TIPS FOR DRAFTING PURCHASE CONTRACTS
Copyright 2001-2008 by James W. Martin. All rights reserved.
Written for presentation at the Lorman Education Services,
"Purchasing Law in Florida" Seminar, Miami, Florida, Nov, 2001
This article is an adaptation of the author’s article
“Fifty Tips for Writing the 21st Century Contract That Stays Out of Court”
Welcome to the 21st Century. Where practicing law requires us to don the garb of computers and the Internet. And where litigation is as costly as ever. Lawyer bills running $10,000 a month are not unusual in a hotly contested breach of contract lawsuit. With every word, phrase and sentence carrying the potential for winning or losing, the stakes are high. Simple logic, therefore, directs us to cautious and thoughtful drafting.
Drafting contracts is actually one of the simple pleasures of practicing law. At the Florida Bar Convention in 1997 I presented 50 tips for contract writing. At the 2000 Convention I presented an article that updated those tips in the context of our new tools and abilities in the 21st Century. This article applies those tips to drafting purchase contracts, as well as other types of contracts. Following these tips could result in your writing a contract that is so clear no one will want to litigate it, saving you or your client from the trials and tribulations of litigation, truly a good reason to write the contract that stays out of court.
These tips apply to writing all kinds of purchase contracts: sales agreements, purchase agreements, equipment leases, financing agreements. Wherever clarity and simplicity are important, these tips will guide you there. The Appendix provides a few sample forms to illustrate these tips.
Before You Write the First Word
1. List the deal points. This can be in the form of a list, outline or narration. Doing this will help you focus on the terms of the agreement.
Engage in "what if" scenarios. A good contract
will anticipate many possible factual situations and express the
parties’ understanding in case those facts arise. Talking to
your client or associates about this will generate many issues
you may not otherwise consider. Avoid this problem:
3. Ask your client or associates for a similar contract. Frequently, clients and firms have had similar transactions in the past or they have access to contracts for similar transactions.
4. Search your office computer or the Internet for a similar form. Many times you can find a similar form on your computer. It may be one you prepared for another client or deal or one you negotiated with another lawyer. Just remember to find and replace the prior parties’ names. Starting with an existing form saves time and avoids the errors of typing. Here are some Web sites where you can find forms:
The Florida Supreme Court links page, Self-Help Center:
5. Obtain forms in books or CD-ROM. Typical forms of contracts can be found in form books, such as West's Legal Forms (a nationwide set) and Florida Jur Forms, as well as in treatises and Florida Bar CLE publications. These can be used as the starting point for drafting the contract or as checklists of typical provisions and wording to include in the contract. Many treatises and form books now come with forms on disk or CD-ROM or Internet download sites.
Don't let your client or company sign a letter of
intent without this wording. Sometimes businesses are
anxious to sign something to show good faith before a contract
is prepared. A properly worded letter of intent is useful at
such times. Just be sure that the letter of intent clearly
states that it is not a contract, but that it is merely an
outline of possible terms for discussion purposes. See Appendix
C Sample Letter of Intent Form.
7. Start with a simple, generic contract form. The form in Appendix A is such a form. It provides a solid starting point for the structure of the contract. Like a house, a contract must have a good, solid foundation.
8. State the correct legal names of the parties in the first paragraph. As obvious as this is, it is one of the most common problems in contracts. For individuals, include full first and last name, and middle initials if available, and other identifying information, if appropriate, such as Jr., M.D., etc. For corporations, check with the Secretary of State where incorporated. (In Florida, call the Florida Division of Corporations at 850-488-9000 or search its database from its website at www.sunbiz.org or for other states see the list of Secretaries of State websites at www.governmentfilesonline.com .
9. Identify the parties by nicknames. Giving each party a nickname in the first paragraph will make the contract easier to read. For example, City of St. Petersburg would be nicknamed “City” and ABC Corporation would be nicknamed “ABC” and so forth.
10. Be careful when using legal terms for nicknames. Do not use "Contractor" as a nickname unless that party is legally a contractor. Do not use "Agent" unless you intend for that party to be an agent, and if you do, then you better specify the scope of authority and other agency issues to avoid future disagreements.
11. Include a blank for the date in the first paragraph. Putting the date in the first paragraph makes it easy to find after the contract is signed. It also makes it easy to describe the contract in other documents in a precise way, such as the "August 1, 2001, Purchase Agreement."
12. Include recitals to provide background. Recitals are the "whereas" clauses that precede the body of a contract. They provide a simple way to bring the contract's reader (party, judge or jury) up to speed on what the contract is about, who the parties are, why they are signing a contract, etc. The first paragraph in the body of the contract can incorporate the recitals by reference and state that they are true and correct. This will avoid a later argument as to whether or not the recitals are a legally binding part of the contract.
13. Outline the contract by writing out and underlining paragraph headings in their logical order. The paragraphs should flow in logical, organized fashion. It is not necessary to write them all at once; you can write them as you think of them. Try to group related concepts in the same paragraphs or in adjacent paragraphs.
14. Complete each paragraph by writing the contract terms that apply to that paragraph. This is simple. You learned this in elementary school. Just explain in words what the parties agree to do or not do paragraph by paragraph.
