Contract Drafting
and Review
for the
Maryland Lawyer
Professor Charles A. Borek
Table of Contents
Foreword...................................................................................................................................................... xix
Author’s
Acknowledgements......................................................................................................... xxi
MICPEL’s
Acknowledgments............................................................................................................. xxiii
Preface............................................................................................................................................................ xxv
Introduction............................................................................................................................................... xxvii
Chapter One
Basic Contract
Architecture, Elements,
and Drafting Styles
I. What A Contract Looks Like ................................................................................................... 1
A. In
General ............................................................................................................................................... 1
B. Physical
Layout ..................................................................................................................................... 2
C. Segmentation
and Numbering ............................................................................................................. 4
II. Parts is Parts: The Essential Elements of any Contract ..................................................... 8
A. In
General ............................................................................................................................................... 8
B. The
Beginning ....................................................................................................................................... 8
C. The
Middle ............................................................................................................................................. 16
D. The
Ending ............................................................................................................................................. 18
III. Sources of Law .......................................................................................................................... 21
IV. Matters of Style ......................................................................................................................... 22
A. In
General ............................................................................................................................................... 22
B. The
Plain Language Movement .......................................................................................................... 23
C. Some
Drafting Conventions ................................................................................................................ 23
D. The
Need for Consistency ................................................................................................................... 26
E. Precision,
Ambiguity, and Vagueness ............................................................................................... 28
V. Conspicuous Language Requirements ................................................................................. 30
A. In
General ............................................................................................................................................... 30
B. Consumer
Transactions ....................................................................................................................... 31
C. Computer
Information Transactions .................................................................................................. 33
D. Health
Clubs .......................................................................................................................................... 35
E. Insurance
................................................................................................................................................ 35
F. Motor
Vehicles ...................................................................................................................................... 36
G. Real
Estate .............................................................................................................................................. 38
H. U.C.C.
Transactions .............................................................................................................................. 44
I. Miscellaneous
Transactions ............................................................................................................... 47
J. Federal
Law ............................................................................................................................................ 48
Chapter Two
Initial Matters
I. The Writing Requirement ...................................................................................................... 49
II. The Public Policy Doctrine and Enforceability ................................................................... 53
A. In
General ............................................................................................................................................... 53
B. Specific
Legislative Pronouncements of Public Policy in Maryland ............................................. 59
C. Heavily
Regulated Activities .............................................................................................................. 64
D. Employment
........................................................................................................................................... 65
E. Insurance
................................................................................................................................................ 66
F. Leases
..................................................................................................................................................... 67
G. Lending
................................................................................................................................................... 68
H. Marriage
................................................................................................................................................. 69
I. Settlement
Agreements ........................................................................................................................ 72
III. Identification of the Parties ..................................................................................................... 73
A. In
General ............................................................................................................................................... 73
B. Ability
to Perform .................................................................................................................................. 73
C. Capacity
to Contract ............................................................................................................................. 80
D. Appropriateness
of Parties .................................................................................................................. 81
IV. Structuring the Exordium ....................................................................................................... 85
A. In
General ............................................................................................................................................... 85
B. Third
Party Beneficiaries ...................................................................................................................... 88
V. Dating the Contract .................................................................................................................. 93
A. In
General ............................................................................................................................................... 93
VI. Transition
Language and Recitals of Consideration ......................................................... 97
Chapter Three
Recitals
I. Background ............................................................................................................................... 99
II. Format of Recitals .................................................................................................................. 102
III. Recitals of Considerations .................................................................................................... 104
IV. Using Recitals for Operative Provisions ............................................................................ 107
V. Using Recitals for Representations and Warranties ...................................................... 119
VI. Consequences of Inaccurate Recitals ................................................................................. 121
VII. Maryland Law Regarding Recitals ...................................................................................... 122
VIII. Properly Constructing Recitals .......................................................................................... 126
IX. Commonly Used Recitals ....................................................................................................... 128
A. Generic
Recitals ..................................................................................................................................... 128
B. Evolution
and Purpose of the Deal .................................................................................................... 128
C. Statutory
Prerequisites ......................................................................................................................... 129
D. Entity
Status .......................................................................................................................................... 131
E. License
Status ....................................................................................................................................... 136
F. Final
Observations ................................................................................................................................ 137
X. Examples of Recitals in Specific Types of Agreements ................................................... 137
A. In
General ............................................................................................................................................... 137
B. Asset
