{"id":2857,"date":"2015-06-13T15:36:08","date_gmt":"2015-06-13T15:36:08","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&p=2857"},"modified":"2015-10-05T20:59:39","modified_gmt":"2015-10-05T20:59:39","slug":"parts-of-a-contract","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/chapter\/parts-of-a-contract\/","title":{"raw":"Reading: Parts of a Contract","rendered":"Reading: Parts of a Contract"},"content":{"raw":"

Parts of a Contract<\/h2>\r\nHow do you write a sound business contract, or evaluate one that you are asked to sign? A contract should include the following four categories of content:\r\n
    \r\n\t
  1. Covenants\u2014the promise made in the contract<\/li>\r\n\t
  2. Conditions\u2014the conditions under which the promises must be kept<\/li>\r\n\t
  3. Representations\u2014include the things that are known at a specific date that are relevant to the contract (e.g., property condition)<\/li>\r\n\t
  4. Warranties\u2014provide assurance that specific facts or conditions are true or will happen<\/li>\r\n<\/ol>\r\n

    Covenants<\/h3>\r\nCovenants are the core of the contract. They describe a promise to engage in or refrain from a specified action. There are four\u00a0logical steps in drafting effective covenants:\r\n\r\n1. Be specific.\r\n\r\nThe individual drafting the contract should start by answering these simple questions: Who? What? When? Where? How? And how much? The covenants should\u00a0clearly articulate the particulars\u00a0of the answers to\u00a0these questions in clear, understandable language.\r\n\r\nWhen a party has an obligation, the covenant will often use\u00a0the word \"shall.\" In every case that a contract contains\u00a0\"shall,\" the reader should be able to replace the word with the phrase \"has a duty to.\"\r\n\r\n2. Focus on both parties.\r\n\r\nOne party is making a commitment to act. One party is making a commitment to pay. The terms for each party need to be clearly defined, including answers to the questions above.\r\n\r\n3. Identify risks for non-performance.\r\n\r\nOften one can imagine how\u00a0promises might\u00a0be broken. The covenants should consider these risks and\u00a0include\u00a0language about how non-performance will be addressed or corrected.\r\n\r\n4. Consider\u00a0execution under unfavorable terms, including worst-case scenarios.\r\n\r\nImagine the parties have an argument as soon as the contract is signed. Effective\u00a0covenants\u2014with clearly defined\u00a0roles and directions for each party\u2014will help the parties\u00a0navigate a resolution and maintain a productive relationship even when conditions change.\r\n\r\nThe contract must also consider the following: \"What are the risks in this contract that would have grave consequences for all parties?\" The covenants should be written in ways that anticipate and address these\u00a0risks.\r\n

    Conditions<\/h3>\r\nCovenants must be performed no matter what occurs. Conditions are performed if<\/em> something occurs.\r\n\r\nWhen\u00a0drafting conditions, it's useful to think in terms of \"if-then\" constructs. For example, if<\/em> the home successfully passes inspection, then<\/em> the purchaser will buy it.\r\n\r\nAs with the covenants, it is important to be clear about the conditions and clearly state the relationship between the conditions that must be fulfilled and the actions that will ensue.\r\n\r\nAn example of an effectively written condition is \"If the seller delivers the product, the purchaser must make payment within five days.\"\r\n

    Representations and Warranties<\/h3>\r\nStatements of fact in a contract or in obtaining the contract are considered to be either warranties or representations.\r\n\r\nRemember, warranties are assurances by one party to the other party that specific facts or conditions are true or will happen. Traditionally, warranties are factual promises that\u00a0are enforced through a contract legal action, regardless of materiality, intent, or reliance.\r\n\r\nRepresentations are traditionally precontractual statements that\u00a0allow for a tort-based action if the misrepresentation is negligent or fraudulent. In other words, representations define what one of the parties knows to be true at the time of the contract. For instance, a party could represent that a car for sale has not been in an accident. Following the sale, that could change, but at that moment it was\u00a0accurate.\r\n\r\nIn U.S. law, the distinction between representations and warranties\u00a0is somewhat ambiguous. Warranties are viewed primarily as contract-based legal action, while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.\r\n\r\n \r\n\r\n \r\n

