When it comes to legally binding agreement, the devil is often in the details. This is why it is important for one to understand the contractual terms, given that it is these terms that actually spell out the nature of the agreement.
Do we need a fresh contract each time?
Since drawing contracts can be time consuming, most organizations do not go to the trouble of drawing up special contracts every time they procure or sell goods and services. For most routine transactions they rely on standard terms.
Each firm will draw up its own standard terms of business, and will seek to ensure that these terms are accepted by other firms with whom they deal. Such terms can commonly be published in the organizations purchase orders, order of acknowledge, invoice and receipts etc.
Standard terms will almost always not work in more complex or strategically critical, high risk non-routine business deals. In such cases the organization will invest time and effort in creating contracts for such.
Model form contracts are published by third party experts (such as trade associations and professional bodies).
Whether you are dealing with the standard or model form contracts, it pays to know the parts or sections of contractual terms.
What are the main sections of contractual terms to lookout for?
Many contracts (though not all) follow an established format which is summarized below
- The ARTICLES
These comprise the very basic agreement: in short summary:
They state that Party A (e.g., the purchaser) is entering into a contract with Party B (e.g., the supplier). Party B agrees to provide the goods or services and Party A agrees to pay for them.
They set out exactly who the parties are by reference to their full legal entity names, usually registered company names and registration numbers where applicable, and their registered office addresses.
In each case they will also give the term by which each party is known throughout the rest of the contract.
This will either be by a generic function (“the purchaser‟, “the client‟, “the supplier‟, “the service provider”, etc.,) or (less helpfully) by a shortened form of the company’s full name (e.g., “Zerite” for Zerite Network Ltd).
This clarifies the purpose of the contract and who the parties are, while at the same time making the drafting of the clauses slightly simpler, by not having to ensure that the party names are inserted repeatedly.
- The RECITALS
These provide the context. They sell out the facts that surround the situation in which the contract happens.
In some agreements it is a very simple re-statement of the facts that the purchaser wants to acquire X and the supplier has agreed to provide it.
In some contacts (particularly building contracts) there will be number of other factual statements covering who will perform other roles necessary for the contact work. By convention they start with the word “whereas” (which means “given this….”) and are followed by “it is now hereby agreed” (or something similar).
If anything in the recitals is wrong, it could undermine the whole contract.
- CONTRACT PARTICULARS
Some forms of contract, particularly industry standards forms, will also have a CONTRACT PARTICULARS section. This sets out some of the specific variables, such as the required date of completion and any specific insurance requirements. It is a mechanism for writing terms and conditions without having to amend clause by clause. It works by creating a schedule of common variables which can be filled in, and to which the detailed terms refer back.
- The full TERMS AND CONDITIONS
These cover the ifs, buts, maybes and what will happen in respect of X if ABC happens to Y. Normally they will be in standard wording, with specific meanings set out in a DEFINITIONS AND INTERPRETATION clause for avoidance of doubt. They will cross-refer to the contract particulars and the schedules.
- The SCHEDULES
These set out project specific detail either as designed by the purchaser (e.g., KIPs) or as submitted by the supplier (e.g., pricing).
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