Updated: Oct 18, 2022
1. Chapter 1: Introduction
2. Chapter 2: The Basics of the Contract: The Building Blocks
3. Chapter 3: The Principles of Effective Drafting
I. Role of Contracts:
The entire world of human transactions are based on Agreements, the nations were built on the foundation of written constitutions, which are nothing but a contract between the citizens among themselves to create a government to rule themselves. The agreements range from multilateral treaties between countries to govern their relationships, to a simple sale deed between two individuals. Every relationship is governed by rules, sometimes these rules are express, sometimes they are implied, but the whole world is a complex web of reward and deterrence based on the rules of contracts, either express or implied. In the world of 21st century, there are increasing complexity in commercial transactions, therefore every new entrant to the legal profession and every person associated with commercial transactions must understand the building blocks of contracts.
The contracts are recorded instruments in which the rights, duties, obligations, and responsibilities of each party is properly defined. The Role of a lawyer is to draw up a contract which reflects the true intentions of the parties, and therefore we chose the language to be very specific which does not mean any other thing but the true intention of the parties.
A contract creates a private body of law between its parties. Each party has the legal right to enforce the obligations and restrictions that the other party has agreed to. Many of the provisions of a complicated agreement go well beyond what the parties consider the "business deal," and, as a result, some people are prone to disregard these provisions as legal boilerplate. It is the responsibility of the lawyer to ensure that the client understands the impact that the contract will have on its business and its business relationships.
A well written contract has no place for ambiguity and it saves a lot of money by negating the chances of litigation. It provides a clear law that both the parties have to adhere.
In this book we will not go into the prevailing laws relating to contracts, rather we will try to understand the dynamics of drafting of contracts and what are the consequences of writing a contract with only slight variations in language. Most of us already know the law of offer, acceptance, and consideration, but our education system is more focused towards creating litigation lawyers, than a transactional lawyer, therefore many new lawyers struggle to understand the mechanics of drafting a good contract, and this book seeks to fill the gap of that training.
II. Drafting of Contracts:
The writing of contracts is an entirely different type of writing. The purpose of writing of contract is to record the meeting of minds of the parties with perfect precision. The contract is not is an expository writing to provide information or to persuade reader but the purpose of writing contracts is to record a transaction in a manner which cannot be interpreted in any other way than reflecting the real intention of the parties.
A lawyer has to analyze the transaction and raise all the potential issues that may arise at the time of execution or in the future, and educate the client and record everything in the contract itself to prevent any chances of litigation in future. The main aim of a well written contract is to prevent litigation, and therefore, a lawyer has to think about all the possible consequences of every action under the contract.
III. Scope of This Book:
· introduces the reader with the basic elements of all contracts (the "building blocks") and their functions;
· describes the lawyer’s function in the drafting and negotiating process;
· examines specific drafting skills;
· discusses some of the provisions typically found in most contracts.
The Basics of the Contract: The Building Blocks
The building blocks of contracts are very important provisions of a contract. The building blocks serve the same purpose in all the contracts, irrespective of its subject matter and operative provisions.
The building blocks of contract are as follows:
a. Representation and Warranties
c. Conditions Precedent
d. Remedial Provisions
The building block further elaborates the provisions of the operative parts of the contract. Suppose we have a contract of sale of real estate property, the operative part of that contract would be description of the property, calculations of price, and the process of transferring of the property, the contract will be complete and enforceable even if only these provisions are included in the contract. But there are various contingencies that may arise, and which may give rise to a potential litigation like there was fault in the property that was not informed by the seller to the buyer, or the seller has damaged the property before the closing, what happens if the seller does not provide help to the buyer in transferring the property. These are the kinds of issues that are addressed in the building block provisions—representations and warranties, covenants, conditions precedent, remedial provisions and definitions.
II. Representations and Warranties:
Representations and warranties are those statements were a party to the contract affirms or denies a statements of fact at a particular point of time. There is a minor difference between the Representations and Warranties, when there is no remedy provided in the contract for failure of representation or warranty; in that case if the representation given by one party fails then other party has the right to terminate the contract, whereby failure of warranty provides the other party the right to recover damages along with termination. When there is remedy of failure of representation and warranty is provided in the contract then there is no distinction between the terms. Generally representations and warranties are used for the same purpose of creating a list of facts that are important to the recipient’s business decision to enter into the transaction. The failure of a party’s representations to be true will result in the other party having rights and remedies under the contract.
Let’s take an example of a simple contract for the sale of building, the buyer would want to know that there are any problem in the sever line and water fittings. The buyer will do his due diligence to ensure that the building and all its equipments are in a sound state. However, it’s possible there had been an issue which was not discovered in the due diligence of the buyer. Therefore, the buyer would want the seller to make a representation that the building and all its equipments are in a sound state. The Seller provides the representation in the contract, then if there is any problem found in the building after the sale then buyer shall have a claim against the seller. If the buyer discovers before the closing that the representation is untrue, it would typically have the right to terminate the contract and walk away from the deal.
A. Allocation of Risk:
Representations have the function of allocating risk between the parties. Representations are based on the natural progression of the principle of caveat emptor. The party making the representation assumes the risk that if the representation is untrue, the other party will have a claim against it or some other remedy under the contract. The party being asked to make the representation may not have any better information on the subject matter of the representation than the party requesting it. But it may be forced to make the representation anyway, based on the principle that the recipient of the representation is entitled to some remedy if the fact being represented turns out to be false. Generally the seller is required to make representation for the soundness of the property to be sold, in this way the risk is allocated to the seller.
B. Categories of Representations:
There are primarily 3 categories, a representation fall into:
1. Representations as to the Contract Itself:
The first category includes representations that relate to the contract itself. The purpose of these representations (referred to here as "enforceability representations") is to provide assurance that the party making them has the contractual capacity and authority to enter into the agreement, and that the contract is legally enforceable and doesn’t result in a violation of law. The party asking for enforceability representations wants to ensure that the other party doesn’t have any technical defenses available to it, if the contract ever becomes the subject of litigation. These are standard representations and are rarely negotiated to any significant extent.
2. Subject Matter Representations:
The subject matter of the contract is the second category of representation. Generally subject matter representations are about the soundness and workability of the subject matter of contract.
A few examples are:
· A trademark license contains representations by the licensor that the trademark is properly registered and doesn’t infringe other trademarks.
· An asset sale agreement includes representations by the seller that the property to be transferred is not subject to any lien.
· A real estate lease contains representations by the lessor that it has not leased the same property to anyone else.
· A contract to rust-proof sheet metal contains representations by the contractor as to the quality of the materials used and the capacity of the provider’s plant to handle the contracted supply.
3. Representations about the Parties;
The third category of representations relate to the representations made about the parties for themselves. There are many contracts which require the parties to make representations about themselves, some examples are:
· Representation about good financial health to repay the loan in a loan agreement.
· Representation about the qualification and experience of candidate in an employment contract.
· Representations about the health condition of the insurance holder in a health insurance contract.
C. Exceptions to representations:
When the representations are negotiated, the situation arises when the parties have to make exceptions to the representations, some examples are:
· The borrower have no outstanding loans except the loan of 1 million $ from Bank of America.(Loan Contract)