Contract Drafting (Fall 2019)

By D. C. Toedt III
Attorney & arbitrator — tech contracts & IP
Adjunct professor, University of Houston Law Center

Updated Wednesday August 21, 2019 15:09 Houston time

Here are links to:

1 Class plan - Day 2 (Wed. Aug. 21)

1.1 Syllabus is updated, as a separate document

See the Syllabus (PDF) (added 8/21).

NOTE: The homework instructions have been tweaked somewhat; be sure to read them.

1.2 Review: Course guidelines

1. QUESTION: How many points on your final grade can you earn for turning in all drafting homework? [1]

2. QUESTION: According to the syllabus, what could happen if you didn’t turn in any homework?
A. You could still pass the course, but you'd have to make up the missing points.
B. Your grade will be dropped by one letter, e.g., A- to B- etc.
C. No adverse consequences, other than not getting the benefit of the work.
D. You will not be able to accumulate enough points to pass the course. [2]

3. QUESTION: According to the syllabus, to what extent are you allowed to collaborate with classmates in doing homework, and what are you supposed to do if you do collaborate? [3]

1.3 Demonstration: Drafting problems with a contract

From a contract drafted by The Other Side of an actual deal (sanitized):

Within thirty (60) days of the close of previous quarter term, ABC shall provide XYZ with a revenue report that provides a total amount of Data Revenue and Software Revenue obtained by ABC during the referenced quarter term, minus any associated costs or expenses and customer returns or refunds ("Revenue Report").

QUESTIONS:

  1. Any drafting problems with this?
  2. Ignoring the substance, how might this be otherwise improved to make it more readable?

DCT COMMENTS:

  1. "Within thirty (60) days …" is a mismatch, illustrating the reason for the D.R.Y. (Don't Repeat Yourself) principle.
  2. "Within 30 days of the close …" is ambiguous — it could mean within the 30 days preceding the end of the quarter.
  3. In the first phrase, it should be "… days of the close of the previous quarter term.
  4. "Quarter term" is not a conventional phrase — consider "calendar quarter," or perhaps "fiscal quarter," instead.
  5. "ABC shall provide XYZ with a revenue report" is OK, and some practitioners prefer it, but "ABC will provide" would be softer and more collaborative-sounding.

DCT REWRITE:

(a) Each quarter, ABC will provide XYZ with a revenue report. The revenue report is to state the following:

(1)     the total amount of Data Revenue and Software Revenue obtained by ABC during the referenced quarter term,

(2)     minus any associated costs or expenses and customer returns or refunds.

Each such report is referred to as a "Revenue Report."

(b) Each Revenue Report is due no later than 30 days after the close of the previous quarter term.

1.4 Lecture: Simplifying a contract

[DCT to pull up a PowerPoint deck.]

1.5 Exercise: Selling your laptop

FACTS:

  • You are a new lawyer, licensed to practice in Texas.
  • Here in Houston, "Alice"* is selling her 2012 Macbook Air laptop computer to "Bob" for USD $ 500.
  • You represent Bob, who has asked you to draw up a contract for the sale.

* In the tech world, communications protocols are often illustrated by using fictional characters Alice, Bob, Carol, Dave, Eve, Fred, etc.)

EXERCISE: In your groups, using the the virtual whiteboard ( 4:00 p.m. section | 6:00 p.m. section ), draft the simplest bare-bones contract you can think of for this transaction that would be reasonably likely:

  1. to be understood and complied with by the parties;
  2. to cover the essential business issues; and
  3. to get Bob to a jury — i.e., past a motion to dismiss for failure to state a claim — if Alice defaults.

1.6 Demonstration: Breaking up a wall of words

From the SEC's Plain English Handbook (at 30):

NLR Insured Mortgage Association, Inc., a Delaware corporation (“NLR MAE”), which is an actively managed, infinite life, New York Stock Exchange-listed real estate investment trust (“REIT”), and PAL Liquidating REIT, Inc., a newly formed, finite life, self-liquidating Delaware corporation which intends to qualify as a REIT (“PAL Liquidating REIT”), hereby jointly offer, upon the terms and subject to the conditions set forth herein and in the related Letters of Transmittal (collectively, the “Offer”), to exchange (i) shares of NLR MAE’s Common Stock, par value $.01 per share (“NLR MAE Shares”), or, at the option of Unitholders, shares of PAL Liquidating REIT’s Common Stock, par value $.01 per share (“PAL Liquidating REIT Shares”), and (ii) the right to receive cash payable 60 days after closing on the first of any Acquisitions (as defined below) but in no event later than 270 days (nine months) following consummation of the Offer (the “Deferred Cash Payment”), for all outstanding Limited Partnership Interests and Depository Units of Limited Partnership Interest (collectively, “Units”) in each of PAL Insured Mortgage Investors, a California limited partnership (“PAL 84”), PAL Insured Mortgage Investors - Series 85, A California Limited Partnership, a California limited partnership (“PAL 85”), and PAL Insured Mortgage Investors L.P. - Series 86, a Delaware limited partnership (“PAL 86”).

