Writing the fine print.
Despite the complexity of the transaction, the element common to both situations is the requirement that the signed contract will reflect the terms of the business transaction. Furthermore, regardless of whether the contract is prepared by the average individual or by a lawyer, a basic knowledge of the essential elements of a contract and how it is to be drafted is fundamental in both situations.
In order to properly draft a contract, one must approach the task much as one would in drafting a traditional essay. The contract must be composed of three parts: the introduction, the body, and the conclusion. The introduction portion will generally include the title, date, name of the parties, and the recitals (clauses stating things such as the general purpose of the contract). The introduction is followed by the body of the contract which consists of the consideration provision, the material terms of the transaction, and what are termed the boilerplate clauses. Last, the conclusion portion will contain the testimonium (this is the final clause of a contract that signifies that the contract has been properly executed and in cases involving individuals, witnessed), and the execution provisions of the contract. In drafting each of these three parts, if certain basic rules are adhered to, any misunderstanding between the parties as to the interpretation and intention of the parties under the contract may be eliminated.
As a rule, most contracts will state the title at the top of the document. This initial description serves the primary purpose of alerting the parties to the legal ramifications accompanying the contract. Unfortunately, too often contracts are titled by a name that has little or no relation to the true substance of the contract. As a consequence of such a misleading title, parties may mistakenly sign something that bears no relation to their understanding of what they had bargained for. For that reason, in order to reduce any confusion about the intention of the contracting parties, the wording of the title must accurately describe the nature of the contract. Where the parties are unsure about the precise nature of their agreement, the generic terminology of Agreement and Contract should be used. In cases where a contract involves a more complex commercial transaction, it may be impractical to attempt to describe all aspects of the contract by reference to an all-encompassing generic title. In these situations, as a means of identifying the nature of a particular clause, subtitles should be inserted within the body of the contract.
Contracting parties must have certainty about when their contractual rights become effective. Generally speaking, and provided no date is specified, a contract will be effective as of the date of its signing. However, where a contract is dated, that date will be taken as the effective date. Therefore, where an undated contract is signed at different times, it may be difficult to determine the exact point when that the contract became effective. For that reason, it is recommended that a contract be given a specific date.
The names of the parties to a contract must be correctly stated in the contract. Where a party is an individual, failure to identify a person by his or her proper name may result in the contract being unenforceable. Although misstatement of an individual's name may create an invalid contract, the same may not necessarily hold true for a corporation. In this regard, circumstances may exist where the validity of the contract will be upheld despite the fact that the corporate party failed to have its name correctly stated in the contract. In these situations, the only consequence of such an act may be the penalty provisions of the applicable corporate legislation.
In addition to cases of mistaken identity, where a party, whether individual or corporation, states its name but complements it with additional wording for the purpose of eluding its contractual obligations, such a contract may be invalid. So for example, the use of the expression "or nominee" in conjunction with a party's name may be fatal to the contract, unless the terms of the contract show that the terminology did not relieve the party of its obligations under the contract. To reduce any uncertainty caused by such wording, if a party wishes to nominate an unknown party for purposes of taking certain rights under the contract, the nomination should specifically take place in the body of the contract.
The recitals are those paragraphs of the contract that come immediately before the consideration and agreement statement. Not all contracts contain recitals; nor is there any legal requirement for their presence in a contract. The primary function of recitals is to provide a short narrative of the general purpose and, where applicable, a history of the events leading up to the making of the contract. Recitals are usually worded in general terms as they are not intended to reflect the terms of the agreement reached between the parties--that is the function of the operative portion. Thus, recitals will not normally operate as covenants (promises) and will be understood as subordinate to the clauses in the body or operative portion of the contract, unless there is ambiguity in the operative portion.
In the event of ambiguity between the recitals and the operative portion, certain rules apply. Due to the fact that recitals may contain information that may assist in the interpretation of the contract, a common practice is to state that the recitals are to operate as covenants. This practice has one material flaw. As recitals precede the operative portion, the insertion of such a statement may create a problem should the wording of the recitals conflict with that of the operative portion. Should this occur, the general rule is that where in a contract an earlier provision is followed by a later one that completely destroys the obligations created by the former, the later provision is rejected and the former is to apply. In order to avoid any potential conflict between the recitals and the operative portion, one should state in the operative portion that in the event of a conflict between the two, the provisions of the operative portion are to govern.
The body is that portion of the contract that contains the terms of the parties' business transaction. The starting point of the body of the contract is the statement regarding the consideration for entering into the contract (a party must receive something of value, the consideration, for making a contract). To constitute sufficient consideration, "such consideration must be real, of some value in the eye of the law". If adequate consideration is not readily apparent, the court must look to the contract to determine that it does exist. Given this factor, two common practices have developed to satisfy this requirement.
The first relates to the sealing of the contract when it is signed, The act of sealing a contract usually involves the placement of a metal seal over the signature so as to leave an imprint which states the party's name. Alternatively, sealing may be the placement of the familiar wax or paper seal next to the signatures. The sealing of a contract depends somewhat on its complexity. In most cases, individuals do not have their own seals, and so a contract between two individuals--buying of selling a car, for example--will not likely be sealed. Lawyers, contractors, architects, and other similar professionals who do a lot of work by contract may have a metal seal. Others may use the red wax or paper seals. Finally, in-between individuals and such professionals, there are many small organizations such as not-for-profits that use a rubber stamp with the name of their society and perhaps the date of its incorporation as their official seal, which is stamped beside the signatures of official signing officers.
The second practice is the insertion of a statement referring to the consideration in terms of a nominal sum of money and having each party acknowledge receipt of the sum.
