By Juan Ramos, USC Gould School of Law
Business professionals come across contracts on a daily basis. Whether they are asked to draft a contract or review and comment on a contract, there are several key foundational contract concepts that business professional should know.
Foundational Contract Concepts
The main foundational contract concepts include representations, covenants, rights, discretionary authority, warranties, and conditions.
Representations. Representations are statements made about a past or present fact intended to induce reliance. The recipient of the representation is taking the other party at its word with respect to the past or present fact. If the statement turns out to be false, the recipient of the representation can sue the other party for misrepresentation. If you are the party making a representation, you want to qualify the representation as much as possible by adding words such as “approximately” or “about,” or by making exceptions to the representation.
If you see a representation about the future, it may actually be a covenant.
Covenants and Rights. A covenant is a promise to do something or not to do something. The maker of the promise – the promisor or covenantor – creates an obligation for itself. It binds itself and has a duty to perform in favor of the recipient of the promise. The recipient of the promises has a right to the promisor’s performance. If the promisor does not live up to that promise, the recipient of that promise can sue for breach of a covenant. Operative words or phrases to signal a covenant include “shall,” “promises,” “covenants” and “is obligated to.” If you are making a promise, you want your obligation to be as weak as possible. You can qualify a covenant to weaken the obligation. For example, instead of promising that you will get something done, you may instead qualify that promise by stating that you will use “reasonable efforts” to try and get that thing done.
Discretionary Authority. Statements that grant a party a choice or permission to act or do something provide that party with discretionary authority. The main operative word to signal discretionary authority is “may.” If you will be exercising the discretionary authority, then you want the grant to be as broad as possible. Consider including phrases such as “sole discretion” or “sole and absolute discretion.” If the other party will be exercising the discretionary authority, narrow the grant as much as possible. To constrain discretion, you may want to require the other party to use of “reasonable discretion” when they exercise their discretionary authority, or you may want to make the exercise of the other party’s discretionary authority be subject to your prior approval.
Warranties. Warranties are a particular type of promise. A warranty is a promise that a state of facts about the past or present is true or that that a state of facts will exist in the future. Unlike a representation, there is no justifiable reliance component. The recipient of a warranty is not relying on the truthfulness of the underlying statement but is instead focusing on the promise that the warrantor will pay damages if the state of facts does not exist in the future.
Conditions. Conditions are “if’s.” With respect to foundational contract concepts, a condition is a state of facts that must exist before an obligation or discretionary authority is triggered. For a state of facts to be a condition, there needs to be uncertainty. That is, the state of facts cannot be certain to occur. For example, the passage of time cannot be a condition because it is certain to occur. Also, a party’s own actions cannot be a condition to its obligations; otherwise, that party would control whether the condition is satisfied. Signal words and phrases for conditions include “if,” “on condition that,” “subject to,” “provided that,” and “conditioned on.”
About the Author:
Juan Ramos teaches Contract Drafting & Strategy for USC Gould School of Law’s online programs. Ramos is an expert in transactional law, including corporate, contracts, real estate, and business law.
For more information on USC Gould School of Law online programs click here: http://gould.usc.edu/go/edcor/
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