Considerations for Drafting Legal Agreements
Transcription
Considerations for Drafting Legal Agreements
Considerations for Drafting Legal Agreements by Michael F. Schaff and Peter Greenbaum At the signing of the Declaration of Independence, Benjamin Franklin was thought to have said: “We must all hang together, or assuredly we shall hang separately.” While most documents attorneys draft do not have the significance of the Declaration of Independence, many attorneys draft, prepare and negotiate legal documents their clients consider essential. he preparation and creation of legal docu- T ment in, or understanding of, the relationship beyond what is ments can be an integral part of an attorney’s written on the paper. When questions or disputes arise, the daily activities. Civil litigators routinely draft businesspeople familiar with the issues may not be those complaints, pleadings, interrogatories, briefs involved with the drafting, negotiating and execution of the and motions. Attorneys specializing in trusts underlying agreement, which often occurred months or years and estates draft wills, trust agreements and before. succession plans. Transactional attorneys draft agreements on Often, the attorneys who are asked by their clients to inter- all topics involving all subject matters, including employment pret the agreement and answer questions are not the same agreements, purchase agreements, leases, license agreements, attorneys involved in initially drafting the agreement. Should shareholder agreements and other organizational documents. litigation arise, the attorneys charged with litigating the dis- Lender’s counsel draft loan agreements, security agreements, pute probably had no input in the initial drafting or subse- promissory notes, and numerous other agreements relating to quent interpretation. Consequently, it is essential that whoev- a loan transaction. er reviews the agreement, whenever the situation arises, and Regardless of your area of specialization, in all likelihood, whatever the question, can clearly understand it on its face. you will be charged with the task of drafting a legal document. The first step in preparing an agreement is to draft an out- With this in mind, this article is a guide for attorneys when line setting forth the general topics that must be included drafting any legal document. Since both authors practice pri- within the document. An outline not only assists in organiz- marily transactional law, the article will focus on considera- ing the drafter’s thoughts, but also will ultimately result in a tions that should be explored by a transactional attorney. more concise agreement that flows smoothly. Background helpful. The use of forms can be an invaluable tool because Consulting a similar agreement drafted previously may be The ultimate goal of an agreement is to enter into a clear, they save time, and as a result money, since there is no need concise and unambiguous arrangement acceptable to all par- to begin from scratch. But any reliance on forms should be ties. An executed agreement, once signed, is usually put in a considered carefully. drawer and forgotten about until there is a question regarding An attorney must not force the transaction into an existing a particular aspect of the relationship or, worse, a dispute. form. A form agreement must be viewed as a resource or start- Therefore, it is vital that the agreement accurately reflect each ing point, to be revised carefully and appropriately to address party’s understanding of the relationship. the transaction and issues at hand. That said, many inexperi- It is also imperative that the agreement be drafted in a enced attorneys rely too heavily on a form and are afraid to manner easily understood by third parties having no involve- depart from its language. Remember, the form being relied 28 NEW JERSEY LAWYER | April 2009 WWW.NJSBA.COM upon was used for a specific transaction, ment agreement, and most others, is the most likely with a different set of facts, recitals, sometimes known as the The Employee shall devote such and possibly prepared by a less experi- “Whereas” provisions. Whereas provi- time as may be reasonably necessary to enced attorney. sions are not legally required, but are a cooperate with the efforts of the useful tool. They provide a basic Board of Directors in the management Drafting Employer. overview of the content of the agree- and governance of the Employer’s Again, every agreement is unique to ment. The goal is to set forth, in simple business. Such duties shall be delegat- the facts of the subject transaction. Yet, terms, the basic purpose of the agree- ed to the Employee by the Board of the general structure of most agree- ment, some background information to Directors from time to time. ments is similar. They begin with identi- set the stage, and the nature of the The Employee shall have and fulfill fying the parties and the general subject transaction. This gives the reader a basic the duties assigned to