WHAT SHOULD BE IN A CONTRACT ?

When I draft a Contract or review a Contract, I look at each agreement from 5 different perspectives.

·      First, I check to see if there are certain risks which should be managed and that require having basic legal provisions such as indemnity, patent indemnity, and warranty.

·      Second, I check to see if  “administrative” type provisions have been included that describe how all the different processes between the parties will be managed:

o   What is required for invoicing;

o   How payments will be made;

o   How RMA processes will be managed;

o   How warranty returns are managed; who receives notices; etc.

·      Third, every contract must have specific business provisions that define the unique aspects of the relationship such as

o   Pricing.

o   Delivery.

o   Logistics.

o   Changes.

o   Other factors such as the Supply Chain or the total cost and life cycle cost factors of the relationship.

·      Fourth, every contract should have performance provisions that define what is required and what happens if the requirements are not met. Performance provisions are requirements such as:

o    Specifications;

o    Drawings;

o   Quality requirements,

o   Performance improvement requirements,

o   Certain warranty provisions,

o   Delivery performance,

o   Required costs reductions, etc.

·      Fifth, every contract should also identify how certain promises that are made will be backed up. For example:

o    If a supplier provides and indemnity against third party claims, that should usually be backed up with a requirement for the supplier to provide the necessary insurance coverage to stand behind the commitment.

o   For smaller supplier it might mean a parent guarantee.

o   For some work it could be bonds or financial guarantees provided by a third party

While each of these five different perspectives is distinctive in nature, contract terms may combine some or all aspects of each into an individual clause. For example:

o   A warranty provision will always contain the specific legal warranties the supplier is making.

o   If will also contain business aspects such as what is warranted, for how long and what may be certain exclusions to that.

o   A warranty provision will usually contain administrative provisions such as how to make claims against the warranty through the RMA process.

o   A warranty provision will may also have performance provisions such as defining the actions the supplier must take depending upon the extent of the claims, with higher failure rates requiring a higher degree of performance and faster response.

o   A warranty could include requirements to assign warranty rights from third parties.

o   A warranty could also include a specific requirement such as a performance bond to ensure the obligations are fulfilled.

Most contracts will have a number of key elements

• A title
• An introductory paragraph that identifies the parties
• Recitals that describe the intent of the parties entering the contract
• Definitions of terms
• Key conditions for the contract
• Representations, Warranties, Covenants, Indemnities, Guarantees and Releases
• Events of Default and Remedies for default
• Boilerplate terms
• Signature blocks
• Exhibits and attachments

The title should describe the nature of the contract being entered into such as Agreement for the Purchase of Goods or Software Licensing Agreement.

The introductory paragraph should contain the legal names of the parties to the agreement, their addresses, the type of company they are, and if they are incorporated the place of their incorporation. The introductory paragraph may also be used to establish when the contract commences (the effective date). The effective date can be whatever the parties agree, so an effective date could be the date it is signed, it could be retroactive to a prior date or it could scheduled to take effect at a future date. A “recitals” section, when included, will usually describe the circumstances or facts leading up to the agreement describing why the parties are entering into it the agreement. This helps show the intent of the parties in entering into the agreement in the event of a dispute.

The definitions section is used to create defined terms so that every time that defined term is used within the agreement, it has that specific meaning. For example “Product” shall mean a product that is listed in Attachment “A” So every time the capitalized word “Product” appears in the Agreement it means a product listed in Attachment “A”.

Defined terms may also be established within the text of the agreement  For example: The Ultra High Speed Combo Drive (hereinafter referred to as “Combo Drive” would create a situation where every time you wrote “Combo Drive” it would mean the “Ultra High Speed Combo Drive”. In large contracts where the list of defined terms could be multiple pages long, the Defined Terms may established in an Exhibit

.

Key conditions are the things such as ordering, delivery, payment, taxes, termination or cancellation.

“Representations” are a statement of presently existing facts intended to produce reliance and action by a party such as entering into an agreement

A “Warranty” is a promise that the facts are as stated.

 A “Covenant” is a promise to act or not to act in the future.

A “Guarantee” is a promise that if another party does not perform the guarantor will.

