Unit 5.1: Introduction to US Business Contracts
Goals
- Better understand US business contracts
- Understand major parts of a contract
Instructions
- Look at the sample contract.
- Read about Parts of a Contract.
- Answer the questions.
I. Parts of a Contract
Not all contracts are the same obviously but lawyers in the US tend to view contracts as having certain sections or parts. Major parts of a contract include:
- Title
- Preamble or Introduction
- Recitals
- Recitation of Agreement & Consideration
- Definitions
- Main subject of the transaction/ Action Provisions
- Termination Provisions
- General or Boilerplate provisions
- Signature block
- Schedules & Exhibits
- Representations & Warranties
A. Title
The title is the name of the contract. You can find this at the top of the contract.
B. Preamble or Introduction
The preamble or introduction to the contract is usually around a paragraph long. The preamble almost always includes the names and addresses of the parties, the date of the agreement, and the name of the contract. The preamble might also include defined terms in parentheses. For example, one party may be defined as the (“Seller”) and the other party as the (“Buyer”).
C. Definitions
Almost every contract includes defined terms. Defined terms are words that the contract expressly defines. In larger contracts, there is often a section of definitions. But in most contracts, you will recognize definitions by parentheses and/or quotations. For example, the printers must be delivered within fourteen days of payment (the “Delivery Date”).
D Recitals
Recitals are the background to the Agreement. They come right before the body of the agreement and just after the preamble. Recitals often start with the word “WHEREAS”. Sometimes the recitals start with a heading such as “background”.
E. Main subject of the transaction/ Action Provisions
This is the part of the contract that clients usually care the most about. These promises relate to the performance of the contract – – fulfilling the obligations most important to the puprose of the contract (e.g.., buying and selling goods, performing a service, etc.)
The contract contains covenants – – promises – – stating what the parties must do, when they must do it, and how it should be done.
F. Termination
Termination provisions provide when a contract will end, either because of completion of the objective or for other “less happy” reasons.
Typically, if the contract is ending earlier than expected, there will be a notice requirement – – that is, one party must properly inform the other party that the contract is terminated.
The termination clause will explain when and how each party may end the agreement.
G. General or Boilerplate Provisions
Every contract usually has general provisions or boilerplate provisions. These agreement are repeated from contract to contract but are very important.
One example of a boilerplate provision is a clause stating that the contract is not intended to benefit any party other than the parties signing the contract. This is known as a “No Third Party Beneficiary” clause.
A particular important general provision is the “choice of law” / “governing law” / “dispute resolution” / “forum selection” clause. This type of clause can have many names but in this clause the parties agree how and where any dispute concerning the contract should be resolved.
For example, an arbitration clause may require the parties to arbitrate a dispute instead of going to court. A choice of law provision may provide that a particular country or state’s law governs the contract.
H. Signature Block
This is where parties or their representatives sign the agreement.
I. Schedules and Exhibits
Schedules and Exhibits are documents attached to the contract.
Schedules are often used for voluminous material, or for a list referred to in the Agreement.
Exhibits are often other agreements or shorter documents that become part of the contract. You can say the exhibits are “incorporated” into the contract as they become part of the contract.
J. Representations and Warranites
This section of the agreement is often abbreviated as Reps & Warranties.
A representation is a promise that something is true, as of a certain date.
A warranty is a promise extending into the future.
For example:
As of the date of this Agreement, the Company is not subject to any pending litigation. (Representation)
The Company shall not petition for bankruptcy prior to the closing date. (Warranty)