him or her from matter, then proceed to the transac- understanding of the transaction in time to time by the Employer. The tion’s particular issues, and end with order to draft the more detailed provi- Employee shall devote his or her full miscellaneous provisions. As an exam- sions that follow. ple, consider a general employment agreement to illustrate the various parts. Opening Paragraph All agreements should begin by identifying the parties. THIS EMPLOYMENT time and attention to the business of the Employer and shall to the utmost of WHEREAS, the Employer is engaged in his or her abilities work for the profit the business of ____________; and and benefit of the Employer. The WHEREAS, the Employee has experi- Employee shall not, without the express ence as a _____________; and prior written consent of the Employer, WHEREAS, the Employer desires to render employ the Employee and the Employ- employed by any person, corporation, services or otherwise be AGREEMENT, ee desires to be employed by the partnership, firm or entity other than dated as of the __ day of ____, 200_ Employer on the terms and conditions the Employer. The Employee will not do by and between ____________________ hereinafter set forth. (the “Employer”) and ______________ (the “Employee”). anything to compete with the Employer’s present or contemplated business, These provisions are not usually part of the legally binding provisions of the nor will he or she plan or organize any competitive business activity. The This is a typical header of an employ- agreement (unless incorporated by refer- Employee will not enter into any agree- ment agreement, which identifies it as ence into the body of the agreement). ment which conflicts with his or her an employment agreement, notes the The drafter should attempt to only sum- duties or obligations to the Employer. date upon which it was executed, and marize the overall relationship, rather Without limiting the generality of identifies all applicable parties. Careful than include specific deal points. the foregoing, the Employee shall consideration should be given to the Whereas provisions are only intended have the following specific obligations applicable parties. Within the global to set the stage. The details of the trans- and economic structure in which companies action will be set forth in the body of _____________________________. operate, it is not unusual for an entity to the agreement. This is alternate generic language have numerous subsidiaries and affiliates, both domestic and foreign. duties: Duties and Obligations relating to the duties and obligations of Typically, the first substantive provi- an employee in an employment agree- must be clear exactly who the “employ- sion in an agreement is the respective ment. Whether an employment rela- er” is, so it is not misstating the employ- duties and obligations of the parties. In tionship, a sale of a business, or other er as an affiliate or a subsidiary of the an employment agreement, duties and transaction, the duties and obligations intended entity. This consideration obligations may consist of the following: of each party must be specifically stated. in the event an entity is selling its busi- Duties: The Employee shall devote his address specific job functions, time ness, the correct entity must be identi- or her full professional time, and commitment, and location of services, fied as the seller. attention, and energy as reasonably among other things. For a sale of a busi- necessary for him or her to perform all ness, these obligations usually consist of Recitals or Whereas Provisions duties assigned or delegated to him or the seller agreeing to sell its business, or her by the Board of Directors of the a portion of it (perhaps consisting of In an employment agreement, it In an employment relationship, they applies to all transactions. For instance, The next provision in an employWWW.NJSBA.COM NEW JERSEY LAWYER | April 2009 29 specific assets, goodwill, employees and In an employment relationship, this ee on the disability of the Employee as other intangible items), and the buyer provision is clear. It specifies how much determined by the Employer in accor- agreeing to certain post-closing respon- the employee is to receive and when it is dance with the Employer’s policies sibilities, such as assisting with the col- to be received. Since it is relatively sim- thereon. lection of the seller’s open accounts ple, including only a flat salary, in reali- receivable, among other things. In the ty there is little ambiguity, resulting in er on at least __________________ (___) case of a lease or license of an item, such less chance of a conflict. days advance written notice to the (iv) By the Employee or the Employ- as an office, software or other equip- The same principle applies in the sale ment, the lessor agrees to lease the iden- of a business or the license or lease of an (v) By the Employer, immediately, tified items to the lessee, and the lessee asset. It is