An “Indemnity” is a commitment to hold another party harmless from losses to third parties

A release is the cancellation of a right to assert a right, claim or privilege

Within Procurement Contracts

• You always have representations and warranties that you ask the supplier to provide with respect to their product or service.  The main difference between a representation and a warranty is if the representation is untrue, they party receiving the representation may cancel the agreement without liability, whereas the breach of a warranty allows both the right to cancel the agreement without liability and collect damages for the breach of the warranty.
• A covenant might be added to a contract if you want the other party to act or nor act, A good example of a covenant would be a covenant not to compete where in consideration for your business the Supplier agrees that they will not compete against you for a specific period. 
• The types of Guarantees that are most common in Procurement agreements are “Parent Guarantees” where the parent assumes financial responsibility for the acts of their affiliate.
• Indemnities for both personal injury and property damage (the General Indemnification) and Intellectual Property Infringement are common in Procurement Agreements. .
• Releases are not common in procurement contracts but could occur in situations where one of the parties is receiving extra consideration under that agreement in return for releasing a right or claim or privilege they have with the other party as a result of prior dealings. More commonly releases occur when there is a negotiated settlement of a claim between the parties.

Events of  Default can be:

1. Failure to perform and obligation
2. Failure to pay monies when due
3. Failure to maintain a certain status or condition
4. Breach or inaccuracy of a representation or warranty
5. Bankruptcy or insolvency
6. Default under another agreement

Events of default and remedies maybe described in an individual section such as what happens when a Supplier fails to deliver the product or perform the service on time, or default and remedies may be describe in general such as a “material breach of any terms of this Agreement where the remedy is primarily the right to terminate the agreement and claim damages. Limitation of liability provisions traditionally will limit the types of damages (remedies) that would be available in the event of a default.

In specifying the acts that can give rise to default and remedies, you need to there are rights and there are duties. 

• A party who has a “right” does not need to exercise the right.  For example, either party may terminate the agreement as a result of a “Material Breach” by the other party. The right, expressed by “may” means its permissive and can be exercised and their sole option. If they elect not to exercise their right, they will be deemed to have waived that right.  To ensure that a single waiver of a right does not waive the right to exercise that option on the future, contracts will normally require that for a right to be waived it must be waived in writing by the parties to the agreement, so in most cases a single waiver by an employee would not constitute a waiver of that right.
• Duties are mandatory and the language used to describe duties needs to affirm that the action is mandatory.  For example for future acts will or shall are used. “Shall” states a future obligation. “Will” states a future fact that must exist. A variation of this when the duty requires another action to occur in advance. That other action is called a “condition precedent”. The duty only will exist if the condition precedent has occurred.
• For example, “if Buyer purchases 100 machines prior to December 31, 2012, Supplier shall pay a ten percent (10%) rebate on the purchase price of all machines”. 
• The duty is to pay the 10% rebate on the purchase price.
• That condition precedent to that duty is the required level of purchases must have been made by the specified date.

Boilerplate terms are things like

• Requirements for making Amendments to the Contract.

·      Rights of Assignment by the parties

·      Choice of the Law that will be applied and jurisdiction for any litigation

·      Jury Trial rights

·      When actions must be brought (Limitation of Action) 

·      Where and how notices must be provided

·      Enforceability of Counterparts (separately signed documents)

·      Exchange of Information

·      Freedom of Action

·      Force Majeure

·      Obligations of Affiliates

·      Merger of Prior Communications

·      Order of Precedence between documents

·      Record Keeping and Audit Rights

·      Severability of the terms (in the event one term is found illegal or unenforceable)

·      What terms” survive” the termination or expiration of the Agreement

·      Requirements for a Waiver to occur

Signature blocks

Identify the parties and witnesses who sign by providing blank lines below their signature lines for their printed names and addresses.

Ensure that those printed lines are legible.

Be sure that corporate officers include their titles, the corporation name and the word "as." Failure to do this can result in personal liability of the officer. Example:

Money Corporation, a New York corporation

By:____________________________________
John C. Smith, as its President

Exhibits and Attachments

For an exhibit of attachment to be part of the agreement it must be incorporated by reference into the agreement. Simply attaching them to the Agreement does not make them part of the Agreement. To properly make them part of the Agreement they should be incorporated by reference within the body of the Agreement or within the body of another document that has been properly incorporated by reference into the Agreement. Incorporation of a document by reference is done by stating the incorporation by reference in the body of the Agreement where the specific document is referred to, or by incorporating those documents in listing of Exhibits and Attachments within the Agreement.