Fulkerson Lotz LLP

1. DRAFTINGCONTRACTS: TIPS FROM A COUPLE OF BUSINESS LITIGATORS Fulkerson Lotz LLP Thomas M. Fulkerson Kelly J. Kirkland Fulkerson Lotz LLP 700 Louisiana, 52nd Floor Houston, Texas 77002 (713) 654-5800

2. “Businessmen habitually adventure large sums of money on contracts which,for purposes of defining legal obligations,are a mere jumbleof words.” Phoenix Ins. Co. of Hartford v. De Monchy, 141 L.T.R. 439, 445 (H.L. 1929) (Lord Atkin).

3. Background: Statute of Frauds – England, 1677

4. Background: Statute of Frauds – England, 1677 • Juries were still settling into their new role as neutral deciders of fact on the basis of testimony from witnesses. • Perjured testimony -- there was a highly developed underground industry devoted to manufacturing perjured testimony.

5. Breach Of Contract Litigation: Two Common Scenarios The Misunderstanding: Both parties thought about the issue in question when the contract was negotiated but have different understandings about how it was resolved. The Unforeseen Situation: Neither party thought about the issue in question when the contract was negotiated.

6. The Misunderstanding Problem: The contract speaks to the issue in question but not clearly. Solution: Avoid ambiguity when drafting.

7. “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” • Towne v. Eisner, 245 U.S. 418, 425 (1918) (J. Holmes)

8. “ambiguous” contract language is ambiguous when it is “reasonably susceptible to more than one meaning.” See, e.g., Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).

9. Is the Contract Ambiguous? Common Misconception Actual Law Surrounding Circumstances

10. “Evidence of surrounding circumstances may be consulted. If, in light of surrounding circumstances, the language of the contract appears to be capable of only a single meaning, the court can then confine itself to the writing.” Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981)

11. “Whether a contract is ambiguous is a question of law that must be decided by examining the contract as a whole in light of the circumstances present when the contract was entered.” Anglo-Dutch Petroleum Int’l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d 445, 449-450 (Tex. 2011) (quoting Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996).

12. Kelly J. Kirkland, “You Say You Want a Revolution: The Troubled Legacy of Sun Oil Co. (Delaware) v. Madeley, 40 Texas Tech Law Review 277 (2008). Contact: kkirkland@fulkersonlotz.com

13. Recital Clauses Whereas The critical function of “recital” (“Whereas”) clauses in a contract is to discuss the surrounding circumstances that the parties want the court to know about when it makes this determination. When you draft recital clauses, you are not speaking to your client or to the other side—they already know the surrounding circumstances. You are speaking to the judge.

14. Drafting Guidelines • Clear, precise, short sentences. • One point per sentence whenever possible. • Define key terms, use consistently throughout the contract.

15. Avoid Circular Definitions “Permanent Improvement” “A Permanent Improvement is an improvement that is permanently affixed or attached to the Property.”

16. Ambiguity (equivocation): Equivocation occurs when a word has two or more possible meanings. “A or B” can be ambiguous: 1. A or B (but not both) – aut in Latin 2. A or B (and perhaps both) – vel in Latin 3. A or B (A, that is to say B) – sive in Latin

17. Ambiguity (amphiboly): Amphiboly occurs when a sentence or phrase has two or more possible meanings, usually due to problems in grammar, sentence structure, or punctuation. “Xxxxx xxx xxxxx xxx xxxxxx xxx xx xxxx.”

18. Ambiguity (amphiboly): “Each vehicle shall contain an enclosed operator’s cabin and storage compartment.” Enclosed = Enclosed Operators Cabin Enclosed = Enclosed Operators Cabin + Storage Comp. Enclosed = Enclosed Operators Cabin + Enclosed Storage Comp.

19. Ambiguity (amphiboly): Compare: “Each vehicle shall contain an operator’s cabin and storage compartment, and the operator’s cabin and the storage compartment shall each be separately enclosed.” Enclosed = Enclosed Operators Cabin + Enclosed Storage Comp.

20. Last Antecedent Rule “This contract shall apply to pens, pencils, and crayons less than six inches long.” Compare: “This contract shall apply to pens, pencils, and crayons but only to the extent that such pens, pencils, and crayons are less than six inches long.”

21. Calculations Consider giving a detailed, completely worked-out example instead of, or in addition to, a description of the algorithm. If you give both an example and an algorithm, make sure they are consistent and provide which one prevails in case of an unintentional conflict.

22. “including” – “including but not limited to” choice of law – “The law of the State of Texas, without regard to its choice of law rules, shall govern all matters arising out of or relating to this contract.” Make sure every pronoun – especially “it” or “its” - has an explicit and unmistakable reference.

23. Drafters of statutes and constitutions often do this: • “Due process of law” If you use a vague term or phrase (e.g., “reasonable,” “adequate,” “where applicable,” “to the extent practicable”), only do so intentionally.

24. The Unforeseen Situation Problem: The contract does not speak to the issue. Solution: Try to anticipate as many issues as humanly possible.

25. The Unforeseen Situation Fleshing out the deal in the course of drafting the contract: Keep asking “What if …?” Make a note of each problematic scenario as it occurs to you. Don’t wait until later.

26. Conduct a “Premortem” Assume that it is some time in the future. Assume further that the deal has fallen apart and the parties are in litigation. Write a few sentences about what went wrong. Even better – get your client to do it also. Daniel Kahneman, Thinking, Fast and Slow, pp. 264-5:

27. Take Advantage of Accumulated Wisdom • Look at similar contracts in the industry. • What future problems do they anticipate? • Look at reported decisions in cases involving similar contracts in the industry. • What did the parties fight about? • Look at articles about the future of the industry. • What do they predict?

28. Examples of Issues Often Left Unaddressed in Contracts Prices go up/down. Supplies run out. Performance gets delayed. New technology replaces/modifies goods, means of transportation or communication, etc. Reference guidelines – for example, the Consumer Price Index (CPI) or the London InterBank Offer Rate (LIBOR) – are changed or cease to be published. Governing laws/regulations change.

29. CONCLUSION Conclusion The extra time you invest now can pay great dividends down the road.