A Checklist for Drafting Good Contracts
M. H. Sam Jacobson*
- Download PDF file (2087 KB) Get Adobe Reader
The drafter of a contract wants to craft a document that accomplishes the objectives of the parties while protecting the interests of the client. To accomplish this, the drafter must be able to predict what may happen between the parties, to provide for each contingency, and to protect the client with a remedy. Often the drafter must do this quickly. While each contract involves different concerns, depending on the subject and the context, all contracts involve common requirements and considerations. With a thorough checklist of these requirements and considerations, a drafter need not reinvent the wheel with each contract. Instead, with the use of a checklist, drafters of contracts can ensure that their contracts are complete and effective.
STEP ONEDetermine the substance of the contract. STEP TWOAnalyze the audience. STEP THREEOrganize the material. STEP FOURDraft the contract. STEP FIVEDesign the document. STEP SIXEvaluate the document. |
For all drafters, a checklist can ensure that the contract will contain the necessary substantive provisions and that decisions about those provisions will have been made by design, not by accident. For the time-challenged drafter, a checklist eliminates the need to rethink from scratch what to include in a contract and how best to draft it. For the detail-challenged drafter, a checklist ensures that all tasks associated with the drafting are completed. For the occasional drafter, a checklist is an invaluable reminder of content and form that might otherwise be forgotten. For the experienced drafter, a checklist effectively reminds the drafter when boilerplate or often-used language is inappropriate, that special circumstances require special language.
Like any legal writing, good drafting requires knowing the law and the substance first, followed by clear organization and by writing appropriate to the audience. It also requires an artist’s touch, to ensure that the design of the contract document will aid in its usability and clarity. Finally, good drafting requires critical evaluation, reading the document through the eyes of bad faith or hostile readers, and periodic review to assure that the document continues to meet the parties’ needs.
The following six steps of contract drafting will help assure that the drafter of a contract meets these goals.1
STEP ONE
Determine the substance of the contract.
I. What does the law require that a contract include?2
A contract must include the common law and statutory requirements for contract formation and any specific requirements for the contract being created.
A. Does the contract include provisions that meet the requirements for formation?3
1. Does the contract reflect an offer and acceptance? The drafter should consider the nature of the agreement, such as a contract of adhesion, and how the contract developed, such as from a battle of forms, a negotiation, or a letter of intent.
2. Does the contract reflect consideration? Consideration is an exchange of something of value.4 Therefore, the drafter should be wary of drafting an illusory contract that promises nothing such as when one party has the option of not performing, perhaps because of a satisfaction clause, or when a party is not under any obligation to perform, perhaps because of the lack of mutuality.
3. Does the contract include the essential terms? For example, a contract for the sale of goods needs to identify the parties, price, quantity, date of delivery, and payment terms unless a statute includes gap-filler provisions. Gap-filler provisions are included in the Uniform Commercial Code: U.C.C. § 2-305 sets “reasonable price at the time of delivery” as the gap-filler for an unsettled term of price; U.C.C. § 2-306 sets “normal or otherwise comparable prior outputs” as the gap-filler for quantity when the output estimates are not stated in the contract; U.C.C. § 2-308 sets the seller’s place of business as the gap-filler for the site of delivery when the site of delivery is not stated in the contract; and U.C.C. § 2-309 sets “reasonable time” as the gap-filler for the delivery date when the delivery terms are not stated in the contract.
4. Does the contract include definite terms? The drafter must consider statutory or judicial interpretations of key terms, and custom and usage. For example, when the custom of the magazine industry is to publish an article or photo only once, a magazine could not republish articles and photos without infringing on the copyright owned by the photographer and writer.5
In addition, the drafter must beware of relying on definitions outside the terms of the contract, such as making a real estate sale price contingent on an appraisal by a person outside the contract, like the Department of Veterans Affairs; or by making the award of disability benefits contingent on a determination by the Social Security Administration. In these circumstances, an essential term of the contract is not established by the parties to the contract, but instead by an outside entity over which the parties have no control.