Purchase Agreement ................................................................................................................. 138
C. Confidentiality
Agreement .................................................................................................................. 139
D. Distributorship
Agreement .................................................................................................................. 140
E. Employment
Agreement ....................................................................................................................... 140
F. Equipment
Lease Agreement .............................................................................................................. 141
G. Escrow
Agreement ................................................................................................................................ 141
H. Forbearance
Agreement ....................................................................................................................... 141
I. Guarantee
Agreement ........................................................................................................................... 142
J. Indemnification
Agreement ................................................................................................................. 142
K. Independent
Contractor Agreement .................................................................................................. 142
L. Loan
Agreement .................................................................................................................................... 143
M. Management
Agreement ..................................................................................................................... 143
N. Merger
Agreement Between Two Corporations .............................................................................. 144
O. Partnership
Agreement ........................................................................................................................ 144
P. Pledge
Agreement ................................................................................................................................. 146
Q. Prenuptial
Agreement ........................................................................................................................... 147
R. Sales
Representative Contract ............................................................................................................ 147
S. Settlement
Agreement .......................................................................................................................... 148
T. Software
License Agreement .............................................................................................................. 148
U. Stockholders’
Agreement for a Small Corporation .......................................................................... 148
V. Stock
Purchase Agreement ................................................................................................................. 150
W. Subordination
Agreement ................................................................................................................... 151
Chapter Four
Definitions
I. Importance of Definitions ...................................................................................................... 153
II. Reliance on Ordinary Meaning ........................................................................................... 154
III. The Technical Meaning of Words ....................................................................................... 157
IV. Drafting Definitions ............................................................................................................... 160
A. Types
of Definitions ............................................................................................................................. 160
B. Parenthetical
Definitions ...................................................................................................................... 161
C. Use
of Separate Definitional Sections ............................................................................................... 164
D. Reference
to Exhibits, Schedules, or Other Sources ........................................................................ 165
E. Inclusionary
and Exclusionary Definitions ....................................................................................... 167
F. Lexiconic
Definitions ............................................................................................................................ 169
G. Defining
for Clarity ............................................................................................................................... 170
V. Statutory and Suggested Definitions .................................................................................. 173
A. In
General ............................................................................................................................................... 173
B. Term
Definitions .................................................................................................................................... 174
1. Address
.......................................................................................................................................... 174
2. Adult
............................................................................................................................................... 174
3. Advertisement
............................................................................................................................... 175
4. Affiliate
........................................................................................................................................... 175
5. Agreement
...................................................................................................................................... 176
6. Appraisal
and Appraiser .............................................................................................................. 176
7. Assets
............................................................................................................................................. 177
8. Audit
............................................................................................................................................... 178
9. Authorized
person ........................................................................................................................ 179
10. Best
efforts ..................................................................................................................................... 179
11. Book
value ..................................................................................................................................... 181
12. Breach
............................................................................................................................................. 181
13. Business
......................................................................................................................................... 182
14. Business
opportunity ................................................................................................................... 182
15. Business
trust ................................................................................................................................ 183
16. Cancellation
................................................................................................................................... 184
17. Cash
flow ........................................................................................................................................ 184
18. Cause
.............................................................................................................................................. 184
19. Child
................................................................................................................................................ 187
20. Company
........................................................................................................................................ 187
21. Compensation
................................................................................................................................ 188
22. Completion
Date ............................................................................................................................ 188
23. Confidential
Information .............................................................................................................. 188
24. Consent
.......................................................................................................................................... 193
25. Course
of dealing .................................................................................................................. 193
26. Day
and other time elements ....................................................................................................... 194
27. Debt
................................................................................................................................................. 196
28. Debtor
in Bankruptcy ................................................................................................................... 196
29. Default
and Events of Default ..................................................................................................... 196
30. Depreciation
................................................................................................................................... 198
31. Disability
and Disabled ................................................................................................................ 199
32. Encumbrance
and Encumber ....................................................................................................... 200
33. Environment
and Environmental Liabilities and Environmental Law .................................... 201
34. Fair
Market Value .......................................................................................................................... 202
35. Family
and family member ............................................................................................................ 203
36. Fiduciary
......................................................................................................................................... 204
37. Financial
asset ............................................................................................................................... 204
