How do you write a sound business contract, or evaluate one that you are asked to sign. A contract should include four categories of content:
Covenants - the promise made in the contract
Conditions - the condition under which the promises must be kept
Representations - include things that are known at a specific date that are relevant to the contract (e.g. property condition)
Warranties - provide assurance that specific facts or conditions are true or will happen
Covenants are the core of the contract. They describe a promise to engage or refrain from a specified action. There are logical steps in drafting effective covenants.
1) Be specific.
Answering the simple questions: who, what, when, where , how and how much, will often provide an excellent start to the covenants. Think about each of these in detail and clearly articulate the specifics. Do not try to use flowery language; try to be direct, specific and clear.
When a party has an obligation use the word "shall," but take care not to confuse use of that word. In every case that a contract reads, "shall" the reader should be able to replace the word with the phrase, "has a duty to."
Use active voice - "the party will pay," rather than "the sum will be paid." This increases clarity of intent.
2) Focus on both parties.
One party is making a commitment to act. One party is making a commitment to pay. The terms for each party need to be clearly defined. Review the questions listed above for both of the parties.
3) Identify risks for non-performance.
Often we can imagine where promises may be broken. Identify those points and add language about how non-performance will be rectified.
4) Think about execution under unfavorable terms.
Imagine the parties have an argument as soon as the contract is signed. Write covenants that will help them navigate a productive relationship without ill will.
5) What is the worst case scenario?
What are the risks in this contract that would have grave consequences? Are the covenants written in a way that has the greatest possibility of having those things occur?
Covenants must be performed no matter what occurs. Conditions are performed if something occurs.
In drafting conditions it is appropriate to think about an "if/then" construct. If the home successfully passes inspection, then the purchaser will buy it. As with the covenants, it important to be clear about the conditions and to clearly state the relationship between the conditions that must be fulfilled and the actions that will ensue.
An example of an effectively written condition is, "If the seller delivers the product the purchaser must make payment within 5 days."
Representations and Warranties
Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations.
Remember, warranties are assurances by one party to the other party that specific facts or conditions are true or will happen. Traditionally, warranties are factual promises which are enforced through a contract legal action, regardless of materiality, intent, or reliance.
Representations are traditionally precontractual statements which allow for a tort-based action if the misrepresentation is negligent or fraudulent. In other words, representations define what one of the parties knows to be true at the time of the contract. A party could represent that a car that is for sale has not been in an accident. Following the sale that could change, but at that moment it is accurate.
In U.S. law, the distinction between the two is somewhat unclear; warranties are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.
In writing and reviewing contracts pay special attention to warranties, ensuring that those are indeed facts or conditions that can be guaranteed.
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