A framework for viewing contracts: 6 problems present in all contracts

Contracts come in all shapes and sizes, from small 1-page agreements between individuals to hundreds of pages, billion-dollar deals between large corporations with a team of lawyers, bankers, and advisors working on each side. Regardless of size, however, only three elements are required to have a binding contract: an offer, acceptance of the offer, and consideration. Put another way, a contract is an agreement in which there is a promise to do something in exchange for a ‘valuable benefit’. However, once the basics of a contract have been established, the parties are free to negotiate in a manner appropriate to their particular situation, provided they do so in good faith and without fraud.

When analyzed, contracts, both large and small, consist of six basic categories. Sometimes (particularly with smaller agreements) these issues are not explicitly stated in the contract, but rather implied by law. These standard rules are a construct of both jurisprudence and statutory law, with Article 2 of the Uniform Commercial Code being the primary means of “filling in the gaps”. In larger agreements, most of these issues will be described in great detail. While this list has broad headings, it does provide an overview of what to look for in a contract. The 6 problems inherent in all contracts are as follows:

1. Rights and obligations under the contract. The fundamental issue in all contracts is who is obligated to perform under the contract and who is entitled to the benefits of that performance. Those with rights may include the person signing the contract, the company on whose behalf the signatory is signing, “successors in interest” (i.e. a company that then buys out the original beneficiary), and sometimes “third party beneficiaries”. Those with obligations under the contract are the signatories and their successors, but may also be guarantors, co-signers or other parties subject to “joint and several liability”. For example, a partner is liable for contracts entered into by his/her partners, whether or not he/she individually signed the contract.

2. Representations and Warranties. Representations and warranties relate to the underlying matters and facts presented in the contract. Specifically, a representation is a statement made by a party at the time the contract is entered into, regarding a fact that affects the formation of the contract. A guarantee is a promise that a statement of fact is true. In larger contracts, a specific section entitled “Representations and Warranties” is devoted to this matter, which sets out all representations and warranties each party makes under the agreement. Regardless of whether there is a specific part of the agreement, however, the parties will rely on the statements made by each other when entering into the contract. Examples of what may appear under this heading include statements as to the condition of the property being sold, statements that a party has the legal right to sell the property, or statements that a party is not in default of any other obligations. Disclaimers and/or “as-is” provisions in a contract are a way to minimize representations and warranties.

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3. Condition. Terms are events that must happen (or not happen) to oblige a party to act in accordance with the contract. If specified circumstances do not occur, a party is not required to perform under the contract. An example of a common condition in business contracts is that the approval of the board of directors or shareholder must be obtained before the contract is enforced. Other conditions may state that all documents are properly delivered before the contract becomes effective or that all representations and warranties discussed above are correct. Conditions need not only relate to the contracting parties. They may include third-party approvals necessary for the contract to take place. Examples of such approvals are government approvals or obtaining insurance.

4. The agreement. After the terms are met, “the deal” is the real meat of the contract, determining who must do what, when they must do it, and what price will be paid. The deal includes allocation of risk (will one party indemnify the other, will the indemnity be limited to a certain amount), and also states the start and end of the contract, including rights of the parties to extend or terminate the contract.

5. Enforcement. Enforcement issues, which are usually the “default” of a contract, indicate how, when and where the contract can be enforced by a party. Enforcement issues include (i) what law will be applied in the event of a dispute, (ii) who will hear disputes (will it be a judge, jury, arbitrator or arbitrator?), (iii) where a dispute will be heard (city , province, state), and (iv) which party has the burden of proof in enforcing the contract.

6. Remedies. Remedies determine who is entitled to what in the event of a breach. Legal remedies often, but not always, involve pecuniary damages. They address a party’s ability to obtain and address whether or not a party can receive punitive damages (which are rare in contracts) or consequential damages (damages not directly resulting from a breach but somehow caused by). ). Aside from monetary damages, remedies may also include specific performance (a situation where the court orders a party to perform) and may give a party the right to terminate the contract for breach.