Contract articles, sections and contract clause numbering

The division of a contract into articles, sections and subsections, and contract clause numbering are characteristic for contracts. What is best practice and why? Here are some guidelines for enumerating matters in contracts and the (non) use of bullet points.

Articles and sections in contracts #

Almost invariably, the body text of an agreement is subdivided into articles, sections, subsections and other enumerated clauses. In large agreements, the articles are sometimes grouped in chapters. Subdividing provisions considerably improves the readability and legibility of a contract; it enables the drafter to make cross-references and, if the contract is well structured, readers can find their way around efficiently. Below, commonly used subdivision, indentation and numbering principles will be discussed.

Article and section naming. There are no rules on naming the articles and sections. In several jurisdictions a terminology that translates easily into English is used (e.g. clauses, sections); whilst in other jurisdictions the terminology used for referring to statutory provisions and regulations is avoided. In this book, we will refer to the main dividing level (level 1) as articles; we will refer to level 2 as sections, we call (level 3) subdivisions of sections subsections, and further subdivisions (on level 4) as paragraphsitems or (also) subsections.

Do not create sections at level 5 or 6. If you do need to enumerate at a fifth level, it is recommended that you do so ‘inline’, in running text (and number either with capital letters, (A), (B), (C), or (x), (y), (z)). It is a good idea to mark references to Articles and Sections by capitalising the first letter (as opposed to references to articles in statutes or other contracts).

Articles and sections as clause headings. Articles are no more than the heading (or ‘caption’) of the sections immediately underneath. The sections contain the provisions relating to a particular topic. A section may consist of one or more phrases, just like a novelist text, gathered together subject by subject. In U.S. style contracts, both articles and sections tend to be lengthier than European style contracts.

Breaking a section. If any section or subsection is more than about six to ten lines long, consider dividing it into separate subsections. In U.S. style contracts, the dividing point would be much later (e.g. twenty lines), or not even a criterion at all. If the other sections of the same article address different subject matters, it is recommended to break the section and to remove the numbering of the second part.

Numbering of contract clauses #

Article numbering. Typically, articles are given Arabic numbers with or without a full stop (1., 2., 3. or 1, 2, 3). In U.S. legal practice you will also find Roman numbering (i.e. Article I, Article II). If you decide to number articles in Roman numbers, you should revert to Arabic numbering for references to sections (i.e. section 2.3 would be the third section of Article II). U.S. originating contracts sometimes also place the word Article before the article number.

Note that dividing the agreement in articles and sections is not mandatory. However, not dividing the agreement into articles is uncommon, especially if the agreement exceeds six or seven sections, or if the various sections are dividable into two or three groups of a fairly different nature. Furthermore, in informal agreements, letter agreements and term sheets, a simple numbering style (i.e. 1., 2., 3.) would be perfectly appropriate.

The numbering and indentation style promulgated in this book (and commonly used on the European continent) is the following:

Numbering 15 05 2011 contract clause numbering

Section numbering. Unless an article consists of one section only, each section should be numbered. Do not place the word Section in front of each section number. You can number sections consecutively (i.e. 1., 2., 3. or (1), (2), (3)) or you can number the articles and sections using a multiple-numeration system (i.e. the sections of article 2 being numbered 2.1, 2.2, 2.3). Do not number sections 2.01, 2.02, 2.03, or 2.1., 2.2., 2.3. (with an extra full stop).

All the text in the body of an article should fall within a section (and, accordingly, should be numbered if there) where enumeration is preceded with a single lead-in, the remainder of the article may need to be reflected as subsections. For example, the lead-in that the seller warrants to the purchaser that each of the following statements is correct would result in all those statements taking the form of subsections with room to add only one or two additional levels of paragraphs. Some drafters resolve this by placing the lead-in (without a number) between the article and the first section. This habit should be discouraged.