38. Generally
Accepted Accounting Principles .............................................................................. 205
39. Goods
.............................................................................................................................................. 205
40. Goodwill
.......................................................................................................................................... 206
41. Governmental
authority ............................................................................................................... 206
42. Hazardous
materials ...................................................................................................................... 207
43. Heir
.................................................................................................................................................. 208
44. Income
............................................................................................................................................ 208
45. Individual
....................................................................................................................................... 208
46. Knowledge
..................................................................................................................................... 209
47. Law
.................................................................................................................................................. 209
48. Legal
separation ............................................................................................................................ 210
49. Lien
.................................................................................................................................................. 210
50. Mail
................................................................................................................................................. 210
51. Material
interest and Materiality ................................................................................................ 211
52. Ministerial
Act ............................................................................................................................... 212
53. Minor
.............................................................................................................................................. 212
54. Notice
and Notifies ....................................................................................................................... 212
55. Ordinary
care ................................................................................................................................. 213
56. Ordinary
Course of Business ...................................................................................................... 213
57. Ownership
interests ...................................................................................................................... 214
58. Person
............................................................................................................................................. 214
59. Personal
representative ................................................................................................................ 215
60. Present
value ................................................................................................................................. 215
61. Professionals
................................................................................................................................. 215
62. Property
.......................................................................................................................................... 216
63. Purchase
......................................................................................................................................... 216
64. Real
Property ................................................................................................................................. 216
65. Related
Person ............................................................................................................................... 216
66. Rent
................................................................................................................................................. 218
67. Security
Interest ............................................................................................................................ 218
68. Small
Business ............................................................................................................................... 218
69. Specific
Statutes ............................................................................................................................ 218
70. State
................................................................................................................................................ 220
71. Stockholder
.................................................................................................................................... 220
72. Subsidiary
...................................................................................................................................... 220
73. Successor
....................................................................................................................................... 221
74. Tangible
personal property ......................................................................................................... 221
75. Taxes
............................................................................................................................................... 221
76. Termination
.................................................................................................................................... 222
77. Timely
............................................................................................................................................. 222
78. Trade
secret ................................................................................................................................... 222
79. Verify
............................................................................................................................................... 223
80. Writing
............................................................................................................................................ 223
Chapter Five
Representations
and Warranties
I. Explanation of Terms ............................................................................................................. 225
II. Consequences of False Representations ............................................................................ 229
III. The Effect of Maryland Statutes on Representations ....................................................... 235
IV. The Basics: Capacity, Authority, Conflicts, and Enforceability .................................... 237
V. Other Common Representations ......................................................................................... 245
A. Financial
Representations ................................................................................................................... 245
B. Representations
Concerning Heavily Regulated Activities ........................................................... 248
C. Tax
Representations ............................................................................................................................. 253
D. Access
to Counsel ................................................................................................................................ 254
E. Brokers
or Finders ................................................................................................................................. 255
VI. Common Representations Used in Different Types of Contracts .................................. 256
A. In
General ....................................................................................................................................... 256
B. Asset
Purchase Agreement ................................................................................................................. 257
C. Employment
Agreement — Employee’s Representations .............................................................. 258
D. Loan
and Security Agreement — Obligor’s Representations ....................................................... 258
E. Partnership
Agreement — New Partner’s Representation ............................................................. 258
F. Prenuptial
Agreement — Mutual Representations of the Parties ................................................. 258
G. Real
Estate Sales Contract (Commercial Real Estate) — Seller’s Representations ..................... 258
H. Stock
Purchase Agreement ................................................................................................................. 259
VII. Warranties
.............................................................................................................................. 260
A. In
General ............................................................................................................................................... 260
B. Federal
Laws Concerning Written Warranties ................................................................................. 262
VIII. Drafting and Reviewing Representations and Warranties ............................................. 265
A. How
to Begin ......................................................................................................................................... 265
B. Broad
vs. Narrow .................................................................................................................................. 266
C. Straight
vs. Qualified ............................................................................................................................ 271
D. Survival
of Representations and Warranties .................................................................................... 273
E. Remedy
Provisions ............................................................................................................................... 274
Chapter Six
Operative Language
I. What, How and When ............................................................................................................. 277
A. The
Basic Approach ............................................................................................................................. 277
