Introduction
Precision and clarity are essential elements of a well-drafted contract. A solid commercial contract not only protects the interests of all parties involved but also reduces the likelihood of the occurrence of disputes caused by unclear terms. At Nour Attorneys, we specialize in creating contracts that are both strong and legally sound. This article will walk you through practical strategies for drafting executable clauses, using real-world examples to illustrate key points.
Establishing Clear Trigger Events
Trigger events essentially tell you when the counter party’s obligations or your obligations under the contract come into effect;
For example, a common loan agreement will specify that an interest rate as agreed between the parties will automatically come in to effect from the date the borrower defaults on its repayment obligations, without the lender having to serve any notice or observe any other formality. In this clause, the trigger event is the buyer’s default of its repayment obligations.
In a more complex arrangement, consider an investor who funds a startup with the caveat on the recipient of the investment that the the money shall be solely used to lease property for the business. In such an instance, most commonly the contract will specify that the receiver must refund any advance payments if the money is not used as intended for the purpose of leasing the property. This essentially gives a remedy to the investor, but it does not set a specific trigger event to make the clause executable.
To improve this clause, it could be rewritten as follows: “The receiver of the investment must return any advance payments made by the investor in full if they fail to use the funds to lease the property within 30 days of receiving the money. For the avoidance of doubt, leasing the property shall include but not limited to conducting due diligence, paying the necessary fees, and obtaining a title deed under its name name.” This version clearly outlines when the refund obligation takes effect, leaving no room for misunderstanding.
Avoiding Ambiguity
Ambiguity in contract language can undermine the agreement’s intent and lead to disputes. For instance, in a general service agreement, if you are representing the interests of the service provider, it is not uncommon to include a waiver clause which sets out that the service recipient waives their right to claim against the service provider for delays caused by the recipient’s actions or omission.
This could lead to confusion, as it implies that claims are possible in every situation except when the recipient is at fault. Accordingly, if the service recipient can establish that the delay is not caused by him to the satisfaction of the service provider, he can have any remedy against the service provider because the parameters of the remedies are not properly outlined.
To clarify, the clause can be revised to read: “The sole and exclusive remedy available to the service recipient for any delay or defect in service delivery is a discount not exceeding 10% of the total service fee.” This makes the recipient’s entitlements clear and removes any potential ambiguities at the enforcement stage.
Drafting Water-Tight Exit Options
Effective exit clauses are crucial in any commercial contract. For example, in a shareholder agreement, a “drag-along” clause allows majority shareholders to require minority shareholders to sell their shares to a third party on the same terms that the majority shareholder has secured the offer from such third party. However, simply stating that the majority shareholder has the right to exercise such drag along provision will not be adequate to make it an enforceable right in front of a competent court.
A more robust clause could read: “The majority shareholder shall notify minority shareholders of the third-party offer, including all terms and payment details. Accordingly, minority shareholders shall be entitled to either sell their shares or buy the majority shareholder’s shares on the same terms, within a [specified number of days] from the date of receipt of such notice, If the minority shareholders fail to action upon such entitlement within the timelines set out, the majority shareholder shall seek a court order to transfer the minority shareholder’s shares without the minority shareholder’s right to counterclaim.” This approach provides clarity on how the process works and details a step-by-step approach to the exercise of the right.
Let us take another example from a franchise agreement; if you are acting in the interests of the franchisor, as a legal advisor you will commonly advise the franchisor to have sole control over the franchised options or include provisions to specify that the franchisee cannot terminate the agreement under any circumstance or claim any ownership interest in the franchised business.
The general clause will read that the “franchisor but not the franchisee shall have the right to terminate this agreement by giving the franchisee of notice of a certain number of days” or it will read “where the franchisee is in breach of the representations and warranties given under the agreement such as having the capacity to perform its obligations, abiding by the confidentiality obligations set out, complying with the operational manual given by the franchisor, promoting the franchisee services etc., the franchisor can consider such breach a material breach under the agreement and terminate the contract immediately without furnishing the franchisee any opportunity to cure such breach”.
While the above clause maybe an effective clause this clause might not essentially be executable; it says the franchisor can terminate the agreement and maybe claim compensation but what happens next, what if the franchisor wishes to assume control of the operations of the franchised business?
Since it is not explicitly set out in the agreement, the franchisor may have to undertake a lengthy court, arbitration or any other dispute resolution forum as specified in the contract, to assume operations of the franchised business.
You could improve this by adding: “If the agreement is terminated, the franchisor can seek an emergency court order to transfer control of the franchise operations, and the franchisee waives any right to contest such order given. In such an event, the franchisor shall then determine compensation to be paid to the franchisee, based on an independent expert’s evaluation.” This gives the franchisor a clear path forward from the contract itself.
The Importance of Dispute Resolution Clauses
Even a well-drafted contract can fail if the dispute resolution clause is poorly constructed. For example, if the contract states that disputes will be resolved by an independent expert whose decision is final, this can limit the parties’ find recourse elsewhere. This essentially means that parties cannot appeal the decision given by the independent expert and that they cannot submit the dispute to an alternative dispute resolution forum which might be more effective.
To add more clarity, consider revising the clause to say: “Such independent expert decision, shall not prevent the parties from submitting to the exclusive jurisdiction of the court to reverse the outcome of the expert decision or to say that it shall not prevent the parties from filing a fresh course of action by submitting to a competent court. This ensures that the parties still have avenues for recourse and the contract has not limited their opportunities.
Conclusion
Drafting executable clauses in commercial contracts requires a strong understanding of legal principles and real-world business dynamics. Establishing clear trigger events, eliminating ambiguity, crafting robust exit options, and carefully structuring dispute resolution clauses are some of the most effective strategies we have been implementing over the years to safeguard our client’s interests while minimizing potential disputes. At Nour Attorneys, we are dedicated to providing our clients with contracts that not only protect their rights but also contracts that are easily executable in the eyes of the law without hassle. Thus, we at Nour Attorneys, strongly believe that effective contract drafting is an investment in the future of any business endeavor, ensuring clarity and security in all transactions.