Numbering subsections. Like the articles and sections, the subsections and paragraphs or items should be numbered as well. However, you should consider not pursuing a further multiple-numeration (i.e. do not number 2.1.1, 2.1.2, 2.1.3). It is common to use lower case letters between parentheses or small roman numbering between parentheses (we prefer (a), (b), (c)). For paragraphs you should choose another style (e.g. in case of subsection numbering by small letters use small roman numbering between parentheses).

No hand-numbering. Do not attribute a number to each article or section yourself! At the end of the 1990s, it had become very common to apply automatic numbering: articles on level 1, sections on level 2, etc..

Many drafters might link this to the Heading-styles provided by Word, but because this is a considerable source of document corruption (causing your computer to crash or slow down) when the contract is opened in another Word-version or another Word-language-version, it is strongly recommended to apply custom-made styles. When applied correctly (but there is only one way to do so in Word) the use of custom styles also allows the automatic renumbering of subitems (and sub-subitems) in non-numbered definitions; a distinct numbering of the contracting parties and recitals and the automatic renumbering of contracts included in a schedule (where the schedule is integrated in the main document of the main agreement).

Indentation of contract clauses #

First line indentation. The readability of a contract considerably increases by a proper paragraph indentation. For the layout of articles, sections and subsections, the most commonly used format (in European style) is ‘hanging indent’: the number of the paragraph stands out of the text of the paragraph (and the first line starts on the same indentation as the subsequent lines of the paragraph). This principle is applied consistently: each additional level indents an extra 1 cm. The result is a neatly staggering paragraph structure.

U.S. style (hanging indent). In U.S. style contracts, drafters need to work with the larger unit of the half-inch (1.27cm). It may be the reason why those contracts often use hanging indents (also increasing the density of the text on pages). An advantage of the hanging-indent format is that enumerations in subsections more easily read as a continuation of the lead-in section.

An example of U.S. style indentation (using virtually the same text as the previous example) is the following:

US style indentation 15 05 2011 contract clause numbering

For the avoidance of doubt, the above indentation style is not endorsed by us.

Enumerations in contracts #

When to enumerate. If a contract provision contains two or three lengthy phrases or more than three list items, it is recommended to break the paragraph and create subparagraphs. A ‘lengthy phrase’ would probably span over more than two or three lines whereas ‘listed items’ should be more than a few words. (In other words, do not create an enumeration if an inline listing would clearly suffice.) The dividing line is a matter of taste, driven by the criteria of readability and avoidance of ambiguity.

Sub-enumeration. When enumerations result in page-crossing lists of items, it may well be advisable to sub-enumerate the list. Enumeration or laundry lists in contracts Weagree Weblog contract clause numberingA typical example of such list can be found in share purchase agreements (where between the effective date and completion of the transaction, a number of actions would not be permitted without the prior approval of the purchaser), or in joint venture agreements (listing the items that are subject to approval by the joint venture partners or a supervisory body).

Business people who are supposed to work with such list feel uncomfortable as to whether all relevant matters are indeed listed or whether a desired action is subject to approval. Instead of one list of 25 to 30 items, it may be recommendable to subdivide the list into several topical ‘sub-lists’ (e.g. operational matters, IP-related resolutions, financial and tax matters, corporate structure-related decisions, employment and pension related matters and miscellaneous topics).

Many lawyers would produce an illegibly lengthy list of matters that are subject to approval, failing to introduce a logic in its order, and ending up in sometimes over 26 enumerated items. The reader of the contract is then stuck in interpreting whether or not something must be deemed to be covered by the enumeration.

See the following example (as picture):

A salient detail in the above example (which is usually inserted in M&A transaction agreements where signing and closing are split) is that the model clauses used by a lawyer from a law firm will start the list with matters that would frustrate the purpose of a transaction fundamentally (and would inevitably constitute abusive behaviour by the seller); whilst the in-house legal counsel and business managers will probably not even consider taking those first listed actions. The latter group of persons actually use the laundry list in order to review if entering into a business contract or if maintenance investments in assets (CAPEX) requires purchaser’s approval.