B. The
What ............................................................................................................................................... 282
C. The
How ................................................................................................................................................. 284
D. The
When .............................................................................................................................................. 286
II. Specific Types of Operative Language ............................................................................... 287
A. Business
Opportunities ....................................................................................................................... 287
B. Business
Ownership Agreements ...................................................................................................... 289
C. Confidentiality
Agreements ................................................................................................................ 300
D. Employment
Agreements ..................................................................................................................... 306
E. Payments
of Money ............................................................................................................................. 311
1. Simple
Cash Payments ................................................................................................................. 311
2. Complex
Cash Payments .............................................................................................................. 313
3. Describing
Fluctuating Cash Payments .................................................................................... 316
4. Deposits
and Escrows .................................................................................................................. 317
5. Deferred
Payments ........................................................................................................................ 321
6. Contingent
Payments ................................................................................................................... 326
F. Performance of Services ....................................................................................................................... 328
G. Preneed
Burial Goods (Caskets, etc.) ................................................................................................. 328
H. Transfer
(Sale & Lease) of Personal Property .................................................................................. 329
1. Sale
and Lease of Goods Under the Uniform Commercial Code ............................................ 329
2. Purchase
of a Business ................................................................................................................ 337
I. Transfer
(Sale & Lease) of Real Property .......................................................................................... 343
1. Sale
of Real Property .................................................................................................................... 343
2. Real
Estate Leases ........................................................................................................................ 350
III. Miscellaneous Drafting Issues —
Describing Weights and Other Measurements .............................................................................. 353
IV. Term and Termination ........................................................................................................... 353
A. In
General ............................................................................................................................................... 353
B. Automatic
Termination ........................................................................................................................ 354
C. Discretionary
Termination ................................................................................................................... 355
D. Conditional
Termination ...................................................................................................................... 355
V. Closing Obligations ............................................................................................................... 359
Chapter Seven
Covenants and
Conditions
I. Covenants ................................................................................................................................. 365
A. In
General ............................................................................................................................................... 365
B. Affirmative
Covenants ......................................................................................................................... 366
C. Restrictive
Covenants .......................................................................................................................... 369
1. In
general ........................................................................................................................................ 369
2. Stock
transfer restrictions ............................................................................................................ 370
3. Non-compete
agreements ............................................................................................................ 374
II. Conditions ................................................................................................................................ 380
Chapter Eight
Remedies
I. In General ................................................................................................................................ 395
II. Attorneys Fees, Costs, Etc. ................................................................................................... 396
III. Exculpatory Provisions .......................................................................................................... 399
IV. Forfeiture of Deposit .............................................................................................................. 403
V. Indemnification ....................................................................................................................... 407
VI. Limitation of Actions ............................................................................................................. 410
A. In
General ............................................................................................................................................... 410
B. Modifying
the Statute of Limitations ................................................................................................. 410
C. Limiting
the Amount of Damages ....................................................................................................... 412
VII. Liquidated Damages ............................................................................................................... 415
VIII. Specific Performance ............................................................................................................ 417
Chapter Nine
Dispute Resolution
I. In General ................................................................................................................................ 421
II. Governing Law ........................................................................................................................ 422
III. Jurisdiction and Venue ......................................................................................................... 428
IV. Methods of Dispute Resolution ............................................................................................ 434
A. In
General ............................................................................................................................................... 434
B. Waiver
of Jury Rights .......................................................................................................................... 436
C. Mediation
............................................................................................................................................... 437
D. Arbitration
.............................................................................................................................................. 440
Chapter Ten
Back of the
Document
I. Why is the Back of the Document so Important? ............................................................. 453
A. The
Boilerplate ...................................................................................................................................... 453
B. Signatures
.............................................................................................................................................. 455
II. A Smorgasbord of Boilerplate Provisions ......................................................................... 456
A. Agency
................................................................................................................................................... 456
B. Amendment
and Modification ............................................................................................................ 461
C. Assignment
............................................................................................................................................ 466
D. Binding
Effect; Benefit ......................................................................................................................... 478
E. Choice
of Law ........................................................................................................................................ 482
F. Construction
Against Drafter ............................................................................................................. 482
G. Counterparts
.......................................................................................................................................... 485
H. Effectiveness
......................................................................................................................................... 485
I. Force
Majeure (Performance Excused) .............................................................................................. 486
J. Further
Assurances .............................................................................................................................. 489
K. Gender
and Number .............................................................................................................................. 493
