Parts of a Contract

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:

1. Covenants—the promise made in the contract
2. Conditions—the conditions under which the promises must be kept
3. Representations—include the things that are known at a specific date that are relevant to the contract (e.g., property condition)
4. Warranties—provide assurance that specific facts or conditions are true or will happen

Covenants

Covenants are the core of the contract. They describe a promise to engage in or refrain from a specified action. There are four logical steps in drafting effective covenants:

1. Be specific.

The individual drafting the contract should start by answering these simple questions: Who? What? When? Where? How? And how much? The covenants should clearly articulate the particulars of the answers to these questions in clear, understandable language.

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

2. Focus on both parties.

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.

3. Identify risks for non-performance.

Often one can imagine how promises might be broken. The covenants should consider these risks and include language about how non-performance will be addressed or corrected.

4. Consider execution under unfavorable terms, including worst-case scenarios.

Imagine the parties have an argument as soon as the contract is signed. Effective covenants—with clearly defined roles and directions for each party—will help the parties navigate a resolution and maintain a productive relationship even when conditions change.

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 risks.

Conditions

Covenants must be performed no matter what occurs. Conditions are performed if something occurs.

When drafting conditions, it’s useful to think in terms of “if-then” constructs. For example, if the home successfully passes inspection, then the purchaser will buy it.

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.

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

Representations and Warranties

Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations.

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 are enforced through a contract legal action, regardless of materiality, intent, or reliance.

Representations are traditionally precontractual statements that allow 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 accurate.

In U.S. law, the distinction between representations and warranties is 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.

Check Your Understanding

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