Using “Tested” or “Market” Contract Language

This is a response to a post by Ken Adams of Adams on Drafting.   In one of my earlier posts about the desires of certain clients to have as short a contract as possible, I stated that it was beneficial to draft an agreement a certain way, including certain terms and language, because judges have seen similar items before. Ken identified this and he reiterated his position that a contract drafter should not rely on what he deems “tested” contract language.

To start off, I’ve read some of Ken’s posts before and they have been particularly helpful with respect to various drafting considerations, especially contract representations and warranties. And I have to say, I’ve changed some of the way I did things based on Ken’s insight. I do think, however, that relying on court precedent in the way you draft an agreement can be beneficial, whether it be using exact language or expanding upon previously used language.  That’s not to say I am a card carrying proponent of “tested” contract language.

I always strive to draft with clarity, but there are times when “tested” language is a decent option.  Some of my reasons for this are below:

  1. Whether language in a contract is clear is subjective. The history of the practice of law is based on disputing the meaning of language that the drafter thought was clear and legal at the time of drafting (whether it be a contract, statute or regulation). My version of a contract may be clear in my eyes, but others may disagree, including a judge. If 99% of people agree that a provision is clear but the 1% that doesn’t includes the judge that rules on it, then that’s a problem. The use of tested language in a contract is an attempt to limit the judge’s ability to rule in an unexpected way.
  2. Contract drafting isn’t done in a vacuum. There is a profound difference between drafting a form contract and drafting and negotiating an agreement for a multi-million dollar deal that is closing in two days with numerous parties. I think that most practicing attorneys are proponents of outspoken advocates for clear contract language (or they should be).  But unfortunately clarity is an ideal, and to close transactions attorneys must at times be pragmatic.  As a transaction progresses, there is another attorney (or more than one)  trying to cross out your “clear” language and add his or her own language into the agreement, or he may be trying to make your language intentionally less clear (it is usually a much more amicable process, but that is literally what is going on).  Therefore, whether certain language in an agreement is “clear” is in the eyes of the beholder, or more aptly here, in the eyes of the drafter.  Using tested language can be a compromise as both sides have seen similar language in the past (although the provisions should still be made to be as readable as possible).  An example of this is when I was a younger lawyer I was not happy with the way the vesting and right of repurchase provisions were written in typical startup founder restricted stock purchase agreements.  I drafted my own version which I was pretty proud of and implemented it with some startups I was representing.  When one of the startups was closing on its first real institutional investment, the investor’s lawyer told me that my language needed to go back to the “regular” vesting and repurchase provisions.  The startup needed the money and could have cared less about my prose so we amended all the founder agreements back to the “market” provision (in addition to some other changes).  Maybe this is a statement about the practice of law in general and how it could be improved, but nonetheless, it is still present, and the ideal is not always achievable.
  3. Personally, if I had to choose between (A) language in a contract provision that generally makes sense, is familiar to lawyers and business people in the industry and has been ruled upon by courts, or (B) novel contract language which is clear but has never been tested, then I’ll take (A) most of the time. I frankly believe that going with (B) in the regular course may be doing your client a disservice by introducing unneeded uncertainty.  If, however, I believe the probability of a beneficial outcome is higher using the language in (B) as opposed to that in (A), I wouldn’t hesitate to use (B).  I just believe that (A), if it exists, is the safer option in most instances, and would wager that plenty of lawyers, who hedge risk for a living, would agree.

I did want to include another example of what I meant. Here is an example of “tested” language, that can be relied upon in drafting a certain type of agreement.  Based on that case if I wanted to draft a provision so that the representations and warranties would terminate and shorten the statute of limitations to cut off a purchaser/investor’s right to bring an action after a certain period, the language set forth in the case would do this.  While the language in the case could certainly be improved upon, it could be used just as written and assuming the contract was covered by Delaware law, the drafter could have some piece of mind that the provision would do what they intend it to do.  If the purchaser/investor ever attempted to sue for a breach of a representation after the time period, a litigator could point to this case.  I do, however, believe that the language cited could be taken and expanded upon to make it crystal clear, and the court even gave some examples of how the drafter could get to the same outcome more effectively.

At the end of the day, I think that tested language is just another tool in a transactional lawyer’s toolbox.  It might not be relied upon that often, but can occasionally be helpful.

 

Previous

Updates to IRS Tax Partnership Audit Rules

Next

Is your Trademark License Agreement really a Franchise Agreement? In New York the answer is “Yes”

1 Comment

  1. Mike: Thanks for taking up my challenge! I’ve posted some thoughts at the bottom of my original post. Ken

Leave a Reply

Powered by WordPress & Theme by Anders Norén