Contracts are less complex than they are made out to be. However, certain things can make a big difference between a contract that does what it's supposed to do, and the one that fails to deliver.
This is not an area where you can wing it and expect for the best to happen.
In this article, you will get a better understanding of contracts and their structure, as well as get some life-saving tips that might help you or your client, if things ever get sour.
The general structure
The structural features of contracts have no legal requirements. A simple contract can, for example, be written on a napkin and only contain the names of the parties and their obligations, and still be legally enforceable.
However, many legal documents have similar formats. Usually, they are structured as follows:
- The names of the parties
- The body or provisional clauses
- Miscellaneous/boilerplate clauses
Quick tip: While the structure of the contracts is simple, keeping every term consistent within the contractual framework is something else. To make sure everything checks out and you're not making errors while drafting or reviewing, we recommend using legal document software.
This type of software erases the need for a lot of back-forth while double-checking the nooks and crannies of your agreement. Think of it as having a second pair of eyes, aiding you along the way.
1. The names of the parties
This part of the contract contains full legal names, as well as addresses of the parties.
A good practice for drafting an easy-to-understand contract is to specify a short name for each party that is to be used in the rest of the agreement. For instance, the contract might state:
International Fruit Packers Inc. (hereafter referred to as the 'Company')
Make sure to correctly identify the parties, don't use the names of the people signing the agreement. Use the legal name of the business, including suffixes like Inc., or LCC.
Recitals are written to provide a background to an agreement. For example, they outline the general purpose of the contract, the parties signing it, and the reason why they are signing it.
The recitals are also important because they present the facts that might give the court more information on how to interpret certain clauses of the agreement.
However, no obligations are tied to recitals as they can describe a contractual relationship. If this part needs to be regarded as an essential component of the contract, a clause stating this fact should be written in.
Contracts can't leave any room for ambiguity. That's why a definition section of the contract is paramount. It defines how particular words should be interpreted in the main body of the agreement.
The main cause for a defined term being used in the contract is the decreased risk for misinterpretation.
Having a defined term gives the defined word a special interpretation within the context of the contract. For example:
''Product'' means every product packed by the Company.
4. The body
This part of the contract contains all the key terms defining the rights and obligations of each party in the contract, as well as the consequences of unfulfilled duties.
The general provisions come first and they describe the defining scope of the contract, including the desired results and principles.
After that, we have specific provisions that provide more details, such as procedures or exceptions.
This is the part that makes different legal documents different. If you've wondered what is a non-disclosure agreement and how different it is from a commercial contract, it's mainly in the operational clauses.
An NDA, for instance, will have confidentiality clauses as the main focal point, while a commercial agreement will have clauses relating to the warranties and the condition of the transfer of goods in the body of the document.
5. Boilerplate clauses
These standard clauses are usually found at the end of most contracts. They can help address the specifics.
A good example of boilerplate clauses are:
- A force majeure: if an unforeseeable circumstance prevents the completion of any obligation in the contract, the contract can be terminated.
- Arbitration clause: the parties will solve a dispute through arbitration rather than going to court.
- Limitation on damages: in case of a court dispute, a limit is placed on damages that can be awarded to the parties.
6. Schedules and signatures
The schedules section doesn't refer to the timing frames of the contract (that should be also defined in the body of the contract). Rather, its purpose is to clarify and give additional details to the matters of the agreement.
While signatures are usually not needed for a legal document to be enforceable, it's a good and safe practice when entering a legal agreement.
In simple terms, a signature confirms the consent of the parties to the terms and conditions of the contract. This section should include signature lines, the printed names, as well as the title and date for each party involved in the contract.
A foolproof document
Remember the napkin example? Well, that agreement could work in theory, however, its application is limited. Contracts are there to protect our interests, and the stronger they are, the bigger the safety is.
Having all the definitions written down, writing each term in detail, as well as adding boilerplate clauses is an extra layer of protection if the contract ever ends up getting breached.
Ultimately, contracts are as complex as you make them out to be. Still, with practice and attention, you will be able to craft a document that will make all business dealings smooth sailing.