April 2015

Here are some of the commonest parts of a contract that you need to know about, for contracts in the common law jurisdictions, such as most of Canada, the United States, and Great Britain.

Parties

It takes at least two parties to make a contract. Who the parties really are is vitally important but not always obvious.

Suppose you negotiated with good old Joe of Joe’s Fish & Bait Limited, and Joe signs for the corporation. The corporation would be bound by the contract but, unless there was a special clause in the contract saying so, or other special circumstances, good old Joe himself would not be bound.

So Joe usually would not be liable if the corporation breaches the contract, even if it was Joe himself who decided that it would breach the contract.

Even sophisticated businesses with millions of dollars at stake can make this mistake. Consider the great salad oil scandal of decades ago. A crooked businessman, Anthony “Tino” De Angelis, borrowed millions based on American Express warehouse receipts verifying that he had a sea of salad oil. He actually had nowhere near as much salad oil as the warehouse receipts said. The lending kept going for years despite warning signs, including tip-off warnings about the fraud, because the lenders trusted American Express.

When the fraud finally came to an end American Express pointed out that the receipts came from a subsidiary, not from the main American Express company. This let American Express negotiate a payment to the defrauded lenders that was a fraction of what it would otherwise have had to pay.

Consideration

This can be complex. The key point is that for a binding contract all sides have to give something of value. Value can take many forms, such as money, real estate, binding promises to do things…

Some lawyers would disagree but in my opinion it is useless to write into the contract “magic words” like “payment of $1 and other good and valuable consideration”. Was the $1 really paid, and can you prove it? What is the “other good and valuable consideration”? The wording is not harmful but it might well not save the contract if it is unclear what the real consideration is.

Decades ago I represented a buyer. He bought out the other shareholder in a corporation by assuming the debts and handing over a miniscule cash payment, in coins. I actually photocopied those coins to help me prove, if it ever became an issue, that my client had really paid.

Term & Renewal

Some contracts cover only a specific event, like a simple sale of property, but others cover a lengthy period, a “term”.

Understand what the term is, because it can make the difference between a good deal and a disaster. A restaurant with only two years left in the term of its lease would be much less valuable than one with 4 years left to go plus the option to renew for up to two five-year terms.

Written?

Not all contracts have to be in writing, but having it written certainly helps if you need to prove exactly what the deal was.

Some contracts must be in writing. For example Ontario’s Statute of Frauds, and similar laws in other places, require that a contact to sell land, or a lease, needs to be in writing.

Is the FULL deal written?

A partly written contract can be even more dangerous than a completely unwritten one. If what the other side gets is written out in full detail some of what you are supposed to get is left out of the written contract, you are in trouble.

Arbitration clause

If the contract has an arbitration clause then some or all disputes related to the contract might have to be dealt with by an arbitration and not by a judge in the regular courts.

Governing Law & Jurisdiction

If all the parties to a contract are in one place, and the contract itself is to be carried out in the same place, you probably don’t need such clauses.

But it is not always that simple, so clauses can set out what kind of law applies, or what courts will handle any problems coming from the contract.

So the contract could theoretically have a clause saying problems arising from the contract are to be handled by the courts of Albania (jurisdiction) applying the law of Italy (governing law). More often the jurisdiction clause and the governing law clause will point to the same place, such as the courts of California applying the law of California.

Force Majeure

Force majeure clauses set out what circumstances beyond the control of a party would suspend or end that party’s obligation to fulfil the contract. In those contracts containing them, the clauses might for example cover one or more of war, expropriation, crime, and natural disaster.

Conclusion

You must understand that I have listed only some of the contract clauses you might need to pay attention to. Also, you might have a special situation that is an exception to the above general comments.

If you would like to talk with me about contracts or other business law issues, or could use some legal help, you can contact me by phone at 416 929 7202 or by e-mail at afrank@FrankLaw.ca.

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Also, you can get a copy of the above article in .pdf format, suitable for sharing with your contacts electronically or by a paper printout, by e-mailing a request to me at afrank@FrankLaw.ca