Numbering inline enumerations. If a running text contains an enumeration that you want to number, use the numbering style of the level that would apply if you had divided the enumeration into separate paragraphs. For example, if subsections are numbered (a), (b), (c), an enumeration within the body of a section should adopt the subsection numbering style. Obviously, if the same section already contains subsections, the numbering within the body text should be different.

Semi-colons, commas or full stops. Enumerated paragraphs should be separated by semicolons. The last enumerated paragraph should end with a full stop, except if it ‘continues’ in a non-numbered closing paragraph (see below). A different approach is acceptable if there is no non-numbering closing paragraph (see below), provided that such approach is adopted consistently (i.e. all enumerated paragraphs should end with the full stop).

For example, recitals may well be ended by a full stop (even though they are all deemed to be led in by the heading whereas:); definitions are increasingly often ended by a full stop; if you use a document assembly software application, enumerated clauses may be inserted or cut out, triggering a preference to end each clause with a full stop. Otherwise, enumerations, which are not divided into paragraphs, should be separated by commas.

The lead-in. It is a best practice rule to move as much text as possible from the enumerated paragraph into the lead-in of all enumerated paragraphs. This is also in order to prevent enumerated paragraphs starting with such emphasis on the continuation of the lead-in clause that it becomes irritating or formalistically repetitive. For example, if all the enumerations start with a verb in the infinitive, the word to is probably best placed in the lead-in phrase. For example, recitals should read as a story and provide basic background facts: the second and subsequent recitals should not start with whereas. It is better to place whereas above all the recitals.

Capitals, lower case and sentence breaks. If the enumerated paragraphs are ended by a semi-colon, the subsequent paragraphs should (as a rule of best practice) start with an underscore. The idea is that the entire clause consisting of the lead-in and all enumerated paragraphs are one continuous sentence. If you end each enumerated paragraph with a full stop, each enumerated paragraph should start with a capital (including the first enumerated paragraph, even though one could argue that it is the continuation of the lead-in phrase). If the enumerated paragraph consists of more than one sentence, it is nevertheless commonplace to end the final sentence of that enumerated paragraph with a semi-colon.

Grammatical structure. If applicable, the verb tense or the structure by which an enumerated paragraph starts should be repeated consistently.

For example, if you choose to start the enumerated paragraph by using the infinitive (to make) all subsequent enumerated paragraphs should use the infinitive and not shift to the present progressive tense (is making) or present perfect (has made).

For another example, do not shift the lead-in words in the event that X applies,… of one enumerated paragraph to words importing exactly the same in other paragraphs of the same enumeration (e.g. do not change halfway to in case X does not apply,… or, worse, if X is not applicable,…).

Use of and and or in enumerations. The final enumerated paragraph should be preceded by or or and (in inline enumerations placed before the numbering).

In case of or a drafter may sometimes seek certainty by adding or to each of the enumerated paragraphs; this is not necessary, unless the enumerated paragraphs apply by exclusion of the other paragraphs (i.e. the lead-in should clarify this by using the word either).

In case of and there is no need to add and to each paragraph. If the enumerated paragraphs in any running sentence are relatively complex or lengthy to warrant their being preceded by a colon, then they should also be separated by semi-colons rather than commas.

Non-numbering closing paragraphs. Occasionally, the enumerated paragraphs continue into a wrap-up sentence that applies to each enumerated paragraph (whichever paragraph may apply in any given context). Such wrap-up paragraph should be given the indentation of the lead-in clause to the enumerated paragraphs (but without a number). The continuation from the preceding enumerated clauses is indicated by using a comma at the end of the last enumerated paragraph (instead of a full stop). For example (at the end of subsection (b)):

5.1       As soon as practicable but in any event within 30 days following the Closing Date, Seller shall prepare:
(a)        a statement of financial position (balance sheet) of Acquired Company as of the Effective Date and a statement of comprehensive income (income statement) of Acquired Company for the 12-month period ending on the Effective Date, based on the Accounting Principles (the Preliminary Accounts); and
(b)        a document setting out the EBIT, Cash and Cash Equivalents and Debt (the Purchase Price Elements), as derived from the Preliminary Accounts,
and deliver these documents to Purchaser.

