Contract creation actions explained

In the previous weblog (click here), I addressed the main actions of a contract drafter. In this blog, I will explain what those actions entail.

Splitting up. Subdividing the contract elements into articles and contract sections. This requires a classification or determination where any given provision should be placed. Whether articles should be split up or whether contract clauses should be subdivided, may well depend on the length of the contract. In U.S. stylish contracts, the tendency is to reduce the number of articles (in a share purchase agreement sometimes no more than four or five articles). Whether a contract clause should be divided into subclauses mainly depends on how long the section is, the topics it addresses and whether the subdivision enhances clarity.

Classification. Recitals, definitions, warranties and conditions have their own place in the contract. Background considerations and explanations (e.g., “…in order to enable Seller…”) should be split off of obligations or other contract provisions and be concentrated in the preamble. Definitions are typically placed in a separate article (or sometimes a schedule). Warranties should never be mixed up with obligations or other contractual provisions. Conditions that affect the entire agreement or a contract’s main dynamics should be brought together in one article.

Prioritisation and logical ordering. In determining the sequence of the articles and contract clauses, a few forces play the game. Because typically a contract is not drafted from scratch but based on a model, the sequence of articles and contract clauses would be similar from contract to contract. A share purchase agreement, for example, is often structured as follows: conditions precedent; general sale and transfer provisions; purchase price provisions; covenants in relation to the sale and transfer; covenants covering the period to closing; the closing agenda; non-compete; warranties; limitations of liability; specific indemnities; and miscellaneous provisions.

As also discussed in connection with the general contract drafting principles (see also this blog), efficiency suggests that the following considerations should apply:

  • General provisions (e.g., defining scope or extension) should come before special provisions (i.e., limiting scope or principle, or defining exceptions or carve-outs).
  • Important provisions should precede less important provisions.
  • Clauses identifying causes of action or triggering events should precede their consequences.
  • Substance should be distinguished from form.
  • Content should be distinguished from procedure.
  • Chronological order (if applicable).
  • Provisions with a certain permanency should precede temporary or ad hoc provisions.
  • Miscellaneous provisions (boilerplates) come at the end.

Custom not only has an economy of effort in its favor; it also makes it easier for experienced practitioners to find their way in a contract and determine how the contract addresses a certain topic. Ultimately, it is up to the individual drafter to strike a balance between logic and customization when determining sequence.

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