The Essential Contract Review Checklist - Part 1: Identifying the Agreement, Parties, Effective Date, and Definitions
When entering into any contract, you’re not only formalizing a transaction; you’re shaping a legally binding agreement that can directly influence your business operations, relationships, and financial outcomes for years to come. A well-drafted contract forms the foundation for any successful partnership, but the complexity of legal language and the risk of overlooking critical details make thorough contract review an essential step for any organization.
In this series of articles, I aim to provide a comprehensive checklist for reviewing contracts, focusing on key clauses that require close scrutiny to protect interests and ensure long-term success. Ideally, a checklist should be tailored to the specific nature of the agreement, the parties’ specific business requirements, the industry, legal and regulatory landscape, and the jurisdiction in which the agreement operates, amongst other factors. However, certain fundamental elements may be present in any contract review checklist, such as the following:
1. Identifying the Agreement, Parties, Effective Date, and Definitions
The foundation of any robust commercial contract lies in its clear identification and structuring. This introductory section serves as the contract's entry-gate, providing essential information that sets the stage for the entire agreement.
Title
Firstly, it's crucial to prominently display a bolded title at the top of the document's first page. This title should accurately reflect the nature of the agreement being entered into. For instance, if you're dealing with provision of services, the title can read “Services Agreement”. This immediate clarification helps all parties and potential reviewers quickly understand the contract's purpose.
It's important to ensure the title accurately represents the full scope of the agreement. Sometimes a contract may have a certain heading, but upon closer inspection, it may contain provisions or obligations that do not typically fit within the scope suggested by the title. In such cases, one should be mindful of such provisions in the contract and may consider revising to a more general or comprehensive title that takes into account the full scope of the agreement.
Introduction of Parties
The title is usually followed by a concise yet comprehensive introduction of the parties involved. This is a legal necessity to ensure each party is accurately identified and bound by the contract's terms. The full legal names of all parties can be included, specifying their form of organization (e.g., corporation, LLC, partnership) and the state in which they're registered. For example, “XYZ Corporation, a Delaware corporation”. The principal business address of each party may be included in this section. Alternatively, this information may also be included in a separate notice section.
To enhance readability and facilitate easy reference throughout the document, each party is assigned a shorthand name or designation (e.g., “Supplier”, “Customer”, “Client” or “Company”). This practice simplifies the contract's language and reduces the risk of confusion in longer contracts.
Effective Date
The effective date is another critical element of the introductory section. This date determines when the contract's obligations become binding and may be structured in several ways:
Based on the execution date (e.g., “This agreement is effective as of the date of the last signature herein”).
As of a specific date (e.g., “This agreement is effective as of X date”).
Upon satisfaction of certain preliminary conditions (e.g., “This agreement shall become effective upon Company’s receipt of all necessary regulatory approvals”).
The choice depends on the specific circumstances of your business arrangement and any preparatory steps that need to be completed before the contract can take effect.
Definitions or Defined Terms
A comprehensive section dedicated to Definitions or Defined Terms may come in the initial part of the contract or sometimes even at the end of the contract. This section serves as a critical reference point for the entire agreement, aiming to ensure consistency and clarity throughout the document.
When drafting or reviewing defined terms, one can ensure that all key terms are properly defined, including technical terms, industry-specific language, any terms repeatedly used throughout the contract, and any terms that may have multiple interpretations. Ideally, definitions must be precise, unambiguous, and used consistently throughout the agreement. For ease of reference, defined terms may typically be arranged in alphabetical order and may include cross-references to relevant sections of the agreement.
Parties should pay close attention to defined terms during negotiations, as subtle changes can have far-reaching effects on the scope and interpretation of the agreement. Jurisdictional variations in the legal interpretations of terms should be considered, as well as the use of inclusive language when providing examples within definitions. The definitions should also be thoroughly reviewed for redundancy and potential contradictions with substantive provisions of the contract.
The Importance of Bookmarking, Hyperlinking, and Cross-referencing
To enhance navigability and comprehension, it may help to utilize document bookmarking and hyperlinking features for assigned shorthand names and defined terms in the contract. This formatting technique allows all subsequent reviewers, including legal counsel and business stakeholders, to quickly identify and reference the legal entity behind designations such as "Client" or "Company" throughout the contract, as well as quickly identify and reference the meaning of defined terms in the contract. By implementing this cross-referencing system, you may significantly improve document readability, reduce the potential for misinterpretation, and facilitate a more efficient review process, particularly for complex or lengthy contracts.
Recitals
Following the identification of parties and the effective date, it's often beneficial to include a section for recitals. These are introductory statements that provide background information and context for the agreement. Recitals typically begin with “WHEREAS” and outline the parties' intent, the purpose of the agreement, and any relevant facts or circumstances that led to its formation. Recitals can be valuable in interpreting the parties' intentions and they serve as a narrative bridge between the formal identification elements and the substantive provisions of the contract, setting the stage for the detailed terms that follow.
I love anything to do with contracts, be it drafting, reviewing, or negotiating! In the next article, we will look at Primary Duties and Obligations - The Core of the Contract.
THE INFORMATION PROVIDED IN THIS ARTICLE DOES NOT, AND IS NOT INTENDED TO, CONSTITUTE LEGAL ADVICE; AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION; INSTEAD, ALL INFORMATION AND CONTENT IN THIS ARTICLE ARE FOR GENERAL INFORMATIONAL PURPOSES ONLY.