How is a Contract Organized?
Contracts vary in length, formality of language, etc. The main components of a contract are as follow:
- Preamble, Recital, Words of Agreement
- Action Section (Consideration)
- Reps & Warranties
- Covenants & Rights
- Conditions to Obligations
- Endgame Provisions & Remedies
- General Provisions
The preamble states the name of the agreement, its date of execution, and the parties involved. If the parties are businesses, then the preamble will identify the type of entity and the state of organization. The preamble provides a descriptive noun, such as “Buyer” and “Seller”, used to refer to the parties throughout the rest of the document.
- Example: This Sales Agreement (“Agreement“) is made as of September 18, 2009 (the “Effective Date“) between John Smith, an individual with an address at 123 Peachtree St., Atlanta, Georgia (“Buyer“), and Goizueta, Inc., a corporation organized pursuant to section 123-345 of the Annotated Code of Georgia, with an address at 456 University Lane, Decatur, Georgia (“Seller“).
Recitals are an optional form of the contract. Their purpose is to provide background to the agreement. They often state the parties’ general understanding of the situation and their purpose or intent in entering into this agreement. This section does not contain provisions that create duties, rights, or obligations in the contract. Nothing in the recitals are enforceable under the contract.
- Note: Parties should take care not to include any contract representation, covenants, or conditions. The recitals can be very valuable for contract interpretation. These provisions should contain terms that provide for the intent of the parties or recite the prior course of dealing or performance between the parties.
- A. WHEREAS, Seller is the a supplier of parts for _____.
- B. WHEREAS, Buyer is currently a member of ______.
Words of agreement?
As explained in previous chapters, a contract requires an exchange of promises (or promise for immediate action). The words of agreement indicate the parties’ intention to manifest their agreement to the promises (and other terms) contained in the rest of the agreement.
- • Example: NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows.
- • Example: NOW THEREFORE, the Parties agree as follows:
The definition section allows parties to provide precise explanation of contact terms. You recall from prior chapters the discussion of contract interpretation. The definition section allows parties to provide precise definition of what terms mean within this specific agreement. It can be used to introduce and explain trade terms or give special meaning to words that are susceptible of alternative meanings.
The Action Sections?
This section contains the exchange of promises that is the subject matter of the agreement. It will specifically identify the value to be exchanged between the parties. For example, it will identify goods or services to be provided to the other party. It will indicate the total amount or unit rate of currency exchanged in the transaction. This section sets the stage for all of the other contractual terms that support this exchange.
Duties of each party may include:
- Rights of each party
- Relevant dates
- Relevant prices or other dollar amounts
- Relevant quantities
- Payment terms
- Lump sum, COD, installments?
- Payment due dates
- Late fees
Representations and warranties?
The representations are assurances by a party that certain facts or circumstances are true. Often times the reason for the contract or the value exchanged by the parties depends entirely on certain facts or circumstances about the agreement being true. Warranties are assurance by a party that certain representations are true or will be true at some point in the future prior to the consummation of the transaction. The representations and warranties allow the party receiving the assurances a cause of action for misrepresentation in the event the representations or warranties are not true or accurate.
What are Covenants?
Covenants are ancillary promises by the parties to undertake some action or cause some action to be taken prior to the consummation of the agreement. These promises involve incidental activities by either party necessary to bring about the circumstances or value intended by the contract.
What are Conditions?
Conditions or situations that must arise or facts that must be true before the a party has the obligation to perform her obligations under the contract.
The Endgame Provisions?
Endgame provisions provide for the consequences for a failure of a representation, condition, covenant, or the subject matter of the agreement. It will contain the remedies by the parties or liquidated damages.
The General Provisions?
General provisions are generally referred to as boilerplate. These provisions regard the governance or management of the contract. Examples of boilerplate provisions include:
- The choice of law governing the agreement,
- The forum and jurisdiction of a court in the event of contract dispute,
- How and where notice to any party should be delivered,
- The integrations clause
- Limitations on liability
- Confidentiality provision
- Indemnification provision
- Arbitration clause
- Governing law
- Venue of lawsuits involving the contract
- Statement that contract constitutes entire agreement (Merger Clause)
- Severability of individual provisions
The Contract Enforceable?
The last part of the contract is the statement of authority and the signature blocks. As discussed earlier in the text, the contract must be signed by someone with authority to enter into the agreement.