Contract Drafting: Points on Common Mistakes and How to Avoid Them June 2012

Transcription

1 Contract Drafting: Points on Common Mistakes and How to Avoid Them June 2012 Douglas L. Osborn MacPherson Leslie & Tyerman LLP

2 CONTRACT DRAFTING: POINTS ON COMMON MISTAKES AND HOW TO AVOID THEM I. INTRODUCTION Creating a concise and understandable agreement should be the goal of any contract drafting exercise. Transactions, at first review, may appear similar but the lawyer must ensure the written contract reflects the negotiated result. This paper, and the presentation which accompanies it, will highlight some common issues which arise in drafting contracts. The items discussed arise primarily out of experience of the author over numerous transactions of various types as compared to being a discussion of current case law in the area. A good resource for the drafting of any type of contract is the book Behind and Beyond Boilerplate: Drafting Commercial Agreements, Cynthia L. Elderkin and Julia S. Shin Doi, Carswell, II. PARTIES TO THE CONTRACT A. Do the named parties accurately reflect the intended subject matter of the contract? - Does the named vendor or lessor own the particular sold or leased asset? B. General Partnership as a Party - You should check the title to land, financial statements, or share registers, as examples, for evidence that you have the correct vendor party named. - At first blush, a party may not appear correct (as, for eg., it is not the registered owner of land) but there may be an agency/nominee agreement or perhaps a head lease in behind which would explain things. Don't assume this is the case. Find the supporting contract if one exists. - Using the name of the partnership is acceptable if that name is registered under The Business Names Registration Act.

3 If joint and several liability amongst the partners is desired, then each partner needs to be listed as a party (and sign the contract) and specific joint and several language included in the contract. - If the name of the partnership is used as the party, execution should be by a partner "as agent for " or certain individuals "as authorized representatives/signatories for ". C. Limited Partnership as a Party - A limited partnership is properly described as a contracting party using its name, for eg, "ABC Limited Partnership". It is an entity recognized by statue (The Partnership Act). The name can include a reference to the general partner ("as general partner of" or "by its general partner") but it is not absolutely required. - Execution of a contract by a limited partnership is usually handled by the general partner (unless the limited partnership agreement states otherwise). As a result, in the signature area the reference to the general partner is recommended. For example: "ABC Limited Partnership, by its general partner ABC Inc. Per: " III. DEFINITIONS A. The use of definitions is worthwhile in any contract. If there is a need to describe an item or phrase more than once (maximum twice) then the term should be defined and capitalized. - Search the contract to ensure you are using the defined term whenever it is referenced avoids confusion and saves ink. - If multiple documents are used in a transaction, use defined terms consistently throughout all of the documents. This makes for an easier understanding of the transaction for someone reading the documents. - Be careful to ensure consistency of defined terms. For example, watch for using "Purchase Agreement" once then "Sale Agreement" next when referring to the same agreement. B. Definitions should not include any covenant language or representation language. - Use descriptive language only.

4 Covenants and representations are best placed elsewhere in the contract. C. Not currently a common mistake, but may become one in the future, is use of the term "GAAP" (generally accepted accounting principles). These principles are being replaced and as a result, going forward, use of "IFRS" (international financial reporting standards) or "ASPE" (accounting standards for private enterprises) is recommended. - When drafting, you will want to check with the accountant involved to determine the appropriate reference. IV. BODY OF CONTRACT A. Cross-referencing contractual terms within a contract can prove troublesome, especially when the contract results from numerous revisions and re-drafts. - Best suggestion is to only use cross-referencing when necessary. If possible, refer to a defined term as compared to "as described in Section ". - When cross-references are used there really is no substitute for a final review of the contract to ensure the cross-references are correct. B. As much as possible, separate representations and warranties from covenants and conditions to avoid uncertainty. - Representations and warranties are factual statements made by a party to the contract about a subject matter of the contract. - Covenants and conditions involve actions to be done, or not done, by a party to the contract. - Keeping these concepts separate in the contract allows the covenants and conditions to be readily identifiable and a convenient list of what must be done for/on closing. C. An extension of the concept of using the same defined terms in all transaction documents is to ensure that all transaction documents are consistent on the same subject matter. - Best example of this is financing transactions. - The commitment letter, credit agreement or whatever is used includes terms negotiated between lender and borrower. - Security documents (often standard forms) include their own terms which can be inconsistent with the main loan contract.

5 - 5 - V. EXECUTION - It goes without saying that you can't ask a borrower to say, or agree with, two different things in separate contracts covering the same transaction. - One suggestion is to add a paramountcy clause to the security documents saying the terms of the loan agreement prevail. - The caution here relates to a mortgage which, of course, is filed in the land registry but the loan agreement is rarely attached. A subsequent encumbrancer on land may not be bound by the terms of a contract not filed in the land registry. A. It is becoming more common to sign documents in counterpart, especially where there are multiple parties. - This drives the use of separate signature pages which is a recommended approach. - When using separate signature page(s), remove any page number or footer (document description) references. - This removes any argument as to which electronic version of a document was signed and it removes the chance of one party signing one version and another party signing another version. - It also avoids different footers being generated by different computer systems in the printing process. - Unmarked signature page(s) can be used regardless of the final version of the contract ultimately agreed to by the parties.