Empty sections preceding subsections. Avoid using empty subsections. Occasionally, the subdivision of an article into sections forces the drafter into using an empty section; this happens when one of the sections consists of two or more subsections without a lead-in phrase. Such empty section can be avoided by using the caption to ‘fill’ the section, but if no captions are used elsewhere in the contract an empty paragraph might be the preferred solution. To illustrate this (with an empty section 3.2):

3.1     In the event of X, Seller shall…

3.2
(a)     If Y is the case, Purchaser shall do a whole lot of things to reduce the effects of Y…
(b)     If Y is not the case, Purchaser shall be relieved from doing a whole lot of things, except for…

Alternatively, but suboptimally, the subsection can be placed into the ‘empty’ section and start with the number of that subsection, followed by a tab and the text of that subsection. An important disadvantage of this latter approach is that the indentation of the first subsection (including its subsequent paragraph lines) is visually different from the following ones. The previous example would result in the following layout (see in particular the word reduce in the second line of 3.2(a)) which is not correctly aligned:

3.1     In the event of X, Seller shall…
3.2     (a)  If Y is the case, Purchaser shall do a whole lot of things to reduce the effects of Y…
(b)  If Y is not the case, Purchaser shall be relieved from doing a whole lot of things, except for…

Two sets of subsections. Sometimes, a section contains two series of enumerated subsections. Whilst it is better to avoid this phenomenon, a drafter should anyhow avoid confusion by using a different numbering style for each set (and probably be forced to also apply different indentations).

Bulletpoints in contracts #

Best practice rule. Do not use bullet points in contracts.

  • Bullet points are difficult to address in a conversation. For example, imagine the confusion at the following roundtable discussion: “we disagree with the obligations reflected in bullet point seven and with the fourth sub-bullet point of the second bullet point on page 3. To start with the first…”).
  • Indentation is only clear to two levels (i.e. bullets and sub bullets).
  • It is impossible to make a cross-reference to a bullet point.

Nevertheless, if you do use bullet points, use an indentation style consistent with the sections or subsections.

Cross-references in contracts #

A provision often refers to a contract clause in the same contract or another contract. (Note that a provision can also refer to itself: this Section 9.2.) Such a cross reference indicates how the two provisions interact; whether the one is an elaboration on the other, subordinated or prevailing.

For example:

Sections 6.4, 6.5(b), 7, 8.4, 12, 16, 17 and 18 shall survive the Term or an earlier termination of this Agreement.
Subject to Section 4.4, within 30 days of the date of delivery…
Technology Licence means the technology licence agreement attached as Schedule 4.
The Deliverables corrected, completed or modified in accordance with Section 5.2(b)(ii) are subject to Acceptance in accordance with this Section 5.1.

Best practices. It is strongly recommended to keep the number of cross-references to a minimum. First, it improves the readability of the contract; the fewer the number of cross-references the better a reader should be able to understand a given provision on its own, without having to turn to other parts of the contract. The references subject tonotwithstanding and without prejudice to are normally the most disruptive ones. Second, a high number of cross-references, especially in a first draft of the contract, increases the chance of erroneous or dead references.

Suffixes. Some drafters add an indication belowabove or hereof to the cross-reference. It indicates that the reference is an internal cross-reference rather than a reference to a section of some other contract. It is good practice to omit such a ‘suffix’. Omission implies the possibility that a reference made without the suffix can be interpreted as a reference to something arguably outside the contract. But, in virtually all cases, its omission does not entail any confusion (whilst in the opposite context, where reference is made to a source outside the contract, the drafter will likely be keen to ascertain that the reference is specific and correct).

In case of references to a schedule or an annex, it may be useful to add the title of the schedule or annex immediately after the reference (and, obviously, make sure that the title does not change unless the reference is also changed).

