Procurement Policy Drafting 101—Appendix A
Best Practices for Negotiating and Drafting Contracts
Hallmarks of Well-Formulated Contracts
- In writing
- Legible – 12 pt. font, 1” margins, no caps unless emphasis required
- Logically formatted – outline form with subject headings; operative terms first, boilerplate provisions last
- Understandable – concisely written in plain English
- Complete – contains all material terms (ideally) within one written document
- Tailored to the transaction – inapplicable provisions excluded
- Anticipates and appropriately allocates risk – incorporates appropriate safeguards and contingency provisions
- All relevant Parties, including third-party beneficiaries and indispensable parties, are named in and bound by the contract, i.e. they must sign the contract.
- A Detailed Description of the Product Purchased or Work to be performed is included. The more detail, the better!
- For products: any special specifications, quality, or satisfaction requirements are included.
- For services: all duties to be performed, deliverables to be produced, restrictions on or instructions governing the manner of performance, etc., are included.
- States the Delivery Date or Schedule of Performance/Deliverables, including milestones, deadlines, and final due date.
- Establishes the Contract Term (g., the signing date to product delivery date/service completion date), with plenty of leeway at the end
- States the Price, including total cost and type of billing system used (e.g. fixed-rate, hourly, time and materials, etc.)
- Addresses the Mode and Manner of Payment, including accepted forms of payment (e.g. invoice, credit card, line of credit, up-front, graduated, etc.), time of payment, and reasonable penalties for late payment.
- Provides for Termination in event of a default and for convenience, including who may terminate the contract, under what circumstances, and how a party gives notification about a termination.
- Includes appropriate Remedies upon Breach, if necessary (not always necessary!). Unique to each contract, but should be reasonable, non-arbitrary, and tailored to the potential harm or loss.
- Provides for how the contract may be Amended. Any amendment should be in writing to be effective.
- Proposed Signatories have authority to bind the seller/contractor and your organization, respectively.
Helpful Provisions to Include, Depending on the Circumstances
- Time is of the Essence
- Cost Not to Exceed
- Governing Law and Venue
- Assignment and Delegation
- Force Majeure
- Intellectual Property
- Indemnification (when done properly)
- Insurance Requirement
- No Setoff
- Product Warranties and Disclaimers
- Successors and Assigns
- Joint and Several Liability
- Electronic Signatures
- Right of First Refusal
- Representations and Warranties
Harmful Provisions to Avoid, if Possible
- Limitations on Liability, including limitations on the causes of action, damages, remedies, statutes of limitations, etc., available to your organization. To neutralize, consider striking altogether, making it mutual, increasing the amount of the liability caps to induce performance, making limitations more reasonable/closely related to actual likely harm.
- Representations and Warranties. Scrutinize to ensure your organization is not unreasonably assuming the risk of a dangerous or defective product or service, or agreeing to an inadequate remedy.
- Binding Arbitration. Inappropriate for most consumer transactions because arbitration fees will likely exceed the dispute’s value. To neutralize, require seller to pay arbitration initiation costs since it’s their chosen forum, require at least one arbitrator of your organization’s choosing, make it non-binding, apply rules of evidence and civil procedure to the proceedings, require venue in your home state, or require exhaustion of good-faith negotiations first).
- Indemnification clauses masquerading as limitations on liability.
- Liquidated Damages To neutralize, impose a generous “grace period” or opportunity to cure period, decrease the amount of damages due, graduate the damages due over time, make damages more reasonable/closely related to actual likely harm.
- Governing Law/Forum To neutralize, suggest Deleware as governing law, federal court as forum, or insert a “plaintiff’s choice” provision, i.e. in event of a breach, non-breaching party chooses which law and/or forum will apply.
- Attorney’s Fees provisions altering the “American Rule”. To neutralize, only agree to “reasonable fees” (customarily 25% or less) as opposed to a specific percentage unless the suggested % is lower, reduce the fee percentage, narrowly define “fees” to exclude expert and other pricey litigation costs, or agree to pay “reasonable fees” or a percentage of fees only if lose the litigation.
- Waivers of Statutory Rights, such as debt collection safeguards, notice provisions, etc. To neutralize, consider striking altogether or negotiating a limited waiver.
- Acceleration Clause. To neutralize, strike altogether or ensure that your organization has notice of default and generous time to cure before it would apply.
Cannons of Contract Construction: How Courts Interpret Disputed Contracts
Knowing and understanding basic “cannons of contract construction,” or rules, that courts regularly use to interpret disputed contract terms can improve contract negotiations and prevent disputes before they arise.
- Courts give disputed contract terms their plain and ordinary meaning, interpreting them as ordinary, average, or reasonable persons would understand them.
- If contract terms are clear and unambiguous, there is no need for further interpretation and the court will enforce the contract as written. By doing so, the court gives effect to the parties’ intentions and avoids inserting its own preferences into the agreement.
- If contract terms are ambiguous, however, the court will consider “extrinsic evidence,” or evidence derived from outside the four corners of the contract (e.g. emails, conversations, preliminary bids, previous transactions and course of conduct between the parties, industry practice or customs, etc.), to determine the parties’ intent and expectations.
- When extrinsic evidence is unavailable or unhelpful, ambiguous contract terms are construed against the party who drafted the contract, especially with respect to provisions that attempt to limit liability. Thus, ambiguous terms will be interpreted in a way that is most favorable to the non-drafting party or invalidated altogether.
Top Ten Contract Drafting & Editing Tips
- Consider “what if” scenarios to flesh-out potential unforeseen problems
- Value clarity and simplicity to a fault – contracting is NOT creative writing!
- Use plain English – no legal jargon, Latin, or acronyms (“and/or”, “herein”, “heretofor”, “said contract”, “party of the first part”, “witnesseth”, “en arguendo”, “supra/infra”, “NIMBY”, etc.)
- Eliminate passive voice (“Seller will send invoices” not “invoices will be sent by Seller”)
- Use affirmative language over prohibitive language (“Contractor will do X” vs. “Contractor will not do Y”, thereby implying X)
- Use short sentences (25 words max.)
- Use short words (“after” vs. “subsequently”); no SAT words/creative variation!
- Eliminate double negatives (“it’s possible” vs. “it is not impossible”)
- Understand basic cannons of contract construction (“will”/ “shall”/ “must” = mandatory vs. “may” / “should” = permissive; drafting errors construed against drafter; specific words control general ones).
- Avoid using abbreviations to denote parties or terms (Consultant’s Rate Schedule = “Rate Schedule” not “CRS”), unless the abbreviation is synonymous with a party or term (Environmental Protection Agency = EPA; Legal Services Corporation = LSC)