Advanced Guidelines For Contract Drafting and Contract Review-1587216863 PDF

INTRODUCTION TO CONTRACT
DRAFTING
Advanced Guidelines For Contract Drafting
And Review

Introduction To Contract Drafting
Advanced Guidelines For Contract Drafting And Review
Approximate reading time: 15 minutes

One of the biggest challenges that first timers face while drafting or editing a contract is the
fear of making mistakes. While you may read, understand and criticise a contract, this fear
prevents you from typing a single word of the contract.

You want to study more, read more, review more and write less. You may also be guided by
the contracts you have seen earlier to insert more legalese and jargon.

However, you need to do exactly the opposite. Your contract needs to be simple and
understandable for anyone. This will involve forgetting some prior notions of using
complicated terms or using language in a smart way, that could trick a reader.

Remember that if both parties are clear about the meaning of various terms, chances of
ambiguity, confusion and therefore, disputes, are low.

Learning Objectives
This chapter develops the concepts from the previous chapters and explains in detail how
to use language and grammar to ensure that your drafts are simple for anyone to read and
understand, accurate to your intention and accordingly effective. You will learn:

1. How to use active and passive voice, tenses, conjunctions, dates and values to
express your intention without ambiguity;
2. How to avoid jargon and keep your contracts clear, tight and understandable;
3. When and how to use subjectivity or include subjective standards in a contract to
benefit your interest; and
4. Different levels of review of contracts.

There will be reference to different kinds of clauses in a contract, so you must keep
referring to the chapters in the next module, if you are unable to understand the meaning
of a clause.

1. Active vs. Passive voice
Passive voice makes sentences complex and indirect. In this structure, the doer of a
particular act or a job, i.e. the person on whom the responsibility is placed, is often
difficult to identify.

On the other hand, framing a sentence in active voice intrinsically ensures basic
clarity.

For instance, “the start date of the construction is to be decided” is a very confusing
statement (written in passive voice) which does not clarify that who will decide the
date of construction. Now, if we write the same sentence in active voice “the

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contractor will decide the start date of construction”, this makes it clear that it is the
responsibility of the contractor to decide the start date of construction.

It is appropriate to use passive voice only when it is more important to mention and
focus on what was done or not done and where the person responsible is not
required to be identified or focussed on.

2. Avoid use of archaic language and jargon
“If the language is not correct, then what is said is not what is meant. If what is said is not
what is meant, then what ought to be done remains undone.”- Confucius

This quote quite evidently brings out the importance of language. An individual is
exposed to a myriad of challenges in terms of the language used for drafting. For
effective drafting, legalese should be replaced with simple words, long sentences
should be made shorter and simpler and most importantly, pretentious and verbose
expressions should be trimmed town.

Examples of archaic words

Words like however, thereafter, herein are not commonly used in English language
but are excessively used in contracts, policies, notices and replies. One should
abstain from using such words as they are effete substitutes of proper pronouns.
Sometimes they also lead to ambiguous references. Example of archaic words:

1. Above
2. Above mentioned
3. Aforementioned
4. Aforesaid
5. Before- mentioned
6. Henceforth
7. Hereby
8. Herein
9. Hereof
10. Hereto
11. Hereinafter
12. Hereinbefore
13. Herewith
14. Said
15. Same
16. Such
17. Thereof
18. Therewith
19. Whatsoever
20. Whomsoever


It is possible to replace the archaic words with simpler words. Examples which show

the use of these words and suggested alternatives are below:

1. Hereby

Archaic: - Each party waives its right to a jury trial with respect to the
transactions contemplated hereby.

Suggestive: - Each party waives its right to a jury trial with respect to the
transactions contemplated by this agreement.

Replacement of “Hereby” with “by this agreement” makes the provision more
definite and specific.

2. Thereof

Archaic:- The Escrow fund shall be held by the escrow agent under the escrow
agreement pursuant to the terms thereof.

Suggestive:- The Escrow fund shall be held by the escrow agent under the
escrow agreement pursuant to its terms.

“Thereof” can be replaced with “its”. Alternatively, determine what thereof
refers to and create a prepositional phrase beginning with ‘of’ and ending with
the thing to which thereof is referring.

3. Choose verbs that are consistent to your intention
Verbs express the nature of the obligation of the parties and inaccurate usage of
verbs can destroy your draft. A few pointers for using verbs effectively are provided
below.

Use of Shall

As a simple rule, use ‘Shall’ to indicate the binding nature of something.

Shall is a mandatory word and the subject of the sentence should be obligated to do
something as a result of "shall." The most simple test to see if "shall" is used correctly
or not is to check if “shall” can be replaced with “has a duty to”. Use shall to indicate a
covenant. A party’s name should always precede shall.

