Dubious Contract Drafting: An Extract from a Model Confidentiality Agreement

You’d have thought that by now I’d be inured to how problematic contract drafting is at all levels of the legal profession, but I find myself continually amazed.

So how should I respond? Constant kvetching can make me look like a crank. But saying nothing seems defeatist. So I’ve decided that what I’ll do is periodically dissect deficient drafting offered by someone or some organization with an aura of expertise. I won’t identify them by name, as my aim isn’t to try to cut them down to size.

Instead, I want to encourage the legal profession generally—lawyers and their clients—to realize that the emperor has no clothes and that clearer contracts and a more efficient contract process are eminently achievable.

As my first sample, I offer you the 183-word “no obligation to proceed” language contained in a model confidentiality agreement compiled by a partner at a major law firm and published by an imprint of a major legal publisher:

Each party agrees that unless and until a definitive agreement between the parties with respect to any Transaction has been executed and delivered, neither of the parties will be under any legal obligation of any kind whatsoever with respect to such a Transaction by virtue of this or any written or oral expression with respect to such a Transaction by any of its directors, officers, employees, agents or any other Representatives or its advisors except for the matters specifically agreed to in this Agreement. Each party further acknowledges and agrees that (i) the other party shall have no obligation to authorize or pursue with it or any other party any transaction, (ii) it understands that the other party has not, as of the date hereof, authorized or made any decision to pursue any such transaction and (iii) the other party reserves the right, in its sole and absolute discretion and without giving any reason therefor, to reject all proposals, to pursue a Transaction with another party without prior notice and to terminate discussions and negotiations with it, in each case at any time.

What are the shortcomings in this extract? Let me count the ways:

  1. Redundancy (e.g., “Each party agrees that”; “unless and until”; “Each party further acknowledges and agrees that”)
  2. Sloppiness (e.g., “any Transaction,” although the defined term is “the Transaction”; “any other Representatives or its advisors,” although advisors are included in the definition of “Representatives”)
  3. Needless elaboration (e.g., “its directors, officers, employees, agents or any other Representatives” rather than “any Representatives”)
  4. Rhetorical emphasis (“any kind whatsoever”; “specifically agreed”)
  5. Undisciplined verb use (“the other party shall have no obligation”; “the other party reserves the right”)
  6. Potentially problematic waiver of the implied duty of good faith (“reserves the right, in its sole and absolute discretion and without giving any reason therefor”)
  7. Jargon (“executed and delivered”)

But my biggest problem with this language is the considerable overlap between the first sentence and the second sentence. I can’t see any purpose to it.

As to why is the author offering such problematic language to the world as a model, I suspect he’s unaware of its shortcomings. (I use the masculine pronoun as a convenience.) After all, he presumably learned to draft by regurgitating precedent contracts. The only question is whether he, like some other successful BigLaw partners I’ve encountered, regards as a threat, as a personal slight, any suggestion that one might do things differently.

And note that the whole point of this example is that in its shortcomings, it’s representative of BigLaw drafting.

By the way, here’s my “no obligation to proceed” language (28 words):

Until such time as the parties enter into a definitive agreement with respect to the Proposed Transaction, neither party will be obligated to proceed with the Proposed Transaction.

I’m open to suggestions for how it might be improved.

[Updated 6:55 p.m. EDT, May 5: Here’s my proposed language, revised to reflect Jim’s comment and Chris’s comment and my responses:

Unless the parties agree otherwise in writing, neither party is obligated to proceed with the Proposed Transaction or any other transaction.

***

Think this sort of analysis is useful/useless/reprehensible? Let me know. Want me to critique a bit of contract drafting (from an actual deal or from a publication)? Then get in touch.

Posted in Confidentiality Agreements | 22 Comments

  • Mike

    Neither party is obligated to proceed with any other Transaction [the Proposed Transaction] until the parties execute a written agreement with respect to such Transaction.

