Understanding the 5 essential elements of every agreement
What do Amelia, Brad, and Chloe have in common?
Amelia wanted to fly across the ocean. But she didn’t have money to buy a plane. So she went to the bank and asked for a loan. When the bank said yes, Emily and the bank signed a loan agreement.
Brad decided to start a podcast. Eventually it became so popular that companies approached him about plugging their products and airing advertisements. To cement these arrangements, Brad and the companies signed marketing agreements.
Chloe wanted a job as a sales manager. She networked, sent out résumés, and finally landed a job. When she did, Chloe and her employer signed an employment contract.
While Amelia, Brad, and Chloe were looking for very different things, they all had one thing in common: They needed to sign a contract as part of bringing their goal to life.
These examples underscore a modern reality: Contracts are everywhere. Each of us will need to read, understand, and ultimately understand at least one contract in our lifetime. And, for most of us, that number will be significantly higher. Thus, it’s worth knowing how contracts are structured.
Well-drafted contracts are generally broken into five sections: the preamble, background, business terms, boilerplate, and signature block. Let’s discuss each.
First up is the preamble, which is the start of the contract. Its job is to announce the date, people, and type of contract that will follow. It will look something like this:
This Rental Agreement (the “Lease”), dated 13 August 2018, is between John Smith (the “Landlord”), and Excelsior Construction, LLC (the “Tenant”).
Sometimes the preamble also includes the parties’ contact information. Other times that information is included in a notice clause later in the contract. Either approach is fine. But contact information should almost always be somewhere in the contract.
Immediately after the preamble comes the background section (often known as the recitals). This section often yields a reader’s first encounter with what lawyers call legalese—archaic language like “whereas” and “witnesseth that.” While these archaisms are unnecessary, the background section can be very helpful, especially for complicated contracts. The background section does exactly what its name suggests—it says why the parties signed the contract. It should look something like this:
• The Seller manufactures hammocks (the “Goods”);
• The Retailer markets and sells hammocks and related products; and
• The parties desire for the Seller to sell the Goods to the Retailer, all on the terms below.
Next up is the meat of the contract—the business terms. This section is what the parties care about. For example, in a rental agreement, this section will set out the length of the agreement, how much rent is due and when, and so on. This section will often start like this:
The parties therefore agree as follows:
• Term. This agreement is for 1 year, from 1 August 2019 through 31 July 2020.
• Rent. The Tenant shall pay the Landlord US$1,000, payable in advance on the 1st of each month.
• Security Deposit. The Tenant shall pay the Landlord a security deposit in the amount of US$1,000, the receipt of which is hereby acknowledged.
• Utilities. The Tenant shall be responsible for its utilities, including power and water.
After the business terms is the legal boilerplate, which contains a series of general terms found in virtually every contract. This section is about the point where most reader’s eyes begin to glaze over. But try to resist that impulse because within that sea of legal verbiage are some essential terms that can make or break the contract.
What are some of the key terms to keep an eye out for? Scan for the Notice clause, which says how you should contact the other party. That information is especially important if a dispute arises. Similarly, pay attention for any clause that says something like: Arbitration, Mediation, Choice of Law, Dispute Resolution, and Waiver of Jury Trial. Each of these will say how disputes will be handled. And if you think you might want to transfer your contractual benefit or obligations (such as a tenant who wants to transfer their lease to someone else), then look for a section usually titled Assignment.
Last is the signature block. This is the spot where the parties sign. It should say each party’s name and whether they are signing on their own behalf or for someone else. In addition, if the parties want to be especially careful or intend for the document to be recorded (such as a deed of gift, warranty deed, or ground lease), then the contract should be notarized. The notarization, in turn, would go in a section titled Acknowledgment(s).
If you’ve read this far, good job. You now know more than most people about contracts. But since people generally don’t bother with a contract unless the topic is important, I’d caution against relying too strongly on your newfound knowledge. Instead, invest in having a professional review the contract with you.
This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.
Jordan Sundell is a lawyer primarily practicing business and real-estate law. He formerly worked for the CNMI Supreme Court and Bridge Capital and is now general counsel for several real-estate companies, including JZ Group. His columns—focused mainly on real estate and small business—are published every other Tuesday. email@example.com.