Use of May

“May” suggests a discretion or possibility, but no binding obligation. For example,
consider the following clause of an employment agreement:


Employee may get an annual bonus.

Usage of “may” implies that there is a possibility of the employee getting a
bonus once a year, however, it is not certain. An employee cannot bring a
legal action against the employer if he doesn’t get a bonus in any year.

‘May’ can also be used to indicate a choice. For example, consider the
following clause:

If the seller makes a misrepresentation or breach of a covenant then the
buyer may pursue all remedies to which it is entitled under the law.

In this situation, the buyer has the choice to pursue one or more available
remedies.

Use of must

“Must” denotes a requirement. For example, consider the following clause of an
employment agreement:

To avail bonus, the employee must not take more than 15 casual leaves in
a year.

Here, usage of “must” prescribes a precondition for the employee to be eligible for
bonus.

Shall and must have similar obligatory implications. Must is used more as a qualifier
or a prerequisite to be eligible for something, while shall is used to impose a duty.

Difference between Would and Could

Consider the following statements. In which of the following alternate versions of a
representation will a lawsuit mentioned below require disclosure?

Scenario 1: The company is not a party to any threatened or pending
litigation that could have a material adverse effect on its business or
financial condition.

litigation that could reasonably be expected to have a material
adverse effect on its business or financial condition.

litigation that would have a material adverse effect on its business or
financial condition.


The use of could gives a discretion to the person, who has to make the disclosure
decision whether the conditions will be met or not. It will be difficult to question the
judgment drawn, if such discretion is given. However, the use of would shifts the
discretion from the party making the disclosure, to the other side. It also imparts a
certain determinacy.

Use of tenses

Pay attention to the use of tenses. Use shall, must or will, depending upon the nature
of the clause and the context for covenants and closing actions clause.

Use present and past tense for representations and warranties, i.e. is or has been.

4. Use the conjunctions ‘and’ and ‘or’ to express your
intention
“And” is conjunctive, meaning that it joins two or more things, whereas,“or” is
disjunctive, meaning that it establishes alternatives between two or more things. For
example, consider these sample clauses in a Purchase Agreement.

Sample Clause 1: Buyer and seller will review the document.
[Here “and” is used as a conjunction to indicate that both buyer and
seller will review the document.]

Sample Clause 2: Buyer or seller will review the document.

Here, the word “or” is used disjunctively and implies that either of them will
review the document.

Don’t use “and/or” together. It creates confusion. Use either ‘and’ or use ‘or’.

5. Use values, age and dates clearly
Time, date and other numbers often quantify the measurements or deadlines for
the obligations of the parties and are therefore critical. You need to ensure that such
clauses do not unintentionally have multiple meanings in your contracts. Therefore,
let’s see how to avoid ambiguity with these values.

Dates

Misuse of prepositions - Common prepositions which lead to uncertainty, when used
in connection with measurable values are ‘by’, ‘within’, ‘between’, ‘from’ and ’until’. To
steer clear of all such ambiguities in a contract, use one of the following:

● Before


● On or before
● After
● On or after
● No later than

Consider these sample clauses in a rent agreement and see how they can be drafted
in a better manner.

Sample Clause 1: The tenant shall vacate the premises by August 15,
2016. x x

This use of “by” raises the issue as to whether August 14 or 15 is the last date to
vacate the premises.

Sample Clause 2: The tenant shall vacate the premises on or before
August 15, 2016. √ √

Sample Clause 3: A potential buyer may tender bids for the target
between November 1, 2016 and November 15, 2016. x x

The ambiguity pertains to whether the party can tender bids on the stated dates or
not.

Sample Clause 4: A potential buyer may tender bids for target
beginning on November 1, 2016 and ending on November 15, 2016. √
√

Time

Most contracts have a term clause or a clause which stipulates a time period. While
drafting a “time” clause in a contract, follow these basic rules:

1. Refer to calendar years only to refer to the period from and including January 1
through December 31 of the same year.

2. Check the ramifications of a leap year.

3. Confirm that a future date is a business day by using a perpetual calendar.

4. If parties to a contract are from different time zones, it is suggested to
specifically provide for the time zones as well. For example, in contracts where
listed securities are pledged, the value of the security is calculated at the end of
the day based on the stock prices at the close of trading on that day. The
trustee is required to measure and communicate, if the security falls short of
the required amount. In such cases, if the parties are situated in different
countries, the time and the time zone when such calculation is to be


undertaken daily by the trustee (on the basis of the close of stock prices) must
be written, so that there is clarity about when the trustee is required to
communicate the outcome of the calculation everyday.

