Banking & Finance Articles
What Makes a Good Contract?
Many clients have misconceptions about the preparation of contracts. Some believe that all a lawyer does to prepare a contract is to insert the names of the parties, push a button, and print out the contract. Others believe it is less expensive if the attorney for the other side prepares the contract. Still others believe that if a preprinted contract form is used, there is no reason to have a lawyer review it. Each of these beliefs misapprehends the attorney’s role in contract preparation.
Most contracts are based on a prior contract or form that deals with the same subject matter as the current transaction. This has two benefits. First, use of a prior form serves as a reminder of issues to be considered in the present transaction. Second, it minimizes time spent on standard miscellaneous provisions (commonly referred to as “boilerplate”) and on formatting the contract. Selecting a prior contract form on which to base a new contract requires more judgment than might first appear. Some contract forms contain provisions distinctly favorable to a seller, while other forms contain provisions more favorable to a buyer. Some forms are many pages in length, while others are relatively short. Some forms are preprinted and others are generated by computer. The right form for a transaction depends on the client’s capacity (e.g., buyer or seller), the sophistication and expectations of the parties, and the complexity and magnitude of the transaction.
Having selected a form to use as a base, the attorney’s next step is to modify the form to fit the current transaction. This process goes far beyond merely inserting the names of the parties and the dates on which events are to occur. It entails a careful consideration of each provision of the contract. Language that was appropriate for a prior transaction may be entirely inappropriate for the current transaction. The care and skill with which the attorney considers, refines, and changes contractual provisions to maximize protection of the client and attainment of the client’s goals will determine how favorable the contract is to the client and how well the client is represented.
The process of drafting contractual provisions takes far more time than most clients realize. Inserting factual information into a contract takes little time at all, but thinking about, and considering how best to handle, the unique aspects of a transaction can take substantial time. No two transactions are exactly alike. Each transaction poses its own set of issues, many of which only surface from the attorney’s thinking about the implications of the client’s stated intentions. Often the attorney will need to discuss those implications with the client to assure the client’s understanding of the issues and to receive client direction on addressing the issues in the contract. A good contract necessarily is one that the client understands and that effectuates the client’s intent.
As the attorney decides which issues need to be addressed and how those issues should be addressed, the attorney must craft the language that produces the desired result. Anyone who has spent time reading contracts knows that possession of a law degree does not ensure an ability to write in a clear and understandable fashion. Words are a lawyer’s tools, and a good contract will reflect the precision with which the lawyer uses those tools. It is remarkably easy to write contractual provisions that are ambiguous. It is frequently difficult to write provisions that are unambiguous. Should a dispute between contracting parties end up in court, it is more likely than not that the parties’ contract is ambiguous on the point in dispute. The goal of good contract drafting is so to eliminate confusion and ambiguity that the contract will never be the subject of litigation.
Preprinted contract forms, usually coupled with an addendum prepared by the attorney, sometimes work well. However, preprinted contract forms standing alone offer no assurance of client protection. Clients often fail to realize that a preprinted form has no special virtue simply by reason of its being preprinted in an official-looking format. Behind every preprinted form is a contract draftsman, and no preprinted form requires of the draftsman any unique skill. As a result, many preprinted forms are wholly inadequate to protect a client’s interests.
A competent attorney typically prefers to prepare a client’s contract, rather than to review a contract prepared by someone else. This has several advantages. When an attorney uses as a base a form the attorney has previously prepared, the attorney already knows what each provision says. For this reason, it frequently takes less time to prepare a contract than to review a contract prepared by someone else. Moreover, the attorney who prepares the initial contract is often more successful in including provisions favorable to the client, because the attorney for the other party may not appreciate the ramifications of such provisions. Lastly, having to review and correct the language of a poorly drafted contract is inefficient and wasteful.
Most clients assume, but do not necessarily know whether, their attorney has produced a contract that is favorable to their interests and carefully prepared. It is uncertain whether most clients even read and understand their contracts. One thing is certain, however. If a client places trust in an attorney to protect a client’s contractual interests, the client should be sure that the attorney chosen to protect those interests is experienced and capable.
What makes a good contract? It is a contract that protects the client’s interests and effectuates the client’s intentions. A good contract depends upon the attorney’s skill and judgment in choosing the right form, analyzing the issues, communicating with the client, and writing provisions that are unambiguous, readily understood, and precisely crafted.