    Check Your Understanding<\/h2>\r\nAnswer the question(s) below to see how well you understand the topics covered in this section. This short quiz does not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.\r\n\r\nUse this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/176","rendered":"

    Parts of a Contract<\/h2>\n

    How do you write a sound business contract, or evaluate one that you are asked to sign? A contract should include the following four categories of content:<\/p>\n

      \n
    1. Covenants\u2014the promise made in the contract<\/li>\n
    2. Conditions\u2014the conditions under which the promises must be kept<\/li>\n
    3. Representations\u2014include the things that are known at a specific date that are relevant to the contract (e.g., property condition)<\/li>\n
    4. Warranties\u2014provide assurance that specific facts or conditions are true or will happen<\/li>\n<\/ol>\n

      Covenants<\/h3>\n

      Covenants are the core of the contract. They describe a promise to engage in or refrain from a specified action. There are four\u00a0logical steps in drafting effective covenants:<\/p>\n

      1. Be specific.<\/p>\n

      The individual drafting the contract should start by answering these simple questions: Who? What? When? Where? How? And how much? The covenants should\u00a0clearly articulate the particulars\u00a0of the answers to\u00a0these questions in clear, understandable language.<\/p>\n

      When a party has an obligation, the covenant will often use\u00a0the word “shall.” In every case that a contract contains\u00a0“shall,” the reader should be able to replace the word with the phrase “has a duty to.”<\/p>\n

      2. Focus on both parties.<\/p>\n

      One party is making a commitment to act. One party is making a commitment to pay. The terms for each party need to be clearly defined, including answers to the questions above.<\/p>\n

      3. Identify risks for non-performance.<\/p>\n

      Often one can imagine how\u00a0promises might\u00a0be broken. The covenants should consider these risks and\u00a0include\u00a0language about how non-performance will be addressed or corrected.<\/p>\n

      4. Consider\u00a0execution under unfavorable terms, including worst-case scenarios.<\/p>\n

      Imagine the parties have an argument as soon as the contract is signed. Effective\u00a0covenants\u2014with clearly defined\u00a0roles and directions for each party\u2014will help the parties\u00a0navigate a resolution and maintain a productive relationship even when conditions change.<\/p>\n

      The contract must also consider the following: “What are the risks in this contract that would have grave consequences for all parties?” The covenants should be written in ways that anticipate and address these\u00a0risks.<\/p>\n

      Conditions<\/h3>\n

      Covenants must be performed no matter what occurs. Conditions are performed if<\/em> something occurs.<\/p>\n

      When\u00a0drafting conditions, it’s useful to think in terms of “if-then” constructs. For example, if<\/em> the home successfully passes inspection, then<\/em> the purchaser will buy it.<\/p>\n

      As with the covenants, it is important to be clear about the conditions and clearly state the relationship between the conditions that must be fulfilled and the actions that will ensue.<\/p>\n

      An example of an effectively written condition is “If the seller delivers the product, the purchaser must make payment within five days.”<\/p>\n

      Representations and Warranties<\/h3>\n

      Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations.<\/p>\n

      Remember, warranties are assurances by one party to the other party that specific facts or conditions are true or will happen. Traditionally, warranties are factual promises that\u00a0are enforced through a contract legal action, regardless of materiality, intent, or reliance.<\/p>\n

      Representations are traditionally precontractual statements that\u00a0allow for a tort-based action if the misrepresentation is negligent or fraudulent. In other words, representations define what one of the parties knows to be true at the time of the contract. For instance, a party could represent that a car for sale has not been in an accident. Following the sale, that could change, but at that moment it was\u00a0accurate.<\/p>\n

      In U.S. law, the distinction between representations and warranties\u00a0is somewhat ambiguous. Warranties are viewed primarily as contract-based legal action, while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.<\/p>\n

       <\/p>\n

       <\/p>\n

      Check Your Understanding<\/h2>\n

      Answer the question(s) below to see how well you understand the topics covered in this section. This short quiz does not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.<\/p>\n

      Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.<\/p>\n

      \t