Age

When referring to a person’s age, state the age at which a right begins. For example,
the property will be transferred to Mr. X’s son when he turns 21.

6. Gender sensitivities
Incorporating gender neutral language stems from appropriateness and inclusivity.
It does not influence legal implications, because the ‘Interpretation’ clause in your
contract or the General Clauses Act (with reference to interpretation of a statute)
states that reference to the masculine includes a reference to the feminine.

What would be an example of gender-neutral language in policies?

For instance, while drafting a leave and attendance policy, writing “Women are not
permitted to stay after 8 P.M. in the office premises”, is gender specific. Instead of
this, writing this as “Employees cannot stay in the office after office hours, without
permission of the office management,” is advisable.

Notice above that, the meaning of the second sentence has changed slightly, as any
employee will need managerial alignment before staying back in the office. The first
sentence, on the other hand, required managerial alignment only if a woman
employee stayed back after 8 P.M. However, such a change in the meaning may be
necessary for a gender-neutral effect. When you do this, make sure you obtain
alignment of your seniors before you change the intended meaning of a policy.

Similarly, you can use words such as:

● ‘personnel’ or ‘workforce’ instead of ‘manpower’,
● ‘crew member’ instead of ‘crewman’.

In the same way, avoid using terminology based on caste, religion, race, culture,
region or language while drafting policies or disciplinary orders.

7. Pay attention to standards of responsibility
Some clauses in a contract establish a standard of responsibility to be followed by a
party. For example, consider the following sentences:

1) Parties shall try their best to mitigate losses.
2) Parties shall try commercially reasonable ways to mitigate losses.


The basic intention of both these sentences is that it is the duty of a party to mitigate

loss, however, there is a visible shift in the standard. Emphasis is laid on an
individual party’s ability to mitigate losses in the first sentence (which can vary
depending on the situation and resources available to the party) and in the second
sentence, emphasis is given to the commercial reasonableness of the practices
adopted to mitigate losses.

Therefore, by changing the adjective from parties trying their individual “best” to
adopting “commercially reasonable” ways, the standard and the degree of a party’s
obligation is reduced substantially.

Pay attention to the standards of responsibility mentioned in different
clauses in a contract. Identify whether they are against or for your
interest. If they are against your interest, modify them to suit your
interest. One of the ways to do this is to use a vague standard when

the discretion to apply it is on you. It provides flexibility. However,
keep in mind that when you invoke a vague standard, it is more likely
to lead to legal disputes.

When the discretion is equally applicable to the other side, use of a vague standard
can be disadvantageous. For example, consider this clause in a rent agreement.

The tenant should give a reasonable notice before terminating the lease
deed.

Reasonability is subjective. What might be reasonable to one person might be
unreasonable to another. Therefore, while drafting such clauses, express time
period categorically.

Consider the following clause:

The tenant must give one month’s notice before terminating the lease
deed.

Use definite standards where you need to clearly determine the rights and liabilities
of the parties.

Therefore, whether a standard needs to be specific or vague, implied or expressed,
will depend upon the deal or transaction and the drafter should not approach the
clauses with a preconceived notion.

Such parameters should be decided on the basis of the deal. Every time a clause in
an agreement establishes a vague standard, analyse whether it helps your client or


organization, or a more specific and concrete standard would improve your client’s
position.

As a matter of rule, while drafting a particular standard of

responsibility, keep in mind what mechanisms you can incorporate
to mitigate risk and losses for your organization. Include the
consequences of breach of a standard as well. This will crystallise the
rights and liabilities of the parties and minimise unwanted litigation.
Good drafters foresee events and articulate the risks involved, thus
protecting their client’s interest.
How to read and review contracts

How should you read and grasp a contract, especially if it is a large document?

Rather than reading it cover to cover, perform three levels of reading. Look for specific
items (outlined below) when you perform each level of reading. Every level of reading may
require you to perform multiple scans of the document.

This principle applies whether you review your own contract or a document sent by
another side.
First level reading

The objective of this level of reading is to understand the broad transaction. You need to
understand:

1. What is the contract or transaction is about?

Read the title of the contract to get a sense of what it is about. Go through the
headings of different clauses, which specify the obligations of the parties to know
this deeper. Also, read the recitals, that is, the terms beginning with ‘Whereas’ to
understand the background.

2. Who are the parties?

Read the names of the parties in the beginning of the contract. Sometimes, the
names of the parties may also be in a schedule.

