THE BLOG
01/22/2015 01:58 pm ET Updated Mar 24, 2015

Suggestions When Preparing Commercial Contracts

Rules that courts use to interpret contracts are called "rules of construction." A court will only apply these rules of construction if the contract is ambiguous or uncertain. If the contract is otherwise lawful, the court will almost always interpret the contract according to its terms. This comment briefly lists ten, of many, considerations when preparing commercial contracts. Always involve experienced legal counsel in preparing and reviewing contracts.

A contract is ambiguous when two different interpretations are both reasonable. A court's primary concern is to determine and give effect to the intentions of the parties as expressed in the contract.

1. Have a few paragraphs at the beginning of the agreement that state the purpose of the agreement and the overall intention of the parties to the agreement.

Technical terms and phrases are interpreted to have the meaning that is ordinarily used by persons in the profession or business to which the terms are related. If the parties agree as to the meaning of a term, then that meaning will be used by the courts.

2. In a significant commercial contract that contains technical vocabulary, include a glossary (dictionary) of definitions within the contract.

If the parties have other documentation or extrinsic evidence (evidence from outside the contract) of agreed terms in addition to the signed contract, those items should be either attached as exhibits or included in the written contract. If they are not attached to the contract, then have them signed by the parties and specifically referenced within the signed contract. For example, "this contract incorporates by reference the engineering specifications prepared by ABC Inc. on January 10, 2015."

3. Consider attaching extrinsic documents as exhibits to the signed contract and use the language "incorporates by reference" to specifically include them by name as part of the signed contract.

If words of a specific meaning are followed by general words, the general words are interpreted to mean only the class or category bounded by the specific words. For example, if the contract reads, "boats and powered vehicles," the contract would be interpreted to include jet skis but not trucks. Consider these additional examples: "power tools including but not limited to drills and saws" is different than "power tools: drills and saws."

4. Carefully review lists for ambiguity. Use the phrase "including but not limited to" if the items named are only examples.

Where there is a conflict, written words and phrases control over preprinted terms. For example if the preprinted form says Quick Freight and typed or handwritten inserted words say Speedy Freight, then the contractual term is Speedy Freight. In like manner, words (one hundred dollars) control over numerals (10000 dollars).

5. Be certain words and numerals match and preprinted terms and written words match.

Is the contract internally consistent? For example, does one section state "delivery on June 1" and another section state "delivery when requested by the purchaser."

6. Consider the interplay of words and clauses in your contract. If they are contradictory or internally inconsistent, make appropriate changes.

If a contract is silent, courts are reluctant to write-in a term or clause. Who knows what agreement the parties would have made if they had negotiated the issue? Are assumptions (for example, nondisclosure of confidential information) expressed in the written contract?

Be careful not to assume certain words or phrases are understood to be part of a contractual clause when they are not stated. While the Uniform Commercial Code has some "fill-in the blank" provisions in sale of goods contracts, better practice is to reach a specifically stated agreement.

7. Does the agreement include the assumptions and understandings of the parties? The "obvious" is not always understood.

What is the source of the goods or services that your contract is supplying? What happens if that source of goods is unavailable? For example, goods from abroad might become unavailable due to a war or an embargo.

8. If goods or services come from a non-party primary source, then reference that primary source in the contract and expressly state what will occur if the primary source is unavailable.

People tend to be optimistic when entering into agreements and are not inclined to think about negative future events. However, one must think of the bad as well as the good. For example, currency fluctuations, strikes, weather events, or transportation delays may occur.

An additional issue is that business people often ignore the language in the contract until a dispute occurs. For example, the contract may require payment on the first of each month but the parties are making and accepting payments on the fifteenth. It is important to write a contract that reflects the parties' actual conduct. Otherwise there develops a conflict between the words of the contract and the actions of the parties. Determining if there is a breach of contract becomes difficult.

9. Does the contract adequately address potential negative contingencies? Does the contract reflect the actual practices of the parties?

World-class swindlers will sign any contract that you prepare. They expect to be long-gone when you decide to sue. Attempt to have a neutral source of secure collateral to support the performance of the contract. This might be a performance bond written by a solvent and reliable U.S. insurance company, for example. Perhaps have items that may be seized and sold if the contract is breached, as commonly occurs in automobile purchase loans. Carefully write these provisions.

10. Does the contract contain adequate protections in the event of non-performance?

Many things may occur in the unknown future that we all face. A contract attempts to create a known future sequence of events. Besides your personal thoughtful review, involve experienced legal counsel when preparing commercial contracts. No transaction is so rushed that it is impossible to have a carefully prepared contract.