Contracts: structure and interpretation
10 Contracts: structure and interpretation
10.1 STRUCTURE OF CONTRACTS
There is generally no legal requirement for a contract to follow a particular format or layout. The exact structure used will vary according to the kind of document being drafted. However, most modern commercial contracts prepared by lawyers follow a similar structure.
There are obvious advantages in having a structured and standard layout that is familiar both to lawyers and to parties to the contract. The aim in all cases should be to produce a document that is laid out in a clear and logical way, thus making it as easy as possible to read and understand.
As a rough rule, the structure of a typical commercial contract is as follows:
• The names and addresses of the parties
• Conditions precedent
• Representations and warranties
• Boilerplate clauses
These brief headings are considered in the notes below.
10.1.1 The names and addresses of the parties
The first section of the contract usually sets out the full names and postal addresses of all the parties to the contract. This section may also specify that a shortened name will be used in the remainder of the contract to denote each of the parties. For example:
Pan-Oceanic Shrimp Packers plc (hereinafter referred to as ‘the Company’)
The words ‘the Company’ will then be used in the remainder of the contract in place of Pan-Oceanic Shrimp Packers plc.
The recital is often referred to as a non-operative part of the contract since it has no specific legal effect. The purpose of the recital is to explain to the reader the background to the transaction. If necessary, the recital also sets out certain facts that may influence the way in which a court might interpret provisions of the contract.
For example, the background to an exclusion clause might be clarified by relating the decision of both parties to impose the risk of loss on one party rather than the other because this is more economical from an insurance viewpoint.
If it is vital to the contract that the content of the recital be treated as an integral part of the substantive part of the contract, an express clause to this effect should be included in the contract.
The definitions section contains a list of terms used later in the contract. A definition is given for each term, which represents the way in which the drafters of the contract wish the term to be interpreted as a matter of law. Here is an example of a definition:
‘Execution date’ shall mean 3 October 2005, the date of execution of this Agreement.
Often the definitions section needs to be read in conjunction with another section of the agreement. For example, a definition may simply state that ‘… shall have the meaning assigned to that term in Section 4.3 of this Agreement’.
The definitions form part of the substance of the contract since they prescribe that certain words and phrases shall mean certain things. It is best to state directly what these words and phrases shall mean rather than resorting to phrases such as ‘where the context so admits’, since this creates potential for ambiguity.
Problems arise with definitions when:
1 the defined word or phrase is used in the agreement in a different sense to the one in which it is defined;
2 the definition is too vague, so that the exact meaning is unclear and depends upon the parties’ interpretation;
3 the definition is too narrow, in which case it can lead to absurd or unintended meanings in certain contexts;
4 a term is defined to be used only once in the agreement;
5 the definition contravenes the golden rule of drafting – which states, never change your language unless you wish to change your meaning, and always change your language if you wish to change your meaning.
When drafting a contract it is often convenient to insert definitions throughout the agreement, as necessary, and then to remove these once the contract has been drafted, then edit and arrange them in a suitable order in the initial definitions section.
10.1.4 Conditions precedent
Conditions precedent are conditions that have to be satisfied before the agreement comes into force. They are generally viewed as being outside the main terms of the contract.
One important consequence of this fact is that these conditions are therefore not subject to the parol evidence rule