To reduce the risk of issues arising with the substance of documents involved in a transaction, whether it be a single document or multiple documents, it is important to try to achieve substantive consistency in the documents. This means consistency in the treatment of various subjects to be addressed in the document(s) as well as consistency in the definition of terms used in the document(s).
Typically, a subject is addressed in a section of the document, not in multiple sections of the document. As a result, it should be easier to make sure that the document is internally consistent. However, when a transaction involves multiple documents, sometimes involving drafting by different people, subjects or portions of subjects may be addressed in more than one document. It is important to review the documents carefully to determine whether the documents provide entirely inconsistent provisions, provisions that overlap with inconsistent consequences, or gaps in provisions so that the subject is not covered as completely as intended.
Another area in which consistency is important is in the definitions of terms used in the documents. Often, a term may not need a particular definition because the meaning of the term is unambiguous. However, sometimes it may be necessary to provide a specific definition of a term for purposes of the specific transaction. In that case, the definition should be consistent throughout a document as well as throughout multiple documents involved in the transaction. If the definitions are not consistent, the ambiguity that results could lead to confusion and disputes. For example, the term “accounts receivable” may mean all accounts receivable. However, for a specific transaction, “accounts receivable” may only mean accounts receivable that have not been outstanding for more than X period of time. In that case, the time constraint should be included in the definition of “accounts receivable.” In the real property context, a deed of trust on real property often includes an assignment of leases and rents as security for repayment of a debt in addition to the security provided by the real property described in the deed of trust. Often, a separate assignment of leases and rents document is also involved in the transaction. Sometimes, the definition of the word “leases” and/or the definition of the word “rents” may be important to the transaction. If the definition is broader or narrower in the deed of trust versus the separate assignment of leases and rents, there is ambiguity about which definition should apply. This can be true for the definitions of a variety of terms for a variety of types of transactions. If the difference in definitions is significant, it could lead to the conclusion that the parties did not have a “meeting of the minds” on an essential term of the agreement, which could result in the agreement being invalidated.
Since disputes can arise for reasons other than inconsistencies within a document or between multiple documents, reducing the occurrence of inconsistencies within a document or between multiple documents may not reduce the number of disputes, but it should reduce the number of disputes that arise due to inconsistencies in the document(s).
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To learn more about Making Sure To Have Consistency in Transaction Documents, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100