How do you write a sound business contract, or evaluate one that you are asked to sign. A contract should include four categories of content:
Covenants – the promise made in the contract
Conditions – the condition under which the promises must be kept
Representations – include things that are known at a specific date that are relevant to the contract (e.g. property condition)
Warranties – provide assurance that specific facts or conditions are true or will happen
Answering the simple questions: who, what, when, where , how and how much, will often provide an excellent start to the covenants. Think about each of these in detail and clearly articulate the specifics. Do not try to use flowery language; try to be direct, specific and clear.
When a party has an obligation use the word “shall,” but take care not to confuse use of that word. In every case that a contract reads, “shall” the reader should be able to replace the word with the phrase, “has a duty to.”
Use active voice – “the party will pay,” rather than “the sum will be paid.” This increases clarity of intent.
Representations and Warranties
Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations.
Remember, warranties are assurances by one party to the other party that specific facts or conditions are true or will happen. Traditionally, warranties are factual promises which are enforced through a contract legal action, regardless of materiality, intent, or reliance.
Representations are traditionally precontractual statements which allow for a tort-based action if the misrepresentation is negligent or fraudulent. In other words, representations define what one of the parties knows to be true at the time of the contract. A party could represent that a car that is for sale has not been in an accident. Following the sale that could change, but at that moment it is accurate.
In U.S. law, the distinction between the two is somewhat unclear; warranties are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.
In writing and reviewing contracts pay special attention to warranties, ensuring that those are indeed facts or conditions that can be guaranteed.