Friday, 9 January 2015


Basic Aspects of a Contract

A well-drafted contract sets out the relationship between the parties, and lays down their agreement regarding the rules that will govern their relationship. A contract should accurately memorialize the business deal, in clear and unambiguous terms. Ideally, it should be fluidly drafted, so it is
flexible enough to deal with changes that occur, while at the same time tying down the parties to their obligations. As an example, let’s use a simple contract involving the sale and purchase of a used car to explain key contract concepts.

A standard contract will always contain the following clauses:
1. A statement of facts made by each party that induced the other party to enter into the Contract:
These are technically referred to as ‘Representations and Warranties’. Representations and warranties are always made as of a moment in time, and do not provide futuristic guarantees. For example: The Seller represents and warrants to the Buyer that the car was purchased in 2000.
2. The rights and obligations of each party to the contract: 
These are technically referred to as ‘Covenants’. Covenants are present and futuristic obligations that each party owes to the other.

For example: The Seller shall maintain the car in good condition, until the date of sale. The Buyer shall have the right to inspect the car, prior to the date of sale.
3. The events/sequence of events that must occur before a party to the contract is required to perform its obligation:
Contracts are always reciprocal arrangements and require one party to comply with a certain obligation, before triggering the obligation of the other party.

For example: The Buyer shall pay the Seller an amount of $10,000 in cash for the purchase of the car.
As per this example, the Seller is not obligated to sell the car to the Buyer until he has received this amount. A subsequent clause would provide that upon receipt of this amount, the Seller will execute a bill of sale for the car in favor of the Buyer.
4. Discretionary rights:
Contracts could often provide a party with a discretionary right that he could use under certain circumstances. Discretionary rights can usually be identified by the use of the term ‘may’ in the drafting of the clause. A discretionary right does not obligate the party to make use of it.

For example: If, upon inspection, the Buyer is not satisfied with the condition of the car, he may terminate the agreement.

If a situation arises where a member of Seller’s immediate family is in need of the car, then the Seller may terminate the agreement.
5. How the contract will end – the rights of parties to terminate the contract:
This includes details of when and how a party can terminate, as well as a list of specific situations under which a party can terminate. These are technically referred to the ‘Termination Clause’. Termination clauses are very important because they give the parties the right to walk away from a transaction under specified and negotiated circumstances. Clearly specifying the conditions under which the parties can walk-away, and the consequences of the parties walking away avoids a messy court battle.

For example: The Buyer shall have the right to terminate the contract if the car is not in good condition on the date of the sale.

Or, the Seller shall have the right to terminate the contract in the event that Buyer fails to pay the purchase price on the date of the sale. 

No comments:

Post a Comment