THE TASK: Rewrite the above wall of words into shorter sentences and paragraphs — without changing the substance of the provisions.

DCT's VERSION:

(a) This is an offer by two certain companies (the "Offering Companies") to acquire all the "Units" [DCT COMMENT: Does that mean all or nothing?] of certain "Target Companies," in exchange for stock and cash, as set forth below.

(1) The "Offering Companies" are:

(A) NLR Insured Mortgage Association, Inc., a Delaware corporation ("NLR MAE"), an actively managed, infinite life, New York Stock Exchange-listed real estate investment trust ("REIT"); and

(B) PAL Liquidating REIT, Inc., a newly formed, finite life, self-liquidating Delaware corporation[,] which intends to qualify as a REIT ("PAL Liquidating REIT").

(2) The "Target Companies" are:

(A) PAL Insured Mortgage Investors, a California limited partnership ("PAL 84");

(B) PAL Insured Mortgage Investors - Series 85, A California Limited Partnership, a California limited partnership ("PAL 85"); and

(C) PAL Insured Mortgage Investors L.P. - Series 86, a Delaware limited partnership ("PAL 86").

(3) The "Units" of the Target Companies are all outstanding Limited Partnership Interests and Depository Units of Limited Partnership Interest of the respective Target Companies.

(4) The "Shares" are:

(A) shares of NLR MAE’s Common Stock, par value $.01 per share ("NLR MAE Shares"), or,

(B) at the option of Unitholders, shares of PAL Liquidating REIT’s Common Stock, par value $.01 per share ("PAL Liquidating REIT Shares"), and

(b) In accordance with subdivision (c), NLR MAE and PAL Liquidating REIT hereby jointly offer to acquire all the Units in exchange for:

(1) Shares of the Offering Companies, as defined above; and

(2) the right to receive cash[,] payable:

(A) 60 days after closing on the first of any "Acquisitions"; but

(B) in no event later than 270 days (nine months) [DCT comment: So which is it, and how might it matter someday?] following consummation of the Offer (the "Deferred Cash Payment").

(c) The offer in subdivision (b) is made upon the terms, and is subject to the conditions, that are set forth herein in this [document title] and in the related Letters of Transmittal; subdivision (b) and and those terms and conditions are referred to collectively as the "Offer."

2 Class plan - Day 1

2.1 Course startup

  1. Student introductions:
    • Name
    • 2L? 3L? LLM?
    • Career intentions
    • Undergraduate school & degree
    • Work experience
    • Previous contract experience
  2. First in-class exercise: Where did Professor Toedt go to law school? Reason: It's a good idea to look up the people on the other side of a contract negotiation — or for that matter, anyone else you'll be dealing with. Google and LinkedIn are extremely useful for that purpose.
  3. Read-along lecture: Course info
  4. Email addresses in the virtual whiteboard ( 4:00 p.m. section | 6:00 p.m. section ) for a Google Groups list
  5. PSA requested by the University: Counseling is available (see the course book)

2.2 Exercises

2.2.1 Streamlining the sentence: The team meeting

In your small groups, discuss how to trim out the "fat" from the following sentence:—

Before:  
The team held a meeting to give consideration to the issue.

After: ???

2.2.2 Ambiguity exercise: Lola, by The Kinks

From The Kinks' famous song Lola (YouTube):

Well I'm not the world's most masculine man
But I know what I am and I'm glad I'm a man
And so is Lohhh-lahhh
Lo lo lo lo Lohhh-lahhh. Lo lo lo lo Lohhh-lahhhh

(Emphasis added.)

QUESTION: When the artists sing, "And so is Lola," what exactly is Lola?

EXERCISE: In your small groups, discuss how this could be clarified (don't worry about rhyme or meter).

2.3 Thumbsucker questions: Goals, etc.

For discussion, in small groups:

  1. In your practice, do you expect you'll be doing more drafting of contracts, or more review of drafts that others have prepared? Explain.
  2. What do you think are the main goals of a contract drafter or reviewer?
  3. In abstract terms, what do you think is the client's overarching goal in negotiating a contract?
  4. What do you think is likely to be the worst bottleneck in getting a contract to signature?
  5. What kind of contract language do you think business lawyers should aspire to write?
  6. TRUE OR FALSE: A contract drafter should strive to anticipate and address all harms to the client that might occur in the course of the parties' relationship.

Footnotes:

[1]

Drafting homework is worth 200 points.

[2]

You could still pass the course, but you'd have to make up the missing points.

[3]

Mutual consultation on homework is encouraged, but (1) each student must do his or her own work.