Further, the drafter must be sure the contract does not contain conflicting terms concerning material items. For example, a contract contained conflicting terms when one provision made the architect’s decisions subject to arbitration and another provision stated the architect’s decision was final and conclusive.6
B. Does the contract avoid potential defenses to formation?
1. Does the contract violate the law? A contract may violate the law because it is illegal,7 it fails to follow the form required by law,8 it uses prohibited terms,9 it omits required language,10 it waives rights where the law does not permit waiver,11 or it includes unconscionable terms.12
2. Does the contract reflect the capacity of the parties to contract? The drafter should consider whether issues of capacity are raised by the parties’ status, such as mental capacity, age, or lack of authority;13 or by the parties’ behavior, such as fraud, duress, undue influence, or unconscionability.14
3. Does the contract avoid the potential defense of mistake? The drafter should consider including assumptions in the contract either as recitals (premises),15 representations,16 or warranties?17 For example, if the value of property that is the subject of a real estate contract could change with a change in zoning, the parties to the contract might protect their right to a higher price (seller) or a lower price (buyer) by including a statement in the recitals that the parties considered the current zoning of the property in establishing the price, a representation that the property is zoned X, or a warranty that the zoning will be X on the date conveyed to the buyer.18
The drafter also should consider whether the client’s interests are best protected by including (or excluding) a merger (or entire agreement) clause, inspection clause, warranty, or an absolute promise to perform.
C. Does the contract include provisions that determine under what circumstances performance should be excused or late?
The drafter should consider what terms will best protect the client for occurrences outside its control, perhaps using a force majeure clause; what conditions must occur for performance; and what warranties should be included after checking for any prior oral or written representations, any description of goods, samples or models shown, any plans or blueprints, any specifications, any market or official standards, any brochures, any advertisements, and the quality of goods received.
For example, a contractor had to comply with the completion date in its contract for constructing a drainage ditch and levee, even though the site flooded after most of the work had been completed, because the contract did not include a provision excusing delays caused by acts of God.19
D. Does the contract include appropriate remedies for a breach?
If the client wants specific performance, the drafter must establish the uniqueness of the goods or services, or the special circumstances of the sale.20 For money damages, the drafter must consider whether to provide expressly for consequential, incidental, cover, liquidated and punitive damages.
The laws governing money damages will vary in different jurisdictions. For example, Oregon allows parties to a contract to agree to limit the measure of damages that a party can recover,21 but it severely restricts the limitation of consequential damages for consumer goods.22 The drafter also should consider whether the remedies should include provisions for arbitration and attorney fees.
E. Does the contract include provisions that define its effect on third parties?
A third party may acquire an interest in a contract as a beneficiary if a party to a contract shifts its interest (in whole or in part) to the third party. The drafter must consider whether to allow assignment of rights,23 delegation of duties,24 or transfer of rights and duties.25
While public policy favors the ability of a party to a privately negotiated contract to assign its rights under a contract,26 the drafter may want to prohibit assignment if the client considers the contract rights to be personal. Public policy may also favor the ability of a party to a privately negotiated contract to delegate its duties under a contract but to a lesser extent than assignment, because duties involving personal choice may not be delegated.27
F. Does the contract meet any additional requirements imposed by statute?
Statutes may require or bar specific provisions concerning various subjects, such as contracts involving the sale of real estate,28 or parties, such as consumers.29
II. Does the contract meet the requirements of the client?
To determine the requirements of the client, the drafter must be familiar not only with the nature of the transaction, but also the nature of the client’s operation, including the client’s long-term and short-term business goals, and the nature of the business in general.
A. Does the contract include provisions that achieve the client’s goals in entering into the contract?
To achieve this, the drafter must first identify the client’s express and implied goals. Express goals are those that would be included in the contract, and implied goals might include the client’s way of doing business.
B. Does the contract include provisions that reflect the degree of risk that the client is willing to assume?30
1. Has the drafter determined each imaginable risk? The drafter must be familiar with the nature of the contract and the business environment in which it will operate. The more the drafter learns about how the client and the client’s industry operate, the better the drafter can determine what risks are involved.
2. Has the drafter assessed the risk for each imaginable risk identified? The drafter must consider what could cause the risk and how often the risk has been a problem in the past. The drafter should consider the client’s prior experience as well as prior experience in the industry to determine if the risk is realistic and if the dangers are significant.
3. Has the drafter allocated the risk in a way that reasonably protects the client from risk it does not wish to assume? The drafter must consider how the risk can be avoided (if at all), what the cost of avoidance would be, who would bear the cost of avoidance, how the risk could be reduced, how the risk could be spread, who would be liable for damages if the risk materialized, and what appropriate limitations on that party’s liability for damages might be included.
In addition, the drafter must consider whether the law precludes a party from avoiding the risk. For example, a health insurer cannot avoid the risk of covering various health conditions or services by various providers if a statute requires that those risks be covered.31 In addition, an insurer cannot define the risk in the contract in a way that would make the contract illusory.32
STEP TWO
Analyze the audience.
Next, the drafter must analyze the audience for the contract. A reader’s goals are to understand the information in the contract and to remember the information for future reference. How best to meet these goals will depend on learning more about the expected readers. The document should not overload the reader with information, the document should be clearly written and easy to follow, and the document should be understandable given the expected reader’s knowledge and experience with the specific subject of the contract.