15. Keep a pad at hand to remember clauses to add. It is normal to think of additional clauses, wording and issues while writing a contract. Jot these down on a pad as you write; they are easily forgotten. Also keep your outline and other forms in front of you as you write, and check off items as you write them.
Repeat yourself only when repetition is necessary to
improve clarity. Ambiguity is created by saying the same
thing more than once; it is almost impossible to say it twice
without creating ambiguity. Only if the concept is a difficult
one should you write it in more than one way. In addition, if
you use an example to clarify a difficult concept or formula, be
sure that all possible meanings are considered and that the
example is accurate and consistent with the concept as worded.
What to Watch Out for When Writing
17. Title it "Contract" or “Agreement.” Do not leave this one to chance. If your client or company wants a contract, call it a contract. A judge now sitting on the federal bench once ruled that a document entitled "Proposal" was not a contract even though signed by both parties. The lesson learned is, "Say what you mean." If you intend the document to be a legally binding contract, use the word "Contract" in the title.
18. Write in short sentences. Short sentences are easier to understand than long ones.
19. Write in active tense, rather than passive. Active tense sentences are shorter and use words more efficiently, and their meaning is more apparent. Example of active: “Sellers shall sell the Goods to Buyer.” Example of passive: “The Goods shall be sold to Buyer by Seller.”
20. Don't use the word "biweekly." It has two meanings: twice a week and every other week. The same applies to "bimonthly." Instead, write "every other week" or "twice a week" or “every other month” or “twice a month.”
21. Don't say things like "blue covers and materials ." Avoid ambiguity by writing either "blue covers and blue materials " or "materials and blue covers." When adding a modifier like "blue" before a compound of nouns like "covers and materials,” be sure to clarify whether you intend the modifier to apply to both nouns or just the first one. If you intend it to apply to both, use parallel construction and write the modifier in front of each noun. If you intend it to apply to just one noun, place that one noun at the end of the list and the modifier directly in front of it.
22. Don't say "Lessor" and "Lessee." These are bad nicknames for a lease because they are easily reversed or mistyped. Use "Landlord" and "Tenant" instead. The same applies to lienor and lienee, mortgagor and mortgagee, grantor and grantee, licensor and licensee, party A and party B. This is where you can use your creativity to come up with a different nickname for a party, as long as you use it consistently throughout the contract.
23. Watch out when using "herein." Does "wherever used herein" mean anywhere in the contract or anywhere in the paragraph? Clarify this ambiguity if it matters.
24. Write numbers as both words and numerals: ten (10). This will reduce the chance for errors.
25. When you write "including" consider adding "but not limited to." Unless you intend the list to be all-inclusive, you had better clarify your intent that it is merely an example.
26. Don't rely on the rules of grammar. The rules of grammar that you learned in school are not universal. The judge or jury interpreting the meaning of your contract may have learned different rules. Write the contract so that no matter what rules they learned, the contract is clear and unambiguous. Follow this test for clear writing: Remove all periods and commas, then read it.
27. Don't be creative with words. Contract writing is not creative writing and is not meant to provoke reflective thoughts or controversies about nuances of meaning. Contract writing is clear, direct and precise. Therefore, use common words and common meanings. Write for the common man and the common woman.
28. Be consistent in using words. If you refer to the subject matter of a sales contract as "goods" use that term throughout the contract; do not alternately call them "goods" and "items." Maintaining consistency is more important than avoiding repetition. Don’t worry about putting the reader to sleep; worry about the opposing lawyer a year from now hunting for ambiguities to get your contract into court.
29. Be consistent in grammar and punctuation. The rules of grammar and punctuation you learned may differ from others, but you had better be consistent in your use of them. Be aware of such things as where you put ending quote marks, whether you place commas after years and states, and similar variations in style.
30. Consider including choice of law, venue selection, and attorneys fee clauses. If your contract gets litigated, you might as well give your client some "ammunition" for the fight.
Write for the Judge and Jury
31. Assume the reader is a knowledgeable layman. If your writing is so clear that a layman could understand it, then it is less likely it will end up in court.
32. Define a word by capitalizing it and putting it in quotes. Capitalizing a word indicates that you intend it to have a special meaning. The following are two sample clauses for defining terms:
Wherever used in this contract, the word "Goods" shall mean the goods that Buyer has agreed to purchase from Seller under this contract.
Buyer hereby agrees to purchase from Seller ten (10) frying pans, hereinafter called the "Goods."
33. Define words when first used. Instead of writing a section of definitions at the beginning or end of a contract, consider defining terms and concepts where they first appear in the contract. This will make it easier for the reader to follow.
Explain technical terms and concepts. Remember
that the parties might understand technical jargon, but the
judge and jury who interpret and apply the contract do not.
Therefore, explain the contract's terms and concepts within the
contract itself. Let the contract speak for itself from within
its four corners.
Keep Your Client and Associates Informed While You Write
35. All contracts should come with a cover letter. This gives you a place to instruct your client or associates on how to use and sign the contract.
