Contracts come in all shapes and sizes, from small 1-page agreements between individuals to multi-million dollar hundred-page agreements between large corporations with a team of lawyers, bankers and advisors working for each party. However, regardless of size, only three elements are required to have a binding contract: an offer, acceptance of the offer, and consideration. Stated another way, a contract is an agreement in which you promise to do something in exchange for a “valuable benefit.” However, once the basics of a contract are established, the parties are free to negotiate in the manner that suits their particular situation, as long as they do so in good faith and without fraud.
When analyzed, contracts, both large and small, fall into six basic categories. Sometimes (especially with smaller deals), these issues will not be explicitly stated in the contract, but rather implicit in the law. These default rules are a construct of both case law and statutory law, with Article 2 of the Uniform Commercial Code being the primary means of “filling in the gaps.” In larger deals, most of these topics will be detailed accurately. While this list contains broad headings, it does provide an overview of what to look for in a contract. The 6 issues inherent to every contract are the following:
1. Rights and Obligations Under the Contract. The fundamental issue in all contracts determines who is bound to perform the contract and who is entitled to the benefits of that performance. Rights holders may include the person signing the contract, the company on whose behalf the signatory signs, “successors in interest” (i.e. a company that subsequently purchases from the original beneficiary), and sometimes “third-party beneficiaries.” Those who have obligations under the contract are the signatories and their successors, but they can also be guarantors, co-debtors or other parties subject to “joint and several liability”. For example, a partner will be responsible for contracts entered into by his partners regardless of whether he signed the contract individually.
2. Representations and Warranties. The representations and warranties relate to the underlying facts and matters presented in the contract. Specifically, a representation is a statement made by one of the parties at the time the contract is entered into, regarding a fact that influences the performance of the agreement. A guarantee is a promise that a statement of fact is true. In larger contracts, a specific section titled “Representations and Warranties” is dedicated to this topic and sets forth all of the representations and warranties that each party is making subject to the agreement. Regardless of whether there is a dedicated section of the agreement, however, the parties will rely on each other’s representations when entering into the contract. Examples of what may appear under this heading include statements regarding 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 breach of any other obligation. . Disclaimers and/or “as is” provisions in a contract are a means of minimizing representations and warranties.
3. Terms. Conditions are events that must happen (or not happen) to force a party to act in accordance with the contract. If the specified conditions are not met, one of the parties need not fulfill the contract. An example of a common condition in business contracts is that board or shareholder approval must be obtained prior to contract performance. Other conditions may state that all documents are properly delivered before the contract becomes effective or that all representations and warranties discussed above are accurate. Conditions do not have to refer only to the parties to a contract. They may involve third-party approvals that are necessary for the contract to happen. Examples of such approvals may be government approvals or obtaining insurance.
4. The deal. Once the conditions are satisfied, “the deal” is the actual substance of the contract, setting out who must do what, when they must do it, and what price will be paid. The agreement includes the allocation of risk (one party will indemnify the other, damages will be limited to a specified amount) and also establishes the beginning and end of the contract, including the rights of the parties to extend or terminate the contract.
5. Application. Typically the “boiler” of a contract, enforcement issues establish how, when, and where one party can enforce the contract. Enforcement issues include (i) what law will apply in the event of a dispute, (ii) who will hear disputes (will it be a judge, jury, mediator, or arbitrator?), (iii) where a dispute will be heard (city, county , state), and (iv) which party bears the burden of proof in enforcing the contract.
6. Remedies. Remedies determine who is entitled to what in the event of a breach. Remedies are often, but not always, related to money damages. They will address a party’s ability to obtain and address whether or not a party may receive punitive damages (which are rare in contracts) or consequential damages (damages that do not arise directly from a breach, but are somehow caused by for this). ). Aside from money damages, remedies can also include specific performance (a situation where the court orders one party to perform) and can potentially give a party the right to terminate the contract for breach.
