Thomas M. FulkersonKelly J. Kirkland

Fulkerson Lotz LLP700 Louisiana, 52nd Floor

Houston, Texas 77002(713) 654-5800

Fulkerson Lotz LLP

DRAFTING CONTRACTS:TIPS FROM A COUPLE OF BUSINESS LITIGATORS

“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.

Problem: The contract speaks to the issue in question but not clearly.

Solution: Avoid ambiguity when drafting.

The Misunderstanding

“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).

Common Misconception

Surrounding Circumstances

Is the Contract Ambiguous?

Actual Law

“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

• 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. Wherea

s

Recital Clauses

• Clear, precise, short sentences.

• One point per sentence whenever possible.

• Define key terms, use consistently throughout the contract.

Drafting Guidelines

“Permanent Improvement”

“A Permanent Improvement is an improvement that is permanently affixed or attached to the Property.”

Avoid Circular Definitions

Ambiguity (equivocation):

“A or B” can be ambiguous:1. A or B (but not both) – aut in Latin2. A or B (and perhaps both) – vel in Latin3. A or B (A, that is to say B) – sive in Latin

Equivocation occurs when a word has two or more possible meanings.

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.=

“This contract shall apply to pens, pencils, and crayons less than six inches long.”

Last Antecedent Rule

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.”

Consider giving a detailed, completely worked-out 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.

Calculations

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.

Daniel Kahneman, Thinking, Fast and Slow, pp. 264-5:

Conduct a “Premortem”

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.

• 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?

Take Advantage of Accumulated Wisdom

• 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.

Examples of Issues Often Left Unaddressed in Contracts

The extra time you invest now can pay great dividends down

the road.

CONCLUSIONConclusion