not unusual for a transaction, on the occurrence of “Cause”, the exis- agrees to certain use restrictions and such as in the case of a sale of a business, tence of which shall be determined in obligations. In any event, the agreement to include not only fixed cash payments, the sole discretion of the Employer should state exactly what is required of but also earn-out payments or other pay- which shall include, but not be limited each party. ments tied to the achievement of finan- to any of the following: When each party’s responsibilities other party. cial thresholds or a formula. In this situ- (A) the Employee’s recurring are not clear, a dispute is more likely to ation, it is essential the formula be clearly absence, other than for illness or dis- arise. The drafter may attempt to pre- stated, including who initially proposes ability; or vent this by being overly specific when the earn-out or other formulaic amount; (B) the Employee’s failure to abide identifying the responsibilities. Some- whether there is a review opportunity by the terms of this Employment times, certain responsibilities are not and, if so, the terms; and should a dis- Agreement, after notice and a ten (10) known at the time of the drafting, and pute arise, whether an accountant or day opportunity to cure to the satisfac- very broad language is inserted. This can other third party would be the final tion of the Employer; or lead to disputes, since one party may arbiter. Providing examples is highly rec- (C) the loss of the Employee’s believe the other is not honoring the ommended, so a complicated formula license to [insert any required licenses]; intent of the agreement. can be more easily understood. or Termination zlement, misappropriation, or similar Other times, the agreement calls for specific responsibilities to be deter- (D) fraud, theft, dishonesty, embez- mined later. In this case, the subsequent Most relationships must eventually determination must be memorialized in come to an end. In the employment (E) the committing of any act or writing. The initial agreement should realm, certain obvious termination failure to act where there is a duty to identify what happens if the parties are events exist, such as death. There are act by the Employee, where such act or unable to agree at that later time. many other events that could trigger a omission constitutes an indictable termination (and all such events may criminal offense; or Financial Considerations Although it is not unusual for a party not be applicable in all relationships). (F) the Employee’s intoxication Consider the following: while on duty; or Termination. This Employment Agree- possession of drugs or intoxicants; or to agree to provide goods or services in exchange for another party’s goods or actions by the Employee; or (G) the Employee’s illegal use or services, in most cases one party is pro- ment shall terminate and the Employ- (H) any other conduct of the Employ- viding goods or services in exchange for ee shall cease to be an employee of ee which the Employer deems detrimen- a payment. For example, in the employ- the Employer and all of the rights of tal to its practice or which constitutes ment context: the Employee hereunder shall termi- cause for termination in the Employer’s nate and the obligations of the reasonable discretion, it being impossi- Employer to make payments hereun- ble to specifically enumerate all events, Compensation. For all services rendered under this Employment Agree- der shall immediately cease upon the conduct, and occurrences which would ment, the Employer shall pay the occurrence of any of the following be injurious to the Employer and which Employee a base salary of equal to events: would constitute cause. $__________ per annum which shall be paid in installments in accordance with 30 (i) By the mutual agreement of the Employee and the Employer. In essence, these provisions state that the Employer’s payroll practices, sub- (ii) By the death of the Employee. the relationship is terminable upon ject to applicable withholdings. (iii) By the Employer or the Employ- death, disability, without cause upon NEW JERSEY LAWYER | April 2009 WWW.NJSBA.COM appropriate notice, and for cause imme- individual or entity that would prohib- diately. A lease and a joint venture rela- it or impede the Employee from (whether of the State of New Jersey or tionship also can be terminable. Any undertaking the any other jurisdiction) that would type of agreement should clearly enu- duties, responsibilities and obligations cause the application of the laws of merate each party’s termination rights, under this Employment Agreement, any jurisdiction other than the State of if any. and the Employee is free to enter into New Jersey. Each of the parties submits and perform the terms and provisions to the jurisdiction of any state or fed- hereof. eral court sitting in the State of New Representations and Warranties and performing conflict of law provision or rule Representations and