Drafting an Effective Commercial Agreement – Any Magic Ingredients?

To tell you the truth, there are no magic ingredients for drafting an effective commercial agreement. Lawyers cannot just simply add certain ingredients or follow certain steps to come up with a professional and effective agreement. Good drafting skills cannot be acquired overnight, they come with practice and experience. Self-reflection is particularly important for our continuous learning and improvement. It is helpful to stop for a moment to reflect critically on what our drafting practice has been. Have you thought about the ingredients you have been using for drafting an agreement? Have they been working well or do you think there could be other ingredients that you could have added? No recipe can do without any basic, essential ingredients, and drafting is no different. What are some of these essential ingredients and how can lawyers turn them into an effective commercial agreement?

What is an “Effective” Commercial Agreement Anyway?

There is a Chinese saying of using the trio “colourful, aromatic, delicious” (色香味) to describe a wonderfully cooked dish. However, there is no one single standard for defining what an “effective” commercial agreement is, and there is certainly no perfect agreement. Regardless, I believe that an “effective” commercial agreement should be a “tailor-made” document with at least the following qualities: “Certainty, Completeness and Clarity” – the 3Cs.

Certainty – the parties want a document which accurately sets out what they have commercially agreed and enables them to refer to it to find out with certainty what to expect and what are expected of them throughout the term of the contract. A commercial agreement should create certainty between the parties and avoid ambiguity.

Completeness – it should be complete and precise, covering all eventualities which ought to be covered: what are the steps and other elements of performing the agreement; what are the risks to which your client is exposed and how to address them? 
Clarity – it should be clear and easily comprehensible. Your client usually prefers a simple document that they can read and understand, but if the parties are in dispute and it is brought to the court, legal precision is also very important. Ultimately, it should be a balancing exercise between comprehensibility and precision. Sometimes, an agreement can just not be oversimplified while losing legal precision, especially if it is for a complex transaction or relationship.

So, what are the essential ingredients for drafting an agreement with the 3Cs?

Preparation is Key

Getting client’s instructions and understanding client’s objectives is the first important step, and also a key ongoing interactive process. What is the purpose of your client entering into this agreement: is it for governing a long-term relationship or is it for a one-off transaction? What are your client’s key commercial objectives and concerns: to keep the confidentiality of certain trade secrets or to minimise any residual liabilities after the deal is closed? If you are asked to cook a dish, you certainly want to find out whether your customer has any allergy, likes or dislikes of food. It is almost impossible to draft a commercial agreement with certainty, accuracy and completeness without these background information and understanding your client’s objectives.

Use Precedents Wisely

Once we obtain the basic information and instructions from our client, it is tempting to start drafting right away. Drafting is the fun part, just like putting all the ingredients into a pan and start frying. But how do we know what ingredients are needed for the different dishes we want to cook? How do we ensure that we are not missing something to make the dish taste like it is supposed to taste? When drafting a commercial agreement, we usually start by referring to a template or precedent. A template is a form of agreement for a particular type of transaction, sometimes with various options to choose from to cater for different scenarios, whereas a precedent is a commercial agreement which has been negotiated or executed for a similar previous transaction.

A template or precedent is just like a basic recipe that a chef will refer to before it turns it into a delicacy which is “colourful, aromatic, delicious”. Hence, obtaining a template or precedent is just part of the preparation and planning process before turning it into a tailor-made agreement. However, there is always a tendency to start amending or revising the precedent without giving it more thought. Precedents should especially be used with care as they are agreements negotiated for a previous transaction where the parties might have had other objectives or commercial considerations. One way of using a precedent wisely and properly is to use it as a checklist and reminder of the provisions and mechanisms commonly included for a particular type of transaction – to help with attaining “completeness”. It is helpful to read the precedent or template at least once to try to understand the structure of the agreement and the provisions included before you start amending it. Preparation and planning are the essential ingredients for drafting an effective commercial agreement.

How to Draft?

One of the bigger challenges is to draft a provision from scratch - where do we start and how? Again, there are no magic ingredients to it, but I would suggest to consider the “Who, What, Where, When, What if, How” - the 5Ws and 1H, to help with achieving the 3Cs. This may seem like a mathematical formula which is often not a lawyer’s friend, but looking at a simple example will solve the mystery. Your client needs to pay a deposit for a second hand car: Who has the obligation to pay the deposit (obviously your client in this example); What is the amount; When is it payable; Where to pay it (if relevant); How to pay it (by cash or cheque); What if your client does not pay it? Thinking through these 5Ws and 1H will help to ensure you draft a clause which is complete with certainty and clarity.

Legalese or Plain English?

I hereby confirm that this article is written for the purpose of sharing my experience and a few suggestions discussed herein which I hope you will find useful and practical, hereinafter known as the “Suggestions”. The preceding sentence is an example of the use of legalese in drafting. Legalese’s main features include lengthy sentences which try to cover numerous points, the use of archaic language, redundant words and words that are overly formal and unfamiliar to layman, and sometimes the use of double negatives. The use of legalese is clearly not helping with attaining clarity and comprehensibility, and actually doing quite the opposite. Drafting with the use of plain English is and has been the way forward. Plain English is language that is clear, concise, direct and straightforward which avoids convoluted sentences and unnecessary words. It enables readers to read, understand and act upon the agreement more easily, which is exactly what we and our clients want for an effective commercial agreement.

Don’t Lose Sight of Who You Act For

Ultimately, you want to come up with a tailor-made agreement to protect your client’s interest. Throughout the drafting process, always bear in mind who you are acting for in the commercial transaction: is your client the purchaser or the seller; the lender or the borrower, the obligor or the obligee? Drafting from different perspectives will certainly affect the words you choose and the drafting techniques you adopt, so try to put yourself in the shoes of your client when you draft to avoid losing sight of that. A simple example can illustrate this: if your client is an obligor, we want to draft a clause to try to lower the level of obligation by using qualifiers like “reasonable endeavours”, “materiality”, etc. If your client is an obligee, our drafting objective will be quite the opposite.

Although there are no magic ingredients to drafting an effective commercial agreement, there are however some essential ingredients we cannot do without and each person may have his or her own list of such ingredients. Good drafting comes with experience and reflective practice – have you been using the right ingredients for drafting commercial agreements and have they been working well?

Jurisdictions: 

Principal Lecturer, Department of Professional Legal Education, Faculty of Law, The University of Hong Kong

Vicci is the course coordinator of the Drafting Commercial Agreements and Listed Companies courses of the Postgraduate Certificate in Laws (PCLL) programme at The University of Hong Kong. She presented in numerous professional development seminars on effective legal writing, various teaching and learning seminars and conferences sharing her teaching practices. Vicci was given the Faculty of Law Outstanding Teaching Award in 2017 and is a Fellow of the Higher Education Academy. Prior to joining the University in 2012, Vicci practised as a solicitor covering capital markets transactions and she also worked in a global investment bank as a derivatives transaction lawyer in Hong Kong. Vicci obtained her M.A. and B.A. (Hons) in Law degrees from the University of Cambridge, and her B.Sc in Consumer Economics degree from Cornell University.