3. What are their roles, responsibilities and obligations?

If there are multiple names, then find out about the roles and responsibilities of
each party by scanning through the document. Sometimes the contract may refer to


other agreements, which may contain the responsibilities of another party. Note
that down.

You can even make a drawing, showing the different parties involved. Successful
lawyers often prepare such notes for future reference, as it can clearly represent a
volume of unwieldy information clearly on a diagram.

You will know from the recitals or from the definitions clause, if there are multiple
documents to the transaction. In your drawing, connect the parties with one
another, adding the types of documents that have been executed.

Find the consideration/completion or the closing clause, which states the services or
actions to be performed. Also look at the ‘covenants’ clause.

4. What is the consideration and what are the payment mechanics?

Identify the monetary or non-monetary consideration that the other side is receiving
and the payment mechanics. Confirm that there is privity of contract.

5. When does it become effective?

Look for the clauses which mention the conditions precedent, effective date or closing.
Also, look at the duration of the contract.

6. What is the duration of the contract? How can it be terminated?

Look for the term and termination clauses. Read the grounds for termination and
renewal provisions.
Second-level reading
At this stage, you have understood what’s happening in the big picture, and your goal is to
understand the contract comprehensively. You can take the following steps:

1. Highlight the important clauses like the ones that state about consideration, rights,
obligations, liabilities, assignment, termination, renewal, etc. Make a specific note
about your own / your client’s obligations.

2. Look for the clauses that are vague, ambiguous or subjective as well as the clauses
that do not state specific information. These clauses will need to be edited.

3. Read the termination and breach provisions.

4. Go through the representations, warranties, conditions precedent and covenants
provisions.


5. Go through the dispute resolution provisions.

6. Go through the other provisions of the contract.
Third-level reading
At this stage you are ready to add value to the contract. You will need to apply your mind
and ask questions from the point of view of:

1. Are there risks or eventualities that have not been provided for?

2. Is there a danger to me / my client?

3. Are there connected obligations which are not expressed?

4. Are there more terms which should be technically defined?

It will require critical thinking, out-of-the-box thinking, visualization of the deal, knowing the
behaviour (or possible misbehaviour) of different participants in that industry, etc. You will
frequently need to browse through the contract and make connections between different
provisions. You will need to understand the cross-referencing inside out as well.

Add your comments in a separate notebook or in track-changes in the relevant word
document, so that the other side can see your suggestions.

All strategic readings are typically a function of the third level.

Checklist for reviewing a contract
Ensure that:

❏ All terms that are intended to have a specific meaning are defined and are always
used throughout the contract in capital form. Further, that no term which is not
defined is capitalized;

❏ All terms mentioned in the contract drafting checklist (included in a separate
chapter) are included;

❏ Representations and warranties are accurate and read thoroughly by you;

❏ Long Stop Date (an outer date by when the conditions precedent should be satisfied
or the obligations will not be effective at all) is provided where that is the intention of
the parties;

❏ The Effective Date for the contract is clearly mentioned;


❏ The procedure for evidencing satisfaction of Conditions Precedent is clearly
mentioned;

❏ The completion process is indicated clearly;

❏ Substantive obligations and the time when they are triggered, are accurately
covered;

❏ Covenants of the parties meet the commercial requirements of the deal;

❏ Risks and the current state of affairs are adequately captured - Representations,
Warranties, Anti-assignment, Change of Control, Force Majeure and Material Adverse
Effect provisions cover all risks involved and which are foreseeable;

❏ Terms defining what constitutes a breach are clear and determinate. Where they are
indeterminate, they are in your favour;

❏ Consequences of breach or termination do not leave room for doubt;

❏ Any deviations from the standard form of documents used in the organization are
approved by your seniors;

❏ Timelines and procedures for different processes are reviewed;

❏ Indemnity provisions are included.

❏ The process for dispute resolution is provided for and includes an arbitration clause;
and

Recap
1. Always write in active voice, unless you have a strategic reason to remove focus
from the doer.

2. Avoid use of archaic terms, jargon, doublets and triplets.

3. Be clear about the use of verbs such as must, shall, may and will and the
conjunctions and and or, so that you can use these effectively to express your
intention.

4. Use standards of responsibility and subjectivity to suit your own or your
organizational interest.

5. Perform at least three levels of reading when you review a document. All strategic
readings are typically a function of the third level reading.


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INTRODUCTION TO CONTRACT

Approximate reading time: 15 minutes

It is possible to replace the archaic words with simpler words. Examples which show

Employee may get an annual bonus.

The basic intention of both these sentences is that it is the duty of a party to mitigate

As a matter of rule, while drafting a particular standard of

How to read and review contracts

First level reading

5. Go through the dispute resolution provisions.

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