  • http://twitter.com/JFBrashear Jim Brashear

    “This agreement does not create any obligation to negotiate or effect the Proposed Transaction.”

    Isn’t the point simply that the NDA is not the definitive agreement?

    • http://www.koncision.com Ken Adams

      Jim: Your language raises interesting issues.

      First, you said “negotiate or effect,” I said “proceed with.” I sort of like mine, as it covers the same territory more economically. But I could be persuaded otherwise.

      Second, this presents an interesting “categories of contract language” exercise. Your language is language of policy; mine is language of discretion. You could in effect turn all language of obligation and language of discretion into your kind of language of policy: “This agreement imposes on Acme an obligation to / grants Acme the right to …” I think my version is more direct. In that regard, note how your version doesn’t mention the parties.

      Third, you omitted my reference to a definitive agreement. In one respect, that’s an improvement: referring to a definitive agreement is mostly a BS way of saying “unless the parties agree otherwise.” But more generally, the parties are of course at liberty to agree otherwise whenever the heck they want, but I think there’s some value to flagging the possibility if you’re dealing with a proposed transaction.

      I’ve added at the bottom of the post a revised version of my proposed language.

      Ken

  • Random John

    Clause (iii)/your #6 is probably a response to Global Asset Capital v. Rubicon. Sophisticated parties now spell out that there is no duty to negotiate in good faith or with any particular bidder, etc.

    • http://www.koncision.com Ken Adams

      Random: I agree with Jim that if you say there’s no obligation to negotiate rather than saying that you have the right to reject proposals, you sidestep any good-faith issue. Ken

  • http://twitter.com/johngillies John Gillies

    I very much like the language proposed by Jim Brashear.

    • http://www.koncision.com Ken Adams

      John: What do you make of my response to Jim? Ken

  • http://twitter.com/JFBrashear Jim Brashear

    The existence of an implied duty to negotiate in good faith may depend on the jurisdiction whose law governs the parties’ negotiating behavior (which may not be the same as the jurisdiction designated in a contractual choice of law provision). There is some authority that Texas, for example, does not recognize an implied duty of good faith in arms-length commercial transactions generally (a principle that may derive from Old West horse trading days).

    As a negotiating matter, however, it is difficult to assert that one reserves the right to not act in good faith if negotiations do proceed. So, for the purpose of this drafting exercise, it may suffice to simply deny there is any duty to negotiate (i.e., if there is no duty at all to negotiate, then there is no duty to do so in good faith). One might add “in good faith or at all” to what I wrote in the post below, but it may be surplusage.

    • http://www.koncision.com Ken Adams

      Jim: I’ve started writing an article on the implied duty of good faith. It raises to some tricky issues. I agree that in this context it’s irrelevant. Ken

  • http://www.theContractsGuy.net Brian Rogers

    Ken: I love this post’s concept and will keep my eyes open for deficient standard drafting. I’ve seen references to telex machines in notice provisions in recent years. Although not standard by any means, such provisions do reflect the mindless propogation of form language.

    • http://www.koncision.com Ken Adams

      Brian: Regarding “telex,” I considered that in this AdamsDrafting post. For this series, I have in mind provisions that come from some exalted source but are bollixed in all sorts of ways. Ken

      • http://www.theContractsGuy.net Brian Rogers

        Ken: I’m surprised telex notice provisions are so alive and well–185 contracts filed with the SEC two years ago reference telex notice? The sad thing is that when I first encountered telex notice as a junior associate, I just left the telex reference in the contract because I didn’t know what a telex was, yet I was reluctant to alter the precedent.

  • http://www.koncision.com Ken Adams

    D.C.: In this post I noted that an obligation to negotiate is one of only two contexts where I’d use a good-faith standard. But as I noted in my response to Jim’s comment, if you say you don’t have to negotiate at all, I think that subsumes not having to negotiate in good faith.

    Incidentally, I don’t use “for the avoidance of doubt.”

