Tuesday, 5 February 2013

Common Contract Format -- Tips from Lawyer for Small and Medium Sized Businesses

Common Contract Format
By: Gary Courtney, Barrister and Solicitor, 
Providing Information to Assist in Business

Most commercial agreements prepared by lawyers, or prepared from a lawyer’s precedent, have six parts, each with their own purpose:

a)         Date

Generally the date of the agreement will be the first thing found in any agreement.  It should be the date the agreement is signed.  It is usually the date the agreement is effective.

From time to time one may find the following term:

“This Agreement dated the 5th day of May, 2012 to be effective from the 1st day of January, 2012.”

In other words the term is backdating the agreement.  The above term is much preferred to simply dating the Agreement for January 1st, 2012, when in fact it is not signed until May 5th.

There is nothing wrong with the above wording having the effect of backdating an agreement, as long as the agreement was in fact in place on January 1, 2012, but simply took about four months to properly document.

 A problem arises if there was no agreement on January 1, 2012, as in reality the agreement was not struck until May.  In other words we do not have a proper effective date of an agreement that took a few months to document, but we have a fictitious backdating of an agreement reached in May.  In this case the contracting parties may be committing a fraud if for example the reason for backdating is to obtain some tax advantage.

 b)         Parties

The second part of the contract should accurately set out the parties to the agreement. Make sure the name of a corporate party is accurately set out.

c)         Preamble

Most contracts, especially if the document is a lengthy one, will set out a preamble.

The preamble is meant to set out the background for the parties entering into an agreement.  Its purpose is to assist in explaining what will be coming next, i.e., what has been agreed.  It also often contains a standard clause acknowledging the flow of consideration necessary to form a binding agreement.

In addition to the Preamble’s position in the contract document, following the listing of the “Parties”, one can often recognize the preamble by the use of the word “Whereas”.

A typical example is as follows:


1.         Sally Smith is the owner of 50 shares of A.B.C. Investments Ltd. which she wishes to sell;

2.         John Jones wishes to purchase 50 shares of A.B.C. Investments Ltd.

Now Therefore in return for the sum of $1.00 paid by John Jones to Sally Smith and other good and valuable consideration contained herein the payment and receipt of which is acknowledged:


d)         What is Agreed

The next part of the typical agreement will generally be the setting out of the main points of the agreement.  If the contracting parties were asked what has been agreed, most or all would be incorporated into this part of the agreement.

Usually this part of the contract will state what is to be done, when it is to be done, and how it is to be done.

This part might state the following:

1.         Sally Smith agrees to sell and transfer to John Jones all her interest and title to 50 shares of A.B.C. Investments Ltd. for a price of $1,000.00, or $20.00 per share.

2.         John Jones will pay to Sally Smith the sum of $1,000.00 or $20.00 per share for the 50 shares of A.B.C. Investments Ltd., which sum will be paid on or before May 31, 2000, by certified cheque payable in trust for Sally Smith to Courtney Aarbo, Barristers and Solicitors, 1131 Kensington Road N.W. (3rd Floor), Calgary, Alberta, T2P 3P4.

3.         On receipt of payment for the shares Sally Smith will forthwith effect the share     transfer by causing a transfer of the share certificate to John Jones to be effected  and registered on the share register of A.B.C. Investments Ltd.

e)         Standard Clauses

The next parts of a standard agreement are the standard clauses, sometimes referred to as “the fine print”.  The section is typically thought of as the part of the agreement that the parties’ lawyers would likely put into an agreement.  It may be much longer than the rest of the agreement.  The terms are difficult to understand.  Unfortunately the parties often do not read these sections of the agreement prior to signing it.

In the share transfer agreement that we have been using as an example this area of the agreement would likely contain terms covering the following areas:

·         Extensive provisions regarding representations  and warranties that Sally Smith would give to John Jones concerning her having good and clear title to the shares, her having the right to transfer the shares, and even the financial position of the company itself.

·         Detailed particulars of further acts which must be done to effect the share transfer.

·         Conditions precedent to the share transfer.

·         Termination of the agreement.

·         Amendment of the agreement.

·         Interest for late payment.

·         Where notices can be sent.

·         Arbitration of dispute clause.

·         “Standard” closing clauses such as the clause that the written agreement contains the whole agreement.

A further example that most persons can relate to is a mortgage.  Most individuals will review their mortgage, to the extent of the first few clauses setting out the amount borrowed, the interest rate, and the payment terms.  A particularly studious person may review their early payment provision.  With respect to the other 80% of the mortgage, few take the time to review it.

If people did review their whole mortgage, they would find shocking terms, such as that they were supposed to get permission of the mortgage company for renovations, and provide copies of their insurance policies.

Persons in business should be aware that the “Fine Print” generally contains crucial terms which should be reviewed and understood before signing.  In the event the agreement is signed, and one of the “Fine Print” terms comes back to haunt the signatory, there is no defense to a claim based on not having read the contract.

In the real world of business it is difficult to find the time, or have the patience to review all the “Fine Print”.  If the contract is of great importance then likely it will be reviewed by the business’ lawyer, in which case one can often rely on the lawyer to bring any problem to your attention.  Due to cost concerns, it is not always possible to hire a lawyer, but if that decision is made, it will be even more critical for the business person to take the time to review the agreement thoroughly.

f)         Execution

The last part of any agreement is the portion where the parties sign.

For more information contact Courtney Aarbo Barristers and Solicitors at www.courtneyaarbo.ca or info@courtneyaarbo.ca  or phone 403 571-5120.

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