If you are concerned about the specificity of a cross-reference without such a suffix, consider including a clause in the interpretation article, such as:

References to Articles, Sections, Annexes and Schedules are references to articles or sections of, or annexes or schedules to this Agreement.

If someone comments on the draft of someone else, it often happens that sections or articles are inserted or that sections are deleted. The result is that the cross-referred to section falls away (e.g. because a section is deleted) or that it is renumbered.

Automated cross-references. Common word processors provide a functionality to update references automatically, but in MS Word this is an additional source of problems because the technical point of reference easily falls away when editing the document. It is a good habit to use such functionality and, if you do so regularly, consider changing your personal preferences such that ‘field shading’ is always shown in grey on the screen (where the default setting would be that it turns grey only if the cursor is on the reference). Such automatically generated cross-references are reliable in the case of contract automation software applications, but also, in those cases, the subsequent drafting work may render references incorrect.

Marking references. Some drafters mark all cross-references by underlining or printing them in bold. This enables the reader to trace quickly where and how cross-referred to sections or annexes are referred to. Marking might also assist in checking internal cross-references. Otherwise, marking cross-references does not seem to serve any purpose. If cross-references are numerous, consider limiting the marked cross-references to those that refer to a schedule or annex only (which is what we prefer).

Clause headings (captions of contract clauses) #

Article titles (headings). The articles themselves are mere headings of the sections and, if you use chapters within an agreement, the chapter headings are also mere headings (immediately followed by an article). Choose an article title that covers all section topics. Do not use an article title that promises more than the sections actually deliver or that is otherwise misleading. Furthermore, the overriding principle is: keep it short (no more than a few words).

Common article titles are (see also section 3.5 – the body of the agreement):

  • Interpretation (for article 1; if no interpretation guidelines are inserted, Definitions would be fine as well)
  • Scope or Scope of this Agreement (for article 2; alternatively use the key obligation addressed in this article: Sale and purchase or Sale and delivery, as appropriate)
  • Conditions precedent (or simply Conditions)
  • Covenants (or, if more articles contain covenants, as the context requires: Pre-Closing covenantsOngoing covenantsFinancial covenants and Restrictive covenants)
  • Ordering and delivery
  • Licence restrictions
  • Warranties
  • Limitations of liability
  • Indemnification

It is a good idea to bring all the miscellaneous provisions under one article heading called Miscellaneous (except, as you may prefer, for confidentiality, applicable law and dispute resolution). Finally, it is recommended that you use article titles consistently for all the (model) contracts the company or firm drafts (but do not change the article titles chosen by the other party).

Captions. Many contract drafters, including myself, prefer to use captions. Captions are the one, two or three words at the beginning of a contract clause; they signal the subject of the contract clause. For example, the words preferred supplier is such a caption:

2.3 Preferred supplier. The Shareholders and their Affiliates shall treat the JVC and its Subsidiaries on an arm’s length basis and vice versa. The Shareholders and their Affiliates shall be the Preferred Supplier of the JVC and its Subsidiaries.

Like the division of an agreement into articles (with inevitably an article title), the indication of the subject matters of contract clauses may guide the reader through the contents. Obviously, using captions introduces a possibility that eventually, the caption does not cover the contents of the clause anymore. With brief contract sections such risk is fairly limited, whereas the captions still help the reader.

No captions for subsections. Do not use captions for subsections, unless it outweighs the disadvantage of losing readability.

Presentation of captions. Captions enable a law firm to distinguish its style from that of other firms. The preliminary question is of course whether or not agreements should contain captions at all. The presentation may subsequently take several forms: as an inline clause header in bold or underlined (being the most frequently used styles, as reflected in the above example) or as the numbered, bold heading of a non-numbered contract clause:

2.3 Preferred supplier. The Shareholders and their Affiliates shall treat the JVC and its Subsidiaries on an arm’s length basis and vice versa. The Shareholders and their Affiliates shall be the Preferred Supplier of the JVC and its Subsidiaries.

 

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