L. Governing
Law (Choice of Law) ......................................................................................................... 494
M. Headings
................................................................................................................................................ 495
N. Inconsistency
........................................................................................................................................ 496
O. Incorporation
by Reference ................................................................................................................. 497
P. Integration
(Merger or Entire Agreement) ........................................................................................ 499
Q. Jurisdiction
and Venue (Forum) .......................................................................................................... 502
R. Notice
...................................................................................................................................................... 503
S. Remedies
Cumulative ........................................................................................................................... 508
T. Severability
............................................................................................................................................ 511
U. Survival
................................................................................................................................................... 513
V. Time
of the Essence .............................................................................................................................. 515
W. Waiver
.................................................................................................................................................... 517
III. Signatures ............................................................................................................................... 521
A. In
General ............................................................................................................................................... 521
B. Acknowledgments
................................................................................................................................ 523
C. Notarization
............................................................................................................................................ 524
D. Testimonium
Clauses ........................................................................................................................... 525
E. Seals
........................................................................................................................................................ 527
F. Representative
Capacity ...................................................................................................................... 529
G. Electronic
Signatures ............................................................................................................................ 530
Appendix A
Checklist for
Drafting and
Reviewing Contracts
I. Before You Begin ................................................................................................................... 531
II. Overall Structure of the Document ..................................................................................... 531
III. Identification of the Parties .................................................................................................. 532
IV. Dating the Contract ................................................................................................................ 533
V. Transition Language and Recitals of Consideration ....................................................... 533
VI. Recitals ..................................................................................................................................... 533
VII. Definitions ............................................................................................................................... 534
VIII. Representations and Warranties ........................................................................................ 536
IX. Operative Language ............................................................................................................... 536
X. Term and Termination ........................................................................................................... 538
XI. Covenants ................................................................................................................................. 539
XII. Conditions ................................................................................................................................ 540
XIII. Remedies .................................................................................................................................. 540
XIV. Dispute Resolution ................................................................................................................. 542
XV. Boilerplate ............................................................................................................................... 544
XVI. Signatures ............................................................................................................................... 547
Appendix B
Bibliography
Accounting, Banking, and Finance ............................................................................................................... 549
Business Acquisitions ..................................................................................................................................... 549
Construction ...................................................................................................................................................... 550
Consumer Transactions .................................................................................................................................. 550
Dictionaries ....................................................................................................................................................... 551
Dispute Resolution ........................................................................................................................................... 552
Distributor Agreements .................................................................................................................................. 553
Drafting and Review (General) ....................................................................................................................... 554
Electronic Contracting .................................................................................................................................... 555
Employment ........................................................................................................................................................ 556
Environmental Issues ....................................................................................................................................... 556
Forms (General) ................................................................................................................................................ 557
Franchises .......................................................................................................................................................... 557
General Contract Law ...................................................................................................................................... 558
Government Contracts ..................................................................................................................................... 558
Health Care ........................................................................................................................................................ 559
Insurance ............................................................................................................................................................ 559
Intellectual Property ........................................................................................................................................ 560
International ...................................................................................................................................................... 560
Leases ................................................................................................................................................................. 561
Licensing ............................................................................................................................................................ 561
LLC, Partnership, and Stockholder
Agrements ......................................................................................... 563
Loan Documents ................................................................................................................................................ 563
Marital Agreements ......................................................................................................................................... 564
Real Estate .......................................................................................................................................................... 564
Remedies ............................................................................................................................................................ 566
Services .............................................................................................................................................................. 567
Tax Issues ........................................................................................................................................................... 567
U.C.C. Transactions ......................................................................................................................................... 567
Table
of Authorities.............................................................................................................................. 569
Table
of Cases............................................................................................................................................ 577
Index.................................................................................................................................................................. 597