36. Tell your client the ideas that come as you write. Many ideas will occur to you as you write: things that could go wrong with the deal, things that might happen in the future, things that happened in the past, ways to structure things better. Write these in your letter to the client or associates.
37. Inform your client and associates of the risks. Writing a letter to the client or associates as you write the contract is the perfect way to inform them of the risks and rewards of entering into the contract. Frequently, problems do not become apparent until time is spent trying to word a contract.
What To Do After the First Draft Is Written
38. Check spelling, paragraph numbering, and cross references both manually and with your word processor's spelling and grammar checker. This almost goes without saying today, especially since Microsoft Word now checks your spelling and grammar as you type.
39. Let your secretary or paralegal read it. Not only will your staff frequently find spelling and grammar errors missed by your word processor's spell checker, but they will find inconsistencies and confusing areas that you missed when drafting.
40. Stamp "Draft #1 11/7/2001" on it. This may be the first of many drafts, so avoid confusion early by numbering and dating all drafts at the top of the first page. It is also a good idea to write "DRAFT" across the face of each page to preclude the possibility of an impatient client or associate signing a draft rather than waiting for the final version.
41. Let your client or boss read it. Letting the client or boss in on reading the first draft assures that your drafting will stay in tune with his or her wishes.
42. Save the drafts as multiple files on your computer. If you save the first draft on your computer as two files, you will have one file identified as the first draft and the other identified as the current version. This can be done by naming the current version "contract" and the first draft as "contract.d1." Then, subsequent versions can be named "contract.d2", "contract.d3," etc., where the “d” in the extension indicates draft. (Of course, if you’re not using WordPerfect 5.1 for DOS, as I like to do, you can use long file names to show the contract name, draft number and draft date, such as “Contract Smith Jones draft 2 dtd 6 22 2000.”)
43. Compare the current version to prior versions. If you save draft versions, it is very easy to compare one version to another using the word processor's compare feature. When you compare "contract.d1" to "contract.d2", save the comparison as "contract.c21" and print it to show the client what changes were made.
How to Print and Sign the Final Draft
44. Print the contract on 24 pound bond paper instead of 20 pound copier paper. Using a heavy bond paper will make it easy to tell the original contract from copies. It will also last longer.
45. Print on pages using the same paper, and if pages are changed, reprint the document using the same paper. This will avoid an argument that pages were substituted after the contract was signed.
46. Sign the contract in blue ink, not black ink. This, too, will make it easier to differentiate the signed original contract from photocopies.
47. Initial every page of the contract. Having each party initial each page of the contract will make it less likely that anyone could claim a page was changed after the contract was signed.
48. Identify the parties and witnesses who sign by providing blank lines below their signature lines for their printed names and addresses. This will make it easier to find the witnesses if the contract is contested. And remember to include two witnesses for commercial leases.
49. Be sure that corporate officers include their titles, the corporation name and the word "as." Failure to do this can result in personal liability of the officer. The proper way to sign in a representative capacity is as follows:
John Jones, as its President
50. Add a notary clause that complies with the notary law where the contract is signed. The notary acknowledgement in Appendix B is such a clause for Florida.
If these 50 tips don't keep your contracts out of court, try mastering Strunk & White's Elements of Style*. It’s now available for free online at www.bartleby.com/141/index.html .
Appendix A (Basic Form of Contract)
this _______ day of ____________, 20_____, between
______________________, a Florida corporation, of
___________________, hereinafter called "Buyer", and
______________________, a Florida corporation, of
____________________, hereinafter called "Seller."
1. Recitals. The parties agree that the foregoing recitals are true and correct and incorporated herein by this reference.
IN WITNESS WHEREOF, the parties have signed this agreement as of the day and year first above written.
_______________________ As its:_________________
_______________________ As its:________________
Appendix B (Basic Form of Florida Notary Acknowledgement)
STATE OF FLORIDA
The foregoing instrument was acknowledged before me this _____ day of __________________, 20____, by __________________ as ________ of __________________, a Florida corporation.
Notary Public-State of Florida:
Personally Known _____; OR Produced Identification _____
Type of Identification Produced: ____________________________
Affix Seal Below:
Appendix C (Sample Letter of Intent Form)
LETTER OF INTENT FOR
Possible Seller: _____________________________
Possible Buyer: _____________________________
Date: ______________, 20_____
This is a non-binding letter of intent that contains provisions that are being discussed for a possible purchase of the Goods described above from the possible Seller named above to the possible Buyer named above. This is not a contract. This is not a legally binding agreement. This is merely an outline of possible contract terms for discussion purposes only. This is being signed in order to enable the Possible Buyer to apply for financing of the purchase price. This letter of intent is confidential and shall not be disclosed to anyone other than the parties and their employees, attorneys and accountants and the possible lenders of the Possible Buyer. The terms of the transaction being discussed are attached hereto, but the terms (and the possible sale itself) are not binding unless and until they are set forth in a written contract signed by Possible Seller and Possible Buyer. The word "shall" is used in the attached terms only as an example of how a contract might read, and it does not mean that the attached terms are or ever will be legally binding.
As its:____________ As its:_________________