Hello again and welcome back. This is part 3A of my 4-part post on contracts. Post 1 dealt with the essential elements of a contract, and post 2 covered the introduction in a contract. Post 3 deals with the body, which is the meat and potatoes, as it were. For this reason, I’m dividing part 3 into two parts because I want to provide plenty of examples, and I think part 3 will be too long if it’s not broken up. I don’t want to overload those of you who are reading.
And with that said, let’s get back at it, shall we?
So, after the introduction in a contract, we come to the body, which, as you might expect, takes up the bulk of a contract’s content. What follows is a short list of common clauses that appear in a variety of contracts. Obviously, this list is not exhaustive, but it should serve as a good foundation. After this list, I have provided an explanation of each clause and I’ve highlighted in blue some common terms that, as a translator, you can expect to encounter. In the explanation prior to the examples, some key concepts may be highlighted in orange.
- Subject Matter
- Term/Agreement Period
- Hold Harmless/Liability Waiver
- Force Majeure
- Governing Law
1. SUBJECT MATTER
Logically, if you’re entering into a contract, it’s good to know what it’s about, right? I think so, and most drafters of contracts think so, too. As you might suspect, the subject matter clause extrapolates on the title of the contract to give the reader more information about the exact nature of the deal at hand. Some contracts have a specific clause entitled “subject matter,” which seems like a no-brainer. That being said, I have read other contracts and the “subject matter” isn’t necessarily stated in the title of a clause; the subject matter is simply explained to the reader in paragraph. The following is an example:
ARTICLE 1 – SUBJECT MATTER
These Terms and Conditions determine the provisions applying to our relations with Suppliers with respect to purchasing orders. By executing the order, the seller (recipient of this order) implies that he accepts these Purchasing Terms and Conditions without reservation. The present Terms and Conditions specifically and unconditionally exclude any and all General Purchasing Terms and Conditions and any other documents the Supplier may have.
Article 1. Subject Matter of Sale.
1.1 Aircraft. Company will manufacture and sell to Customer and Customer will purchase from Company aircraft under purchase agreements that incorporate the terms and conditions of this AGTA (Aircraft General Terms Agreement).
1.2 Buyer Furnished Equipment. Exhibit A, Buyer Furnished Equipment Provisions Document to the AGTA, contains the obligations of Customer and Company with respect to equipment purchased and provided by Customer, which Company will receive, inspect, store, and install in an aircraft before delivery to Customer. This equipment is defined as BUYER FURNISHED EQUIPMENT (BFE).
1.3 Customer Support. Exhibit B, Customer Support Document to the AGTA, contains the obligations of Company relating to Materials (as defined in Part 3 thereof), training, services, and other things in support of aircraft.
1.4 Product Assurance. Exhibit C, Product Assurance Document to the AGTA, contains the obligations of Company and the suppliers of equipment installed in each aircraft at delivery relating to warranties, patent indemnities, software copyright indemnities, and service life policies.
The first example consists of only one paragraph, which isn’t uncommon. Many times the subject matter clause don’t even mention the words “subject matter.” Notice that neither of these examples actually says “subject matter” in the content; it only appears in the title of the clause. What do we have in the subject matter clause? We see that there is reference to the parties and the nature of the agreement, somewhat like the preamble. We also seem “with respect to” and “as defined as,” which are two small phrases that help tell the reader what the subject is. Naturally, the subject matter clause helps the reader answer a very basic question – what?
The definitions clause isn’t so much a clause per se but rather a place in a contract where important terminology used in the contract is defined. This is so the reader will know exactly what the terms mean. This is important because the meaning of any given term may vary from a common interpretation. That’s why you need to read through the definitions of contract because if you don’t, you may actually misunderstand the term within the context of the contract itself.
Here is a portion from the “Definitions” section of a vehicle service contract:
SECTION I. DEFINITIONS
In this Contract, certain words that appear in bold have the following special meanings:
“We”, “Us”, “Our”, “Administrator” and “Service Provider” mean Company XYZ, Inc.
“You”, “Your(s)”, and “Contract Holder” mean the person named as the registered owner of the covered Vehicle identified in the Application.
“Vehicle” is understood as only the private passenger automobile or truck listed as the covered Vehicle in the Application, which is used solely for personal and private use. (Limited commercial usage is available at additional cost.)
