Key Contract Provisions

Strong contracts focus on the key elements — such as the payment terms, the various obligations of the parties, representations and warranties, conditions to closing the deal, liability issues, remedies, and termination rights. You may want to take a look at our Contract Checklist or our sample Boilerplate Provisions to make sure that you understand all pertinent information.

Payment Terms

In some contracts, payment terms are easy to describe, such as "XYZ publisher hereby promises to pay the author $1 million on signing of this contract for him to prepare Business Contracts for Dummies." But make sure your payment terms provision answers these questions:

• How much is being paid and by whom?
• When is the payment to be made?
• What steps have to occur before payment is required?
• What is the form of payment? Is it by check, wire transfer, promissory note, or something else?
• What impact will early contract termination have on payment?

Obligations of the Parties

Aside from payment obligations, a business contract usually spells out the various obligations of each party. So make sure you have addressed:

• What is each party obligated to do?
• By what date must the obligations be performed?
• What quality standards must be met for the obligations to be deemed fully completed?
• What are the consequences of failing to meet these obligations?

This is an area that leads to frequent litigation — where one party expected the other side to do something more, better, or in a different way than the other side understood. So be detailed and clear here as to what you really expect and need the other side to deliver.

Conditions

A number of contracts have "conditions" or "conditions precedent". This phrase is just a complicated way to say that certain things have to occur before the other side is obligated to perform.

Here's an example: In contracts to buy a business, the buyer will usually insist that as a condition to his making payment for the business, the seller will already:

• Have made various representations and warranties about the business
• Have ensured that those representations and warranties are true at the closing
• Have delivered all transfer documents to the buyer
• Have made sure that no litigation or legal roadblocks to the closing exist

Conditions are essential to ensure that everything you expect to happen will happen before you are stuck in performing your side of the bargain. Remember also to spell out the timing of any condition precedent.

Default and Breach

The default or breach section of a contract addresses when a party is in violation of the contract and the innocent party's rights in such event. It should carefully define the breach and provide for effective notice of such a breach to the party in violation.

If the breach is a small one (i.e. not material to the deal), then the remedies will usually be limited in the contract or by law.

If the breach or default is material, then the contract or the law could provide for some or all of the following rights (or remedies) to the nonbreaching party:

• The right to recoup all losses
• The right to suspend further performance
• The right to terminate the contract
• The right to get injunctive relief , that is to stop the other side from continuing to breach the contract, or specific performance , that is to force the breaching party to live up to its obligations under the contract.