warranties are (b) The Employee is under no phys- Jersey in any action or proceeding aris- the formal description of certain facts or ical or mental disability that would ing out of or relating to this Agree- circumstances. Technically, representa- hinder, with our without reasonable ment and agrees that all claims in tions are statements of past or existing accommodations, the Employee’s abili- respect of the action or proceeding facts. Warranties are promises existing ty to carry out the duties, responsibili- may be heard and determined in any facts are or will continue to be accurate. ties or obligations to be rendered by such court. Each party also agrees not For the most part, these terms are used the Employee under this Agreement. to bring any action or proceeding aris- interchangeably. Representations and warranties are a formal way for one party to learn about (c) The Employee is duly licensed as ing out of or relating to this Agree- a ___________ without restriction or ment in any other court. Each of the limitation in the State of ______. parties waives any defense of incon- the other party before or while entering venient forum to the maintenance of into an agreement. They are also used In an acquisition of a business or any action or proceeding so brought in addition to, or in lieu of, other due asset, or the lease or license of an asset, and waives any bond, surety, or other diligence activities. Further, they pro- as with most other relationships, repre- security that might be required of any vide a basis for a party to seek redress sentations and warranties are appropri- other party with respect thereto. against another party in the event one ate, although they differ from situation Entire Agreement and Integration. has breached a representation or war- to situation. Each party must ask itself This Agreement contains the entire ranty (or a representation or warranty is what basic assumptions it is making understanding of the parties hereto. inaccurate). about the other party and the transac- This Agreement supersedes all other Due diligence is conducted within an tion, and whether it is appropriate to prior and contemporaneous agree- agreement, through the representations seek a representation or warranty from ments and statements on the subject and warranties, and outside of the the other party. matter contained herein. agreement, through the review of a party’s documentation and business, as Construction. This Agreement shall Miscellaneous Language be construed as a whole, according to well as by a physical inspection or ask- In almost all agreements, the final set its fair meaning, and not in favor of or ing questions. Representations and war- of provisions is typically called miscella- against any party. The headings of the ranties written in the framework of a neous or boilerplate language. Black’s paragraphs hereof are inserted for definitive agreement may provide an Law Dictionary defines boilerplate lan- convenience only, and do not consti- aggrieved party with an easier path to guage as language “used to describe tute part of and shall not be used to obtaining relief from a breach, as com- standard language in a legal document interpret this Agreement. pared to a situation where no written which is identical in instruments of a Attorneys’ Fees. The Employee shall representations and warranties have like nature.” Many attorneys make a promptly pay (or reimburse, as the been given. practice of viewing it as standard lan- Employer may elect) all costs and Some customary representations in an employment relationship include: guage, and fail to give boilerplate lan- expenses, including, without limita- guage the attention it deserves, and in tion, attorneys’ fees and court costs some cases, any attention at all. and expenses, which the Employer The Employee hereby makes the fol- may incur in connection with the lowing representations and warranties Governing Law and Venue. This Agree- to the Employer: ment shall be governed by and con- enforcement of this Agreement. Severability. If any term, provision, (a) The Employee is under no obli- strued in accordance with the domes- covenant or condition of this Agree- gation, restriction or limitation, con- tic laws of the State of New Jersey ment, or the application thereof to tractual or otherwise, to any other without giving effect to any choice or any person, place or circumstance, WWW.NJSBA.COM NEW JERSEY LAWYER | April 2009 31 shall be held to be invalid, unenforce- upon an employee, and if a party desig- cross reference to the applicable section able or void, the remainder of this nates this jurisdiction’s law as govern- where it is defined. In essence, the goal Agreement and such term, provision, ing, they may have a problem enforcing is to allow the reader to quickly and eas- covenant or condition as applied to a restrictive covenant that may be essen- ily identify a defined term. other persons, places and circum- tial to a transaction. Likewise, headings and