6. Contract Law
Written contracts can be organized in many different ways. However, having a structure can help keep information organized, clear, and easy to find. The best contracts have clear headings that accurately describe what is contained in that section. Using emphasis, such as bold and underlining, work better than italics alone for capturing the reader’s eye.
- Introduction of Parties and Purpose
- Definitions of Material Terms
- Covenants and Promises of Performance
- Breach and Its Consequences
- Representations and Warranties
- Standard (often called “Boilerplate”) Provisions
- Procedure to Modify Contract
- Rights of Assignment and Delegation
- Alternative Dispute Resolution
- Choice of Law and Forum
- Exculpatory Clause
- Force Majeure
- Signature Block
Note that not all contracts will contain all these elements and provisions. The parties’ needs and the purpose of the contract determine the structure of the document.
Contracts have a title, often in bold or CAPITAL letters, at the top of the page. Titles should be as descriptive as possible. “Contract” or “Agreement” are not useful because they require the reader to read through the contract to know what it is about. The best contracts capture the nature of the document in the title. For example, “Employment Agreement Between Jane Doe and Queen’s University.”
Introduction of Parties and Purpose:
The introduction should name the parties and describe the nature of the contract. If background information is useful in explaining the parties’ interests and objectives, then it should be included here.
Definitions of Material Terms:
Most business contracts contain some definitions, unless the subject matter and parties are clear. Definitions are useful because it is an area readers can reference to ensure compliance with the contract. For example, did the seller provide the specific goods as defined by the contract?
Definitions are not necessary for every term, though. If not defined, legal terms are given their legal meaning. And ordinary words are given their common, ordinary meaning. Therefore, businesses should define the material terms of the transaction such as: goods, services, quantity, quality, and price. Definitions that are specific to the industry are also helpful to include.
Covenants and Promises of Performance:
A covenant is a formal promise to perform. This is the section of the contract where the parties state exactly how they will perform the contract. The Buyer will pay a specific amount for the goods while the Seller will deliver a specific item at a particular location. To ensure clarity, the best contracts use active verbs in this section. For example, “Buyer will pay Seller ten dollars.” It is clear who will be paying whom, and how much is owed. Passive voice injects ambiguity, which can be problematic. For example, “Seller shall be paid ten dollars.” Will Buyer pay Seller the money or will someone else tender payment? If payment is not made, is Buyer in breach of contract?
As discussed earlier, conditions are things that must occur before performance is due. Usually, conditions must be expressly stated in a contract to be legally enforceable. The best contracts identify any conditions and delineate a timeline for when performance is due after the condition is met. For example, if an inspection of a property is a condition of purchasing it, it is important to indicate the deadline by which the buyer must perform after the inspection is completed.
Breach and Its Consequences:
To constitute a violation of the contract, a breach must be material. A material breach is a substantial breach of contract that excuses aggrieved parties from further performance and affords them the right to sue for damages.
In contracts that require performance over a period of time, or payments in instalments, it is helpful to define what constitutes a material breach. This clarifies when the non-breaching party can seek a remedy. The best contracts anticipate reasons for breach and identify consequences for them.
An acceleration clause makes all future payments due immediately under the contract. Acceleration clauses often exist in contracts where periodic payments occur. For example, a contract to purchase a vehicle may require payment of all remaining money owed under the contract if the buyer misses a monthly payment. This allows the business that sold the vehicle or the bank that issued the loan to sue for breach of contract once, rather than filing a new lawsuit for each month.
A liquidated damages clause allows parties to determine the amount of damages in the event of a material breach. Agreeing to the value of the contract before any breach occurs often saves time and money should the case be litigated. To be enforceable, liquidated damages must apply to all parties equally, and be based on the value of the contract rather than acting as a penalty.
Representations and Warranties:
- They are properly licensed;
- They are insured;
- Their financial statements are accurate;
- They own all relevant assets;
- They have legal authority to enter into contracts.
Warranties in a contract are express promises that guarantee something in furtherance of the contract by one of the parties. For example, a seller warrants that the object being sold is as represented or promised.
Warranties differ from representations in four ways:
- A warranty is an essential part of a contract, while a representation is usually only a collateral inducement;
- A warranty is written in a contract; while a representation may be written or oral;
- A warranty is conclusively presumed to be material, while a representation must be proven to be material by the party claiming breach; and
- A warranty must be strictly complied with, while a representation must be substantially true.
Often with contracts that require an extended period for performance, modification becomes a concern. What happens if prices or deadlines need to be altered? Will a new contract be required or can the existing contract be modified? Good contracts often include a procedure for how to modify a contract. This may be as informal as writing changes directly on the original contract with the parties’ initials and date. Or it could be through a formal addendum procedure.
Regardless of the chosen procedure, it is best practice for businesses to discuss modification procedures when entering into a contract. If the procedure is clear, less friction occurs when a party seeks modification.
Assignment and Delegation:
In general, parties are free to assign and delegate their rights and duties under a contract. Parties can limit those rights, or they can request notice if an assignment or delegation occurs. This is a provision that is often not needed unless a party has a concern about assignment, such as in the insurance industry.
Alternative Dispute Resolution:
As discussed earlier, many businesses want to reduce their risk of litigation by participating in alternative dispute resolution (ADR). Mandatory arbitration clauses are common in consumer and employment contracts. Before including an ADR provision in a contract, parties should be fully comfortable with the option that they choose. If a party agrees to mediation or arbitration, a court will enforce that choice even if the parties change their mind.
Choice of Law and Forum:
Choice of law provisions determine which province’s laws will be used to interpret the contract. Choice of forum provisions determine the province in which any litigation will take place. If the parties do not select that province’s law or location for litigation, the courts look to:
- Where the contract was signed;
- Where the contract is performed;
- Where the parties are residents; and
- The court’s jurisdictional rules.
An integration clause is a provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract. In other words, it is the agreement. The purpose of an integration clause is to prevent the parties from later claiming that they agreed to additional or different terms than what the contract states. This means that any statements made before the parties signed the contract are not part of the contract and they will not be used to interpret the meaning of the contract.
A severability clause is a provision that keeps the remaining provisions of a contract in force if any portion of the contract is declared unenforceable by the court. It is also known as a savings clause because it “saves” the whole contract from being declared unenforceable. For example, if a non-compete clause in an employment contract is declared unenforceable by a court, then the rest of the employment contract remains in effect.
An exculpatory clause is a provision relieving a party from any liability resulting from a negligent or wrongful act. They are often employed when the risk of injury exists. Exculpatory clauses cannot limit liability when a party acts with gross negligence, commits an intentional tort, or when public policy or provincial laws prohibit them. Exculpatory clauses have been struck down by courts in some cases where parties to a contract have greatly unequal bargaining power, especially when the party with greater power acts unethically or with gross negligence.
A force majeure clause is a provision allocating risk to a certain party if performance becomes impossible as a result of an event that the parties could not have anticipated or controlled. Force majeure events are severe, disruptive events such as natural disasters, war, terrorist attacks, and fires. For example, if the subject matter of an international sales contract is destroyed by a hurricane, does the buyer or seller lose the money in the sale?
Signature Block Example:
For example, Ahmad’s Construction, LLC By: __________ Khalid Ahmad, President
Each person signing the contract should date it next to his or her signature.
For partnerships, only general partners can sign a contract on the partnership’s behalf. For corporations, the president or chief executive officer is presumed to have authority to sign. For an organization or association, a board president would have authority, but it may require a vote of the governing board to approve the contract.