is
“reasonably susceptible to more than one meaning.”
See, e.g., Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).
Is the Contract Ambiguous?
Common Misconception
Actual Law
Surrounding
Circumstances
“Evidence of surrounding circumstances may
be consulted. If, in light of surrounding
circumstances, the language of the contract
appears to be capable of only a single meaning,
the court can then confine itself to the writing.”
Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726,
731 (Tex. 1981)
“Whether a contract is ambiguous is a question
of law that must be decided by examining the
contract as a whole in light of the circumstances
present when the contract was entered.”
Anglo-Dutch Petroleum Int’l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d
445, 449-450 (Tex. 2011) (quoting Columbia Gas Transmission
Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996).
Kelly J. Kirkland, “You Say You Want a Revolution: The Troubled Legacy of Sun
Oil Co. (Delaware) v. Madeley, 40 Texas Tech Law Review 277 (2008).
Contact: kkirkland@fulkersonlotz.com
Recital Clauses
• The critical function of “recital” (“Whereas”) clauses in
a contract is to discuss the surrounding circumstances
that the parties want the court to know about when it
makes this determination.
• When you draft recital clauses, you are not speaking
to your client or to the other side—they already know
the surrounding circumstances. You are speaking to
the judge.
Whereas
Drafting Guidelines
• Clear, precise, short sentences.
• One point per sentence whenever possible.
• Define key terms, use consistently throughout
the contract.
Avoid Circular Definitions
“Permanent Improvement”
“A Permanent Improvement is an
improvement that is permanently affixed
or attached to the Property.”
Ambiguity (equivocation):
Equivocation occurs when a word has two or more
possible meanings.
“A or B” can be ambiguous:
1. A or B (but not both) – aut in Latin
2. A or B (and perhaps both) – vel in Latin
3. A or B (A, that is to say B) – sive in Latin
Ambiguity (amphiboly):
Amphiboly occurs when a sentence or phrase has
two or more possible meanings, usually due to
problems in grammar, sentence structure, or
punctuation.
“Xxxxx xxx xxxxx xxx xxxxxx xxx xx xxxx.”
Ambiguity (amphiboly):
“Each vehicle shall contain an enclosed operator’s
cabin and storage compartment.”
Enclosed = Enclosed Operators Cabin
Enclosed = Enclosed Operators Cabin + Storage Comp.
Enclosed = Enclosed Operators Cabin + Enclosed Storage Comp.
Ambiguity (amphiboly):
Compare:
“Each vehicle shall contain an operator’s cabin and
storage compartment, and the operator’s cabin and
the storage compartment shall each be separately
enclosed.”
Enclosed = Enclosed Operators Cabin + Enclosed Storage Comp.
Last Antecedent Rule
“This contract shall apply to pens, pencils, and
crayons less than six inches long.”
Compare: “This contract shall apply to pens,
pencils, and crayons but only to the extent
that such pens, pencils, and crayons are less
than six inches long.”
Calculations
Consider giving a detailed, completely workedout example instead of, or in addition to, a
description of the algorithm.
If you give both an example and an algorithm,
make sure they are consistent and provide which
one prevails in case of an unintentional conflict.
Make sure every pronoun – especially “it” or “its”
- has an explicit and unmistakable reference.
“including” – “including but not limited to”
choice of law –
“The law of the State of Texas, without regard to
its choice of law rules, shall govern all matters
arising out of or relating to this contract.”
If you use a vague term or phrase (e.g.,
“reasonable,” “adequate,” “where applicable,” “to
the extent practicable”), only do so intentionally.
Drafters of statutes and constitutions
often do this:
–“Due process of law”
The Unforeseen Situation
Problem: The contract does not speak to the
issue.
Solution: Try to anticipate as many issues as
humanly possible.
The Unforeseen Situation
Fleshing out the deal in the course of drafting the
contract:
Keep asking “What if …?”
Make a note of each problematic scenario as it
occurs to you. Don’t wait until later.
Conduct a “Premortem”
Daniel Kahneman, Thinking, Fast and Slow, pp. 264-5:
Assume that it is some time in the future. Assume further
that the deal has fallen apart and the parties are in
litigation. Write a few sentences about what went wrong.
Even better – get your client to do it also.
Take Advantage of Accumulated Wisdom
• Look at similar contracts in the industry.
– What future problems do they anticipate?
• Look at reported decisions in cases involving
similar contracts in the industry.
– What did the parties fight about?
• Look at articles about the future of the industry.
– What do they predict?
Examples of Issues Often Left Unaddressed in Contracts
• Prices go up/down.
• Supplies run out.
• Performance gets delayed.
• New technology replaces/modifies goods, means of
transportation or communication, etc.
• Reference guidelines – for example, the Consumer
Price Index (CPI) or the London InterBank Offer
Rate (LIBOR) – are changed or cease to be published.
• Governing laws/regulations change.
Conclusion
CONCLUSION
The extra time you invest now can
pay great dividends down the road.