Reciprocal Promises and Conditions
A contract may provide a list of what each party promises to do. In this format, each party is responsible
for performance whether or not the other party breaches. These provisions are reciprocal promises,
which means that they are each enforceable independently.
The better approach is for the covenants to be conditional – a party agrees to perform them only if the
other side has first done what it promised.
Representations and Warranties
Covenants are the promises the parties make about what they will do in the future. Representations and
warranties are statements of fact about the past or present; they are true when the contract is signed (or at
some other specific, designated time).1
Boilerplate
These standard previsions are typically placed in a section entitled Miscellaneous; they play an important
protective role. In essence, boilerplate creates a private law that governs disputes between the parties.
Choice of Law and Forum. Choice of law provisions determine which state’s laws will be used to
interpret the contract. Choice of forum determines the state in which any litigation would take place. (One
state’s courts can apply another state’s laws.)
Modification. Contracts should contain a provision governing modification.
If a contract has a provision requiring that amendments be in writing, there are three ways to amend it:
Signing an amendment (or rider)
Crossing out by hand the wrong language and replacing it with the correct terms. It is good
practice for both parties to initial each change. This method is typically used before the document
is signed, say, at the closing if the parties notice a mistake.
Rewriting the entire contract to include the changed provisions. In this case, the contract is
typically renamed: The Amended and Restated Agreement. This method is most appropriate if
there are many, complex alterations.
Assignment of Rights and Delegation of Duties. An assignment of rights is a transfer of your benefits
under a contract to another person. Delegation of duties is a transfer of your obligations under a contract.
Arbitration. Some contracts prohibit the parties from suing in court, and require that disputes be settled
by an arbitrator. Arbitration has its advantages – flexibility and savings in time and money. It also has
downsides.
Attorney’s fees. As a general rule, if parties to a contract end up in litigation, they must pay their
own legal fees, no matter who is in the wrong. But contracts may override this general rule and
provide that the losing party in a dispute pays the attorney’s fees for both sides.
Integration. During contract negotiations, the parties may discuss many ideas that are not ultimately
included in the final version. The point of an integration clause is to prevent either side from later
claiming that the two parties had agreed to additional provisions.
1Although, technically, there is a slight difference between a representation and a warranty, many lawyers confuse
the two terms and the distinction is not important. We will treat them as synonyms, as many lawyers do.
Severability. If, for whatever reason, some part of the contract turns out to be unenforceable, a
severability provision asks the court simply to delete the offending clause and enforce the rest of the
contract.
Force Majeure. A force majeure event is a disruptive, unexpected occurrence for which neither party is to
blame that prevents one or both parties from complying with the contract. Force majeure events typically
include war, terrorist attack, fire, flood or general Act of God.
Notices. After a contract is signed, there may be times when the parties want to send each other official
notices – of a breach, an objection, or an approval, for example. In this section, the parties list the
addresses where these notices can be sent and when the notice is effective.
Closing. To indicate that the parties have agreed to the terms of the contract, they must sign it. A simple
signature is sufficient, but contracts often contain flourishes.
When a party to the contract is a corporation, the signature lines should read like this:
Company Name, Inc.
By: ___
Name:
Title:
Multiple Choice Questions
1. Which of the following statements is true?
(a) Vagueness occurs when the parties do not want the contract to be clear.
(b) Ambiguity occurs when the parties do not want the contract to be clear.
(c) Vagueness in a contract is often appropriate as a way to clinch a deal.
(d) Ambiguity is an appropriate tactic, particularly by the party drafting the contract.
2. A contract provided, “On January 5, Purchaser shall provide Seller with a certified check in the
amount of $100,000. Seller shall transfer a deed for the Property to Purchaser.” What is wrong with
this provision?
(a) It is not clear who Purchaser and Seller are.
(b) The number $100,000 should be written in words.
(c) The promises are reciprocal.
(d) The promises are conditional.
3. In the case of a scrivener’s error, what happens?
(a) A court will not reform the contract. The parties must live with the document they signed.
(b) A court will reform the contract if there is clear and convincing evidence that the clause in
question does not reflect the true intent of the parties.
(c) A court will reform the contract if a preponderance of the evidence indicates that that the clause
in question does not reflect the true intent of the parties.
(d) A court will invalidate the contract in its entirety.
4. A contract states (1) that Buzz Co. legally exists and (2) will provide 2,000 pounds of wild
salmon each week. Which of the following statements is true?
(a) Clause 1 is a covenant and Clause 2 is a representation.
(b) Clause 1 is a representation and Clause 2 is a covenant.
(c) Both clauses are representations.
(d) Both clauses are covenants.
5. Simon has signed a contract with Miley agreeing to provide her company with 1,000 frozen
pizzas each week. The contract states: “This agreement can only be modified by a written
instrument signed by the party to be charged with such amendment.” But when Simon and
Miley run into each other on the train, they agree that he will provide 750 pizzas instead.
Which of the following statements is true?
(a) As long as they both agree, they can amend the contract orally. They do not have to sign
anything.
(b) For the change to be valid, both parties must sign an amendment because both parties are
affected by it.
(c) Only Miley has to sign the amendment because she is the one to be charged by it.
(d) Only Simon must sign the amendment because he is the one to be charged by it.
Case Questions
1. List three types of contracts that should definitely be in writing, and one that probably does not need
to be.
Answer: Should be in writing: The sale of stock, a merger agreement, the sale of land, anything that
falls under the statute of frauds. Need not be in writing: an agreement with friends in which not much
2. Zoe has been offered a job as CIO at Appsley Co, but first she has to negotiate a contract
with the CEO, Phil. Do a role play with another student in your class in which one of you
takes the role of Zoe and the other is Phil. What terms do you each want? Draft the contract.
Now compare your results with others in the class. Who has negotiated the best deal? Who
has written the best contract?
3. List three provisions in a contract that would be material, and three that would not be.
4. Slimline and Distributor signed a contract which provided that Distributor would use reasonable
efforts to promote and sell Slimline’s diet drink. Slimline was already being sold in Warehouse Club.
After the contract was signed, Distributor stopped conducting in-store demos of Slimline. It did not
repackage the product as Slimline Warehouse requested. Sales of Slimline continued to increase
during the term of the contract. Slimline sued Distributor, alleging a violation of the agreement. Who
should win?
5. You Be the Judge: WRITING PROBLEM Chip bought an insurance policy on his
house from Insurance Co. The policy covered damage from fire but explicitly excluded coverage for
harm caused “by or through an earthquake.” When an earthquake struck, Chip’s house suffered no
fire damage but the earthquake caused a building some blocks away to catch on fire. That fire
ultimately spread to Chip’s house, burning it down. Is Insurance Co. liable to Chip? Argument for
Insurance Co.: The policy could not have been clearer or more explicit. If there had been no
earthquake, Chip’s house would still be standing. The policy does not cover his loss. Argument for
Chip: His house was not damaged by an earthquake, it burned down. The policy covered fire damage.
If a contract is ambiguous, it must be interpreted against the drafter of the contract.
Discussion Questions
1. In the movie contract, which side was the more successful negotiator? Can you think of any terms
that either party left out? Are any of the provisions unreasonable?
2. What are the advantages and disadvantages of hiring a lawyer to draft or review a contract?
Answer: Advantages: Lawyers understand the law. They can protect you against unexpected events in
the future. They can be the “bad guys” in negotiations – you can blame them for playing hardball.
3. What are the penalties if Artist breaches the movie contract? