Of course this stuff is hard to read! So is quantum physics, but that’s because quantum physics is, in fact, hard, no matter how well you write it (even for quantum physicists). Contracts, however, should be easy to read – clear declarative sentences organized into paragraphs arranged in a logical order.

Contracts are like computer programs. They set some initial conditions (names of parties, date, etc.). Then they list a series of basic directions and “if…then” statements which, if properly thought through, should cover most any eventuality governed by the agreement. That’s what computer code does.

You can run computer code on a computer processor and you will know pretty quickly if the code runs smoothly or if it hangs. The problem with contract language is that for now, there is no contract processor to run the code, except the gray matter of the reader, who may be a judge, another attorney, or just a contract party.

Here are some tricks I use to make sense of contracts.

If you have the electronic file (in Word or something similar), do these simple “search and replace” operations. Your altered contract may not read perfectly, but it will be improved and more understandable.

After this, your contract will be shorter and reading it may seem less daunting. More importantly, it will be dramatically clearer and more understandable. I actually have a software tool that will do all of this automatically in one pass, which is very helpful.

All of these legalisms have crept into the language of contracts over the years, and now most lawyers just accept them, and even feel uncomfortable without them. Some actually think that adding them is chargeable work. This does not make them necessary or even helpful. In many cases, they are just crutches for sloppy drafting, which is often a symptom of sloppy thinking.

In particular, I despise “For the avoidance of doubt……” followed by anything. I was taught that a good drafter says things once and says them clearly. If you have to repeat it, you need to rewrite it. “For the avoidance of doubt” is the legal equivalent of “I mean, you know, it’s like, blah, blah, blah……..right?” Repetition of the same idea with different wording merely opens up cracks for ambiguity to seep into the contract. If litigators get a hold of that language, they will pry those cracks open with industrial strength jackhammer arguments and corrosive cross-examination leaving your “iron clad” agreement in a pile of rusty rivets and crumbling boilerplate. It’s worth knowing that an infamous case not so long ago turned on the presence or absence of a comma, and millions were at stake. Clarity matters.

So, if you have to read a contract, you can either mentally make these adjustments, or let your word processor do it for you – either way, you will find the contract much more understandable and less soporific. Your eyelid muscles will thank you. And of course, it goes without saying, (but I will say it anyway, for the avoidance of doubt ), you can send me or any of our Virginia business attorneys your contracts and we will be happy to interpret them for you!

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In previous posts we’ve dealt with “boilerplate” clauses such as waiver, jurisdiction and venue, and integration. Today we will talk about two related clauses: the “assignment” clause and the “binding effect” clause. Both of these clauses relate to the question of who may enforce a contract at a later date.

Let’s start with binding effect. The binding effect clause typically reads something like this:

Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the heirs, personal representatives, successors, and assigns of the parties.

It almost seems redundant. Why would you need a paragraph saying that the contract is binding? After all it’s a contract right? Well not so fast. Judge Richard Posner, a noted federal judge and scholar on the topic of contracts recently decided a case in which he explained why not every document which expresses a mutual understanding is or should be enforceable as a contract, especially when that document includes language that specifically disclaims the intent to form a contract. Judge Posner is known for his clear and direct writing and you can read that case here. 

It’s worth noting that the converse is not necessarily true. Just because you say something is a contract, does not make it a contract if it is missing the essential elements such as offer, acceptance, mutuality, consideration (meaning exchange of value) and a legal purpose. Those are all topics for entire first-year Law school contracts course, but it is sufficient for this topic to note that it is easier to disclaim the existence of a contract than to create one. However, if you include a “binding effect clause” you certainly have reinforced the idea that you intend the document to be binding to some extent.

So what does the “binding effect” clause really do? It simply defines the parties to whom the benefits and burdens of the contract apply. Under common law, with some exceptions, a contract is an intangible right that can be freely transferred. One of those exceptions, however, is for personal service contracts. When you contract with someone for their personal services, they may not simply sell that contract and transfer their obligation to another party with whom you have had no prior contact. In the same way, if you are performing an obligation under a contract for a specific person, you may not want to continue to have that obligation if the original party substitutes a new one for any reason. But the most likely application of the binding effect language is when an individual party dies, or becomes disabled, or when a business is sold. In those cases it is critical for the other party to know whether it can expect a contract to survive.

Which brings us to the assignment clause. An assignment clause might read something like this:

Assignment. Neither party shall assign any rights or obligations under this Agreement, which are personal to the parties, without the prior written consent of the other party, which consent shall not be unreasonably withheld. No assignment of this Agreement by the Company shall operate to release the Company from any of its obligations hereunder.

This clause sets limits on either party’s ability to transfer its rights and obligations. Some assignment clauses are very permissive, and some are very restrictive. Just as the binding effect clause deals with transfers caused by unexpected events, such as death, or sale of a business, the assignability clause is more focused on voluntary transfers of rights and obligations. In the assignment clause, either party may restrict the right of the other party to transfer its obligations and benefits. This is very important. For example, what if you enter into a contract with a business, and the contract requires you to provide confidential information about your business to the other party? If that party were then allowed to simply sell that contract to your competitor, your information would be compromised. That’s just one of many examples. Another is where you contract for the services of a specific person because of their expertise, connections, reputation or your pre-existing relationship. If that person could then simply sell the contract to a 3rd party with whom you had no prior dealings, you may not receive the benefit of your bargain.

So as I hope you can see, both the binding effect clause and the assignability clause can have critical implications for your business. However, the circumstances in which they matter are usually not presented immediately. If you sign a contract and everything goes well, the job is completed and payments made, then they really never come into play. It’s only after you are in contract with someone, and the unexpected happens that they become relevant, and often critical.

If you are tempted to try crafting your own contracts, beware of the pitfalls of removing or neglecting these boilerplate terms. How happy will you be with the apparent cost saving when you later have trouble keeping the other party to the agreement true to its requirements? If you have questions or comments, just note them below and one of our Virginia business lawyers will get back to you.

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• When Acceptance Is Not (thecontractanalyst.wordpress.com)

Don’t be so fast to discard it, or to assume that only lawyers care about the “fine print.” Let’s look at another term. Frequently, contracts will have a clause called a “no waiver” clause. This language says that just because a party waives its rights in one situation, does not imply or require them to waive those rights in another similar or even identical situation. You could say it’s protection against the “no good deed goes unpunished” rule.

In the absence of this clause, if a customer typically accepted late shipments, the vendor might try to claim that this “course of dealing” modified the written terms of the agreement, and that they were permitted to ship late without penalty anytime they wanted. Your behavior would have “waived” your contract terms. This argument would fail if the contract had a “no waiver” clause.

In future posts, we will continue our discussion of boilerplate contract clauses, such the venue and jurisdiction provisions. I’m sure you’re on the edge of your seat waiting, but in the meantime, you may want to be sure that your contracts have the standard boilerplate that you need. I’m going to recommend (big surprise) that yours be reviewed by an attorney to make sure that the boilerplate properly protects you. At least as much as the other party. Seriously – have your lawyer look at your agreements before you sign, or better yet, get them to help in preparing them. Don’t let something as simple as a “waiver” clause leave you high and dry.

Isn’t protecting your rights and those of your business a good reason to have a Virginia business lawyer look over the contracts you prepare yourself?

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In the last post we talked about boilerplate clauses, specifically, the “integration clause.”

There are lots of other boilerplate sections that might seem to just be boring and unnecessary text, something you might drop if you didn’t know why they exist. Let’s look at two more.

Example one is the jurisdiction and choice of law clause. The fundamental purpose of a contract is to be able to enforce your rights if there is a dispute. You might assume that you can sue on your contract in the city and state where you made the deal, but that might not be the case. If the other party is in another city or state, they may have asked their attorney to specify that all disputes be resolved in the courts of that city in that state. If they did, it’s also likely that they specified that their local state law would apply.

The contract that requires you to cross several time zones just to make your case is a lot less useful. If your contract requires you to sue in Nevada applying Nevada law and you’re in New Hampshire, it’s going to be a very expensive lawsuit. You’ll probably be hiring a new attorney in another state, who doesn’t know you or your business or anything about the deal. That’s not a good way to start a lawsuit. But the other side will certainly take that all into account in any settlement offer. They will know that your settlement calculations will be more favorable to them because your legal costs will be higher than if you sue in your home court. See how the boilerplate works?

The law of the other state may not be favorable to your case. Although the Uniform Commercial Code (UCC) has been enacted in all 50 states, the case law can vary significantly in the rules of interpretation of the Code. What’s more, there are large areas of law, like employment, that are not covered by the UCC. Some states are “employment at will”, others give employees greater rights to maintain their jobs. If you are preparing an employment agreement, you would certainly want to control whether a California court would interpret a noncompete clause or whether a Virginia court would. I bet the interpretations would be different.

Example two is the “assignment” clause, another boilerplate clause that can dramatically affect your rights. This is not about homework. The assignment clause determines whether or not you or the other party can assign the benefits and obligations of your contract to a third party. Many contracts are designed to be assignable, and for commercial reasons, they have to be. Bank loans are a good example. On the other hand, if you contract with a company because of its specific expertise you may be disappointed to learn that they have assigned it to another company, whose standards are not as high. Sometimes it’s appropriate for one party to be allowed to assign its rights, while the other is restricted. The main point is that there is no single rule, and it’s always better to be clear in advance by using the proper boilerplate.

How will you be sure your contract protects your interests? Well, that’s what a good Virginia business lawyer is for. And all that boilerplate that some might think just increases your cost may eventually save your business, wouldn’t it?