“Powertrain Warranty Component” is understood as any component originally covered by the Vehicle Manufacturer’s Powertrain Warranty issued to the first retail owner.
3. TERM/AGREEMENT PERIOD
The term of the contract informs the reader how long the contract lasts. It tells the read when it starts (the effective date) and when it ends (the end date). Here’s a sample:
Term. The period of performance of this Agreement will be from __________, 20__, until __________, 20__, unless terminated earlier as hereinafter provided. During or at the end of that time, it may be extended as mutually agreed upon in writing.
4. HOLD HARMLESS/ LIABILITY WAIVER
Liability waver clauses, i.e. “hold harmless” provisions, inform the reader of the circumstances under which a party will not be held legally liable should a certain event occur. Such an event will depend on the nature of the contract. In these kinds of provisions, it is common for there be reference to “liability” and “injury” or “damage.” Below are a couple of examples, one dealing with leases, the other with professional services.
Lessee shall defend, indemnify, and hold harmless the County, its officers, officials, employees and volunteers from and against any and all claims, suits, actions, or liabilities for injury or death of any person, or for loss or damage to property, which arises out of Lessee’s use of Premises, or from the conduct of Lessee’s business, or from any activity, work or thing done, permitted, or suffered by Lessee in or about the Premises, except only such injury or damage as shall have been occasioned by the sole negligence of the County.
Consultant shall defend, indemnify and hold the County, its officers, officials, employees and volunteers harmless from any and all claims, injuries, damages, losses or suits including attorney fees, arising out of or resulting from the acts, errors or omissions of the Consultant in performance of this Agreement, except for injuries and damages caused by the sole negligence of the County.
A warranty clause is inserted in a contract to protect a party’s interests or rights. In every day life, consumers can typically find this kind of language on products they purchase at the store. Companies guarantee their products for a certain amount of time against damage or defects. Warranty provisions appear elsewhere as well, like in the following example from a construction management agreement. Notice the use of the word “warrant” and the terms “defects” and “re-perform, remove, repair, replace, and/or reinstall.” These correspond to the problem (defect) and the remedy (re-perform, remove, repair, replace, and/or reinstall) for which the warranty exists.
ARTICLE 10 –WARRANTIES10.1 General Warranty. The Contractor warrants to the Owner Lessor that throughout the period commencing with Substantial Completion and, if later, the installation of any property or the performance of any service constituting part of the Work, and ending one (1) day prior to the first anniversary of Substantial Completion or such later date: all Work furnished pursuant to this Agreement (a) shall comply with the requirements of this Agreement; (b) will be free from latent and patent defects in construction; and (c) will be suitable and adequate for its intended purpose as reasonably inferable from the terms of this Agreement. During such period, the Contractor shall, at its expense, re-perform, remove, repair, replace, and/or reinstall as necessary all Work, or portions thereof, which fail to comply with any or all of the aforementioned warranties.
Arbitration clauses provide the conditions that will govern the parties should a dispute arise between them. Arbitration is an out-of-court proceeding in which a third party (arbitrator) hears all the evidence and issues a binding decision. Arbitration is usually faster and cheaper than settling a dispute in court. On the down side, the decisions cannot be appealed. Arbitration clauses typically state who will conduct the arbitration proceedings and according to which rules. The terms “claim,” “dispute” and “settle” are very common in these types of provisions. Here is a sample:
Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys’ fees. Any such arbitration shall be conducted by an arbitrator experienced in [insert industry or legal experience required for arbitrator] and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who shall be employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.
As you might imagine, the parties to a contract may agree to keep certain information out of the public sphere, as the disclosure thereof may be harmful to their interests. Below is a sample paragraph from a credit agreement. The term “disclosure” commonly appears within the context of confidentiality. In addition, it is not uncommon for there to be a stipulation that a party or the parties return documents, equipment, etc. at the end of the agreement.
Each of the parties hereto shall keep confidential any information obtained from the other party (except information publicly available or in such party’s domain prior to disclosure of such information from the other party hereto, and except as required by applicable laws) and shall promptly return to the other party all schedules, documents, instruments, work papers and other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith.
We’ll take a break here, so you have time to let that all soak in. I’ll be back with part B of this post soon. Thanks for reading!