LEGAL
Has sloppy drafting ever put you or your client in a bind? In a recent article published in The National Law Journal, attorney William Domnarski urges harried litigators to put down their laptops and call in a consultant-editor to polish the final draft of a legal brief i. While lack of time rather than lack of skill contributes to many litigation drafting failures, Mr. Domnarski raises a good point for transactional attorneys to consider as well.
(Skip to "Four simple drafting tips for the in-house counsel" for advice to minimize drafting risk.)
Liens, licensing agreements, loan modifications, employment contracts, and other transactional documents that are executed in the course of daily business may not be intended to appear before a judge, but they may wind up being litigated in a courtroom, one way or another. Parties may breach a contract or misunderstand their obligations. An essential term may have been omitted or defined differently throughout the contract. With its introductions, definitions, recitals and amendments, an agreement to lease, franchise, or otherwise transact can be as complex in form and substance as any legal brief filed in district court.
When drafting mistakes occur, the outcome can never be certain. The party asserting the mistake may have to throw the drafter under the bus, and himself upon the mercy of the court – to plead mistake, and request that the court reform the contract to correct the error. But judges are seldom persuaded that the equitable remedy of reformation is necessary.
An example from the Bankruptcy Court in the Northern District of Ohio last year involves a loan modification agreement, its amendments, omissions and the resulting $100,000 haircut taken by the successor trustee.ii In 2009, the homeowners defaulted on their mortgage and sought a loan modification from their bank. In the loan modification, the bank agreed to defer $100,000 from the principal balance without interest or fees accruing. The homeowners were required to repay the $100,000 deferment at the end of the loan.
A few months later, the loan servicer realized the loan modification contained a calculation error. The loan servicer sent an amendment to the homeowners to fix the error. The amendment omitted any mention of the $100,000 deferment although it amended several other terms defined in the original loan modification. The homeowners signed and returned the amendment.
The homeowners' note was passed along to several successor banks through mergers. The homeowners later filed a complaint against the bank holding the note on their mortgage arguing they did not owe the $100,000 deferment when they completed the terms of the loan modification as stated in the amendment.
The bank, left holding the bag on a note it had received second- or third-hand, argued that the $100,000 deferment was incorporated into the amendment by reference. Alternatively, the bank argued that the loan servicer made a mistake and that, in fairness, the contract should be reformed to enforce the homeowners' obligation to repay the $100,000 deferment.
The bankruptcy court judge agreed with the homeowners. The judge found that the loan servicer who drafted the amendment had "superior knowledge" compared to the homeowners, that the loan servicer proposed the amendment and, therefore, that the sophisticated drafter bore the risk of mistake. The judge refused to reform the contract and ordered judgment in favor of the homeowners.
The evaporation of $100,000 over a missing clause is not uncommon in business – and in-house counsel can risk much greater amounts than that with hasty drafting. Serious losses at the wrong time can jeopardize the future health of any business. But these simple tips are designed to mitigate drafting risk, and hopefully, save time.
By investing time and resources in your drafting at the start, you can prevent far bigger threats to your bottom line caused by drafting mistakes and omissions.
Mary Grams is a member of the Thomson Reuters marketing organization, marketing transactional and regulatory products to legal and business professionals within corporate legal departments. After graduating from the University of Minnesota Law School and clerking on the Minnesota Court of Appeals, she has worked as a legal writer practicing and consulting on trial and appeals brief-writing projects. Mary also enjoys writing about trends in the practice and business of law.
For more information about how Westlaw Drafting Assistant – Transactional can help you minimize risk, click here.
i The National Law Journal, "Let's Admit That Lawyers Should Use Consultant-Editors," William Domnarski, March 30, 2012 (accessed 4/27/12).
ii In re Duong, 451 B.R. 800 (N.D. Ohio, 2011).
iii Johnny Miller, "Sixty Practical Drafting Tips" (accessed 5/7/12).
iv Ross Guberman, "Transactional Nits" (accessed 5/16/12).
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