It can be extremely difficult to discern a good contract from a bad contract. Even after practicing law for several years, I’ve learned that even attorneys can miss a point or have done a better job at drafting a contract. Imagine trying to comprehend a society where an attorney can have difficulty drafting a contract and yet, some business owners that haven’t spent time developing the art of contracts decide to “draft it themselves.” In this situation, some people get lucky and never experience a problem with their contract while others get very unlucky and end up having to shell out hundreds of thousands of dollars to compensate.
So what do you look for to determine whether you’ve got a good contract, a great contract, or a poor contract? A good contract is one that is extremely clear, leaving no questions unanswered, contemplating every possible situation, issue or mishap. You want to look for any open terms to secure them, identify them and narrow the term down to a concrete definition. You want your performance obligations to be clear along with all conditions to be clear. You want the other party’s performance obligations to be clear and all conditions to be clear as well. You want to evaluate what problems or types of problems can possibly arise and make an attempt to provide a remedy, alternative obligation, or escape clause. You want to make a best effort to know the law that may impact your transaction and either attempt to contract around that law or implement it into your contract. A great contract does all of that and more, and additionally, ensures that all the contractual provisions are organized neatly and understood easily.
A poor contract fails to deliver a point, fails to ensure performance and is often either too wordy or does not contain enough words. A poor contract is also usually a hot mess.
The Building Blocks of a Contract.
There are essentially 5 building blocks to a contract. The opening, which introduces the parties, the type of contract we’re dealing with, and the underlying subject matter of the contract. This is done with an introductory paragraph and a recitals section. The next segment is the first party’s covenants, promises and obligations. This can be performance, it can be a promise to pay, it can be a promise not to do something, the possibilities can be endless. The section immediately following should be the second party’s covenants, promises, and obligations. Essentially, the same section just for the next party to the contract.
Subsequent to the party’s obligations, the next section of the contract should spell out all representations and warranties made by the parties to the contract. This is the section that ensures the person has authority to conduct business, or ensures that any representations made before or during contract negotiation were accurate at the time they were made and will continue to be accurate in the future.
Once representations and warranties are drafted, OLC will move into drafting the consequences section of the contract. This is where “default” will be described, the events that can cause a breach of contract, the effects of a breach of contract, and the remedies that the parties can expect in the event of a default or violation of a term of a contract.
Thereafter, you enter the miscellaneous section of the contract where all your boilerplate, standard contract terms are thrown in for protection, choice of law, attorney’s fees, integration, etc. etc. These miscellaneous provisions have less to do with the underlying subject of the contract and more to do with the governance, execution and atmosphere of the contract.
Finally, the ending of the contract will be comprised of an acknowledgment of all the above terms and will contain a signature line for the parties to manifest their intention to be bound to the terms by actually signing it -- although, there are other ways to accept the terms of a contract.
Sound easy? Every section of a contract is critical and can impact the relationship of the parties to that contract.
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