    Ken

    • http://www.OnTechnologyLaw.com D. C. Toedt

      Ken, I guess I’d be concerned that a court might be persuaded by The Other Side to rule as follows: “You were under no obligation to negotiate, because the contract says as much. But once you elected to cross that line and entered into negotiations, other side was entitled to assume you were negotiating in good faith unless you separately, and expressly, disclaimed any obligation to do so.”

      I may be overthinking this, but you know how “creative” litigation counsel can get in their contract interpretations.

      • http://rickcolosimo.com Rick Colosimo

        Concerned? I’d think exactly that myself. There are lots of things you don’t have to do — but once you start, you have an obligation of due care (good samaritan laws and all that); in the contract world, I think that good faith sets the same minimal standard.

  • Chris Lemens

    Ken:

    The only change I would make to your revised language is that I would not use the defined term “the Proposed Transaction.” Often big-deal negotiations abruptly take a different path (from a strategic partnership to an acquisition, for example). If the new negotiations turn out not to fit within the definition of “the Proposed Transaction,” then your language does not help you.

    So, I’d say, “Unless the parties agree otherwise in writing, neither party is obligated to proceed with any transaction.”

    Finally, as a practice note, one should be sensitive to when this language is literally false. For example, if some other agreement does actually obligate a party to proceed with the transaction, one would not want to use exactly this language, since it could be mis-interpreted as either (a) a representation of no obligations to proceed (if the prior obligation was not between the parties) or (b) a negation of the prior obligation (if it was between the parties). I’m not saying that’s a likely winner in court. Outside of this particular scenario, I wouldn’t think it likely to be misinterpreted.

    Chris

    • http://www.koncision.com Ken Adams

      Chris: I accept your first point, but since the contract is geared to the Proposed Transaction, I propose saying “the Proposed Transaction or any other transaction.”

      And your second point is a good one.

      Ken

  • Gary Karl

    Hey, Ken, I note this from your first formulation: “until such time as”? Couldn’t you just say “until”?

    Regards,
    Gary

    • http://www.koncision.com Ken Adams

      Gary: I was reluctant to use just “until,” as that could be read as suggesting that the parties had committed to entering into a definitive agreement. I thought that “until such time” made it clearer that that was not the case. But I’m not sure about that, so I was happy to switch to “unless” in the revised version. Thanks for raising the issue. Ken

  • http://bradykrissesq.com Brady Kriss

    I think posts like this are great, and you should keep doing them. There’s been some concern recently about new revisions to the TwitPic terms of service. I decided to take a look at the TOS, and my jaw just dropped. I’d be interested in your critique, and to know if mine is off. 
    TwitPic TOS is here: http://twitpic.com/terms.do
    My thoughts on it are here: http://bradykrissesq.com/?p=87
    Is it possible that a professional wrote the TOS? I can’t bring myself to believe that…

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  • A. Wright Burke, M. Phil.

    A few comments:

    1     The entire provision seems needless. If the agreement doesn’t require the parties to proceed with the Proposed Transaction, isn’t that enough? Must the agreement specify everything it doesn’t require the parties to do?

    2     I know you approve of “is not required to” and “is not obligated to” as ways to express the absence or boundaries of a duty. I prefer and suggest the alternative “need not” on the basis of concision and avoidance of passive constructions.

    3     Speaking of avoidance of passives, you could write “This agreement does not require either party to.”

    4     Although it sounds weird, you have yourself in MSCD described the concisest way to express the absence or boundary of a duty: “may.” In this case, could you not say, “Either party may proceed with the Proposed Transaction”? Perhaps your reaction is, “That’s absurd! Proceeding with the Proposed Transaction cannot be done unilaterally at the discretion of one party; it requires the parties to interact on terms not yet agreed.” If that is your reaction, then I repeat my suggestion that the whole provision is needless. (I can always be wrong.) Best regards.