cross refer- The inclusion of an entire agreement ences are useful tools. Legal conclusions or integration provision, stating the should not be interpreted from the Nonwaiver. The failure of either agreement supersedes all other and prior heading, but headings should be used to party, whether purposeful or other- agreements, also may have an unin- help the reader quickly locate an appli- wise, to exercise in any instance any tended consequence. Often, parties cable provision. Without the headings, right, power or privilege under this have entered into and/or exchanged a simple answer may require a review of stances shall remain in full force and effect. Agreement or under law shall not con- documentation prior to the execution the entire document. Cross references stitute a waiver of any other right, of the definitive agreement, such as a allow a reader to easily access the appli- power or privilege, nor of the same confidentiality agreement, a statement cable defining provision. right, power or privilege in any other of work, and the like, which they intend instance. to survive and incorporate into the rela- involved in late-night and last-minute tionship. However, the integration pro- negotiations, when all parties want to Notices. Any notice, request, consent or approval required or permitted vision may bar such an incorporation. Finally, most attorneys have been execute an agreement immediately, as to be given under this Agreement or Many attorneys merely cut and paste pursuant to law shall be sufficient if it the boilerplate language from a prior been made. All attorneys must keep in is in writing, and if and when it is hand agreement, but appropriate time and mind that these last-minute changes are delivered or sent by regular mail, with thought should be spent on the boiler- just as significant as the remainder of the postage prepaid, to the Employee’s plate language provisions. document, and should be carefully reviewed in the context of the agreement. residence (as noted in the Employer’s records), or to the Employer’s principal office, as the case may be. soon as some last-minute changes have Other Considerations If drafted inaccurately, or if a last- The use of defined terms in an agree- minute change has an unintended ment helps avoid needless repetition, impact on another provision in the At first blush, this seems innocuous. and allows more clarity when reviewing agreement or on an aspect of the trans- Yet, many issues can arise if not ade- an agreement. Ordinary words, used in action, it will not matter months or quately considered. the agreement in their normal context, years from execution that all parties need not be defined. requested the revisions be made in haste In the case of modifications to the agreement, where there are multiple It is beneficial to define terms and parties to an agreement, a modification phrases that are used uniquely in an requiring the agreement of all parties agreement. That said, defining a term or essentially gives any one party a veto phrase that is only used once or relative- right, even if it is not affected by the ly infrequently is probably unnecessary. The goal of every scrivener should be proposed amendment. If possible, define the term or phrase by to create a clear, unambiguous and con- so the agreement could be executed. Do not rush the final last-minute issues. Conclusion Erroneously providing jurisdiction in a related commonly used word or cise agreement that reflects the under- a venue where a party has no ties can phrase. Defining otherwise will only standing of the parties. Take your time, be result in administrative headaches. For confuse the reader. instance, a party’s attorney may not be Definitions should be written with licensed in the applicable jurisdiction, initial capitalization and placed within requiring them to seek new counsel. the framework of the agreement in a careful and thoughtful, and the result will be a clearly defined, binding contract. Michael F. Schaff is the chair of the cor- Overlooking or failing to consider location easily found by the reader. porate and healthcare departments at appropriate governing laws, can result Often, definitions appear in the open- Wilentz, Goldman & Spitzer, P.A., and a in a court reviewing a contract, or a pro- ing or closing section to an agreement member of the New Jersey Lawyer Maga- vision of the contract, with disfavor, or or in an appendix to an agreement. It is zine Editorial Board. Peter Greenbaum with an unintended consequence. For not unusual to have all defined terms in is a shareholder at Wilentz Goldman & example, many jurisdictions are reluc- one location. For those terms not Spitzer, P.A., and concentrates in corporate tant to enforce a restrictive covenant defined in this location, identify the and healthcare transactions. 32 NEW JERSEY LAWYER | April 2009 This article was originally published in the April 2009 issue of New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission. WWW.NJSBA.COM