I. Has the drafter identified who will be the primary and secondary readers of the contract?
Primary readers are the parties to the contract; secondary readers include anyone else who might read the contract. To illustrate, the primary readers of a residential lease are the landlord and the tenant. Secondary readers might include lawyers for the landlord or tenant, potential subtenants, judges interpreting the lease because of a litigated dispute or a forcible eviction, and service providers (such as a plumber or electrician) determining who is responsible for payment.
II. Has the drafter considered how each reader will use the contract?
The drafter must consider whether the contract will be used as a reference, will not be read, will be read only in part, or will be read with an attorney present.
III. Has the drafter considered what each reader already knows?
The drafter must consider whether special explanations may be needed for technical terms or concepts or to avoid misconceptions.
IV. What is each reader’s attitude about the contract?
The drafter must consider the motivation of the readers and whether any of them are potential “bad faith readers” trying to find fault with the document.
* © M.H. Sam Jacobson 2008. Instructor, Willamette University College of Law. I especially want to thank Angela Wanak and Jon Kulas for their excellent research assistance, and Linda Berger and the peer reviewers for their helpful comments.
1 The checklist is presented in a question format; the drafter of a contract should be able to answer “yes” to each question.
2 The discussion in this article assumes that the reader is familiar with American contract law; it provides only a checklist of the key provisions that the drafter of a contract must consider. For a general discussion of American contract law, consider one of the treatises on contracts, such as Arthur Linton Corbin et al., Corbin on Contracts §§ 1320-33 (LexisNexis 1952 & Supp. 2007); Samuel Williston et al., A Treatise on the Law of Contracts (4th ed., West 1990) or E. Allan Farnsworth et al., Farnsworth on Contracts (Aspen Publishers 2004); or one of several summaries of contract law, such as John D. Calamari & Joseph M. Perillo, The Law of Contracts (5th ed., West 2003) or John Edward Murray, Jr., Murray on Contracts (4th ed., LexisNexis 2001). Additional valuable information on American contract law is contained in the Restatement (Second) of Contracts (1981).
3 Requirements for the formation of contracts are discussed in any of the treatises, supra n. 2. Additional sources include the Uniform Commercial Code for contracts involving the sale of goods and the Restatement (Second) of Contracts for other types of contracts. The Uniform Commercial Code includes §§ 2-201 (Formal Requirements; Statute of Frauds); 2-204 (General Formation), and 2-206 (Offer and Acceptance in Formation of Contract). The Restatement (Second) of Contracts includes §§ 17 (Requirement of a Bargain); 18 (Manifestation of Mutual Assent); 24 (Offer Defined); 50 (Acceptance Defined); and 71 (Requirement of Exchange).
4 E.g. Restatement (Second) of Contracts § 71 (Requirement of Exchange).
5 Ward v. National Geographic Society, 208 F. Supp. 2d 429, 439 (S.D.N.Y. 2002 ).
6 Roosevelt U. v. Mayfair Constr. Co., 331 N.E.2d 835, 845-46 (Ill. App. 1975).
7 E.g. Restatement (Second) of Contracts §§ 192 (Promise Involving a Tort); 178 (When a Term is Unenforceable on Grounds of Public Policy).
8 E.g. Or. Rev. Stat. § 646A.262 (2007) (contract between consumer and credit services
organization must be in at least 10-point type).
9 E.g. Restatement (Second) of Contracts § 178 (When a Term is Unenforceable on Grounds of Public Policy).
10 E.g. Restatement (Second) of Contracts § 163 (When a Misrepresentation Prevents Formation of a Contract).
11 E.g. Wis. Stat. § 218.0171(6) (2001) (prohibiting consumers from waiving their rights under the state “lemon law” statute).
12 E.g. Restatement (Second) of Contracts § 208 (Unconscionable Contract or Term). Unconscionable terms could include the use of boilerplate contractual language if the terms are stated in the most favorable language possible to one party and if they could not be negotiated; significant price-cost disparity or excessive price; denial of basic consumer rights; penalty clauses; language incomprehensible to the other party; and other similar events. See e.g. Restatement (Second) of Contracts § 205 (Duty of Good Faith and Fair Dealing).
13 E.g. Restatement (Second) of Contracts §§ 12 (Capacity to Contract), 14 (Infants), 15 (Mental Illness or Defect), and 16 (Intoxicated Persons).
14 E.g. Restatement (Second) of Contracts §§ 162 (When a Misrepresentation is Fraudulent or Material), 174-77 (Duress and undue influence), and 208 (Unconscionable Contract or Term).