Given the benefits gained by having a contract under seal, it is recommended that where there is doubt as to the validity of the consideration, the contract should be sealed. Where the consideration is stated in terms of a nominal sum, such consideration may not be sufficient to constitute a binding contract. Therefore, if the consideration is stated in terms of a nominal sum (one dollar, for example), then despite the amount stated, it is suggested that reference be made to additional real consideration passing between the parties. For example, Party A wishes to exchange their house for the house owned by Party B. In such a case, in addition to the nominal $1.00 consideration, reference in the consideration statement should include the subject matter of the contract (exchange of land).
Every contract should address the subject of potential contractual disagreements between the parties concerning the contract. In the event of a dispute, the terms of the contract must enable the parties to resolve the dispute in a timely, cost efficient manner without resort to the courts.
Traditionally, contractual disputes were invariably resolved through litigation in the courts. Regrettably, due to the high cost and the lengthy time commitment involved, the litigation process will seldom conclude in a manner satisfactory to the litigants. For that reason, it is strongly suggested that an ADR (alternate dispute resolution) provision be included in the contract. ADR is not limited to one particular mechanism and may include arbitration, mediation, mini-trial, or negotiation. The difficulty lies in first choosing which particular mechanism will meet the needs of the relevant contract and, second, the degree of complexity for which the mechanism is to operate. The general rule is that the more complicated the contract, the greater the need to have a comprehensive ADR provision. Common sense would therefore dictate that a simple, straightforward arbitration provision should suffice for a short licence contract, such as the licensing of a motor vehicle parking stall for one month, or the renting of a community hall for a weekend function. Then again, a more involved ADR provision will be required in cases involving lengthy construction contracts where several of the ADR mechanisms may be employed.
Paramount to the success of any ADR provision is its ability to ensure that resolution of the matter in dispute will occur in a timely fashion and within the confines of the ADR provision. It is therefore critical that the ADR provision set in motion a series of timed events aimed at bringing the dispute to resolution prior to material facts being forgotten by the parties. Furthermore, the ADR provision must ensure that recourse to the courts is not a permitted option. Resolution of a dispute in accordance with the terms of the ADR provision must, therefore, be mandatory and not permissive. Barring certain specific circumstances, if the parties' agreement to resolve disputes under the contract by means of an ADR provision is clear in its wording, the courts will not interfere.
The last part of the body of a contract is usually comprised of those clauses that have been termed boilerplate clauses. Over time these clauses have been developed and refined to the point that they are considered essential if one is to protect his or her rights under the contract. Understandably, because the law changes in response to societal changes, what may have been applicable today may be redundant tomorrow. Attention must therefore be given to select only those boilerplate clauses that will not result in a conflict with the prevailing law and that are absolutely necessary to protect the parties.
The conclusion portion of a contract is perhaps the most important part of a contract because it expresses the acceptance by the parties to the terms of the contract. It usually commences with a statement called the testimonium, which by its very name implies a written testament by the parties that they have executed the contract. Although there is no specific wording for the testimonium, the standard wording usually states, "In witness whereof the parties hereto have hereunto set their hands and seals the day and year first above written". As mentioned previously, given the benefits that may flow from a sealed contract, it is recommended that sealing take place whenever possible.
Despite the fact that the parties may benefit from the standard testimonium wording, there are also disadvantages. In this regard, although this wording may be acceptable where the signature of the parties is actually witnessed, as is the case where a party is an individual, such wording is not appropriate where the parties are corporations. In these cases, one should eliminate reference to a witnessing and merely word the testimonium by using language that reflects that the parties have properly executed the contract.
Although the standard wording of the testimonium may reference the date of the contract as being on the first page, it is also common to insert reference to the date of the contract in the testimonium. This insertion may create a problem if the contract has already been dated on the first page and that date does not match the date in the testimonium. In order to avoid a conflict as to which date the parties intended that the contract operate from, the dates must be the same.
The last part of a contract is the execution portion. It is here that the parties formally declare their agreement to the terms of the contract by placing their signatures and in some cases affixing their seals. Strictly speaking, the execution of a contract "includes the performance of all acts which may be necessary to render it complete--the signing, sealing, and delivery". Be that as it may, the execution aspect of a contract is usually considered as being limited to the signing, or signing and sealing of the contract.
The most fundamental aspect of the execution portion is the actual signing and as stated previously, in certain instances, the sealing of the contract. The benefit of stating that a contract is under seal has already been discussed. In terms of a signature, aside from the fact that the actual signing may be required to bind the parties to the contract, there are certain statutory requirements that definitely require a signature. In particular, this statutory requirement is found in section 4 of the Statute of Frauds.
There is no specific form which a signature is to take. However, where a party wishes to authorize another party to sign on its behalf, this authorization should be expressly stated in the signing portion of the contract. In addition, where the person signing does not wish to obligate himself or herself personally and is signing on behalf of a corporation, then the name of the corporation should be stated followed by the word per and the signature plus a descriptive word stating the person's position with respect to the corporation.
Contractual disagreements almost invariably lead to costly and time-consuming litigation and to a possible irreparable breakdown in the business relationship of the parties to the lawsuit. Thus, parties cannot rely upon the courts to translate their bargain from the wording of the contract. Given the unwanted consequences that may result from a contract that has been the subject of litigation, it is imperative that all contracts be drafted from a perspective that will foster readability and understanding, regardless of one's legal expertise. By exercising this form of preventive medicine, needless disputes and costly litigation may be averted.
Don J. Manderscheid, Q.C. is a lawyer with the City of Edmonton Law Department in Edmonton, Alberta.
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|Title Annotation:||Feature on Contracts|
|Author:||Manderscheid, Don J.|
|Date:||Dec 1, 2004|
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