So what is boilerplate anyway? The term originally meant exactly what it said. Boilerplate was standard, high-strength steel plate used to make boilers. Nothing fancy – just flat and strong to keep the boiler from exploding. Later, the term took on a meaning in the printing industry when blocks of text that were reused frequently were sometimes cast in steel as opposed to lead to make them more durable. Over the years, the word acquired a more general meaning, connoting anything highly standardized and commonplace. Lawyers adopted the term to refer to the language at the end of the contract that doesn’t seem to change very much from deal to deal.

It’s true that contract boilerplate language doesn’t change much, but the changes, while subtle, can be important. Boilerplate language is just as much part of the contract as the price, the delivery date or the description of the goods or services. What’s different about boilerplate is that it mostly matters when there’s a dispute. Of course, that’s when you really want the contract to be clear, unambiguous and, ideally, drafted in your favor.

Let’s look at one typical boilerplate term that most business people gloss over. It’s called the “integration clause.” The integration clause says that the written contract embodies all agreements of the parties with respect to the subject matter.

At first glance this seems obvious, and superfluous. Trust me, it’s not. The reason for this language is that, if it is not present, either side may be able to introduce evidence of subsequent agreements, side agreements, understandings, interpretations or other factors that could dramatically change the meaning of the agreement. If the language is present, then the person trying to prove something other than exactly what the agreement says has a high burden of proof. The only surefire way to prove that the terms of the agreement as written are not binding would be to have another written document amending the agreement and referring to it specifically. So the real purpose of this boilerplate clause is to enhance the certainty for both parties.

In this way, the language performs its boilerplate function exactly, holding the contract together despite pressures that might blow it apart. What common terms are you skipping over in your DIY contracts?

Remember the classic Monty Python skit? Eric Praline (John Cleese) walks into the Post Office to get a fish license for his pet halibut (also named Eric) and gets into an argument with the man behind the counter (Eric Idle). Here is an excerpt*:

Praline (pulling out his “cat license” to prove such things exist):
What’s that then?
Man: This is a dog license with the word ‘dog’ crossed out and the word ‘cat’ written in crayon.
Praline: The man didn’t have the proper form.
Man : What man?
Praline: The man from the cat detector van.

It gets sillier from there, but I digress…

Of what possible relevance is this you ask? Simple, this happens all the time in small business. Understandably, business owners want to control costs. Legal fees in particular. In light of the huge volume of legal documents accessible from the web, who can blame a business owner for finding what looks like a perfectly good form, marking it up and using it for a critical contract. This is commonplace, but very risky. I spend a significant portion of my practice time trying to extricate clients from unfortunate situations caused by this casual approach to contracts.

Here’s an example. Suppose business is tight, and you need some additional help, but you’re not prepared to hire a full-time employee. That’s when many businesses turn to “independent contractors” or “1099s” (in reference to the tax form the company sends to the contactor at tax time). This can be an excellent solution to the business problem, but a casual approach to the contract can have consequences far more expensive than the withholding tax that might be saved. In these situations, I have seen numerous examples where the business owner simply takes their standard “employment at will” agreement, does a search and replace substituting “contractor” for “employee” and “contract” for “employment.” What could be simpler?

But here’s the rub. Many of the pro-employer terms in a good employment agreement can have disastrous tax consequences if they remain in an independent contractor agreement. The IRS is not bound by your contract, but it can certainly give them lots of ammunition to use against you. The IRS has a list of 20 characteristics that determine whether the relationship is truly an independent contractor relationship, or merely a disguised employment. One of those key points is whether the relationship is terminable at will by the “employer.” If it is, then the IRS will likely take the position that this is an employment relationship.

So the standard “at will” clause in an employment agreement is the last thing you want to see in an independent contractor agreement. That’s just one of many examples. If the IRS decides your independent contactor arrangement is really just employment in disguise, they will not only assess the employer for unpaid withholding taxes, they can also impose a heavy 100% penalty on the “control persons” who write the checks or authorize the payments. That would generally be the owner. And what’s worse, if the IRS recharacterizes the independent contractor relationship as one of employment, then the contractor/employee may even have a claim against the employer for unpaid overtime, which would include significant damages and legal fees.

Take the same situation, but reversed. If the company dusts off what is really an independent contractor agreement, and tries to use it as an employment agreement, they have probably tossed away their right to terminate the employee “at-will” because the contractor agreement was for a specified task at a set price. As long as the contractor performs the specified task, they have a right to finish the job and get paid. Is this what you want in an employment agreement? Probably not. Keep that in mind if you are considering the DIY approach. Sure, you will probably save some legal fees, but from our experience, they will be dwarfed by what it will cost to untangle the “hairball” you may create.

For more merriment from Monty Python’s Flying Circus, go here.