15 Recitals (or premises) establish why the parties are entering into the agreement. They are not an enforceable part of the contract. E.g. Green River Valley Found., Inc. v. Foster, 473 P.2d 844, 847 (Wash. 1970) (“operative provisions prevail over recitals”). However, they help establish the parties’ intent and the intended scope of the agreement. E.g. Golden West Baseball Co. v. City of Anaheim, 31 Cal. Rptr. 2d 378, 395 (Cal. App. 4th Dist. 1994).
16 Representations are statements of fact that induce a party to act. If a representation is false and material, the contract may be rescinded, even if the representation was innocently made. E.g. Holland Furnace Co. v. Korth, 262 P.2d 772, 775 (Wash. 1953)..
17 Warranties are promises that statements of fact are true at the time made. E.g. Felley v. Singleton, 705 N.E.2d 930, 934 (Ill. App. 1999) (statement that the car was “in good mechanical condition” was an express warranty).
18 See e.g. Pendelton v. Witcoski, 836 So. 2d 1025, 1025-1026 (Fla. App. 2002) (abuse of trial court’s discretion to rescind a contract for mutual mistake of fact concerning its zoning).
19 See e.g. Prather v. Latshaw, 122 N.E. 721, 722 (Ind. 1919).
20 E.g. U.C.C. § 2-716.
21 Or. Rev. Stat. § 72.7190(1)(a) (2007).
22 Or. Rev. Stat. § 72.7190(3) (2007).
23 An assignment of rights occurs when a party who has the right to receive a performance under the contract shifts the right to receive performance to another person (third-party). Restatement (Second) of Contracts § 316 cmt. C (1981). For the assignment to be enforceable, it must involve consideration. See e.g. Restatement (Second) of Contracts § 317 (Assignment of Right).
24 A delegation of duties occurs when a party to a contract who has the obligation to perform a duty under the contract shifts the duty to another person. Restatement (Second) of Contracts § 318(1). The party conferring the power to perform on a third-party remains liable for performance unless the delegation involved consideration. Id. at § 318(3); U.C.C. § 2-210(1).
25 In the Restatement, an assignment of rights and delegation of duties constitutes an assignment of the contract. Restatement (Second) of Contracts § 328 (1).
26 E.g. Farmland Irrigation Co. v. Dopplmaier, 308 P.2d 732, 740 (Cal. 1957) (noting “[t]he statutes in this state clearly manifest a policy in favor of the free transferability of all types of property, including rights under contracts”).
27 E.g. Restatement (Second) of Contracts § 318 (2).
28 E.g. Cal. Com. Code § 10206 (West 1988) (discussing special requirements for an offer and acceptance in the formation of a lease contract).
29 E.g. Or. Rev. Stat. § 646.607 (2007) (prohibiting unconscionable tactics concerning consumers).
30 For a more detailed discussion of risk allocation, see Murray, supra n. 2, at §§ 112-116, 725-766. Additional discussions of risk allocations appear in the discussion of impossibility in Corbin et al., supra n. 2, at vol. 1 §§ 1320-33, 1088-1111; Farnsworth et al., supra n. 2, at vol. II §§ 9.1-9.9a, 583-681; and Williston et al., supra n. 2, at vol. 8 §§ 19:31-19:79, 340-602.
31 E.g. Or. Rev. Stat. §§ 743A.110 (2007) (must cover mastectomy-related services); 743A.080 (2007) (must cover pregnancy and child-birth expenses); 743A.184 (2007) (must cover diabetes self-management); 743A.012 (2007) (must cover emergency services); 743A.040 (2007) (must reimburse for optometrist); 743.706 (must cover maxillofacial treatments); 743A.090 (2007) (must insure newly born child and adopted children); 743A.048 (2007) (must reimburse for psychologists); 743A.036 (2007) (must reimburse for nurse practitioner); 743A.028 (2007) (must reimburse for denturist); 743A.024 (2007) (must reimburse for clinical social worker); 743A.014 (2007) (must reimburse for ambulance care and transportation); 743A.014 (2007) (must reimburse for acupuncturist); 743.725 (must reimburse for physician’s assistant); 743.727 (must cover mammograms); and 743.728 (must cover annual pelvic exams and Pap smears).
32 E.g. Chase Manhattan Bank v. New Hampshire Ins. Co., 749 N.Y.S.2d 632, 638-39 (N.Y. Sup. Ct. 2002) (noting that an insurance contract, by definition, covers fortuitous events and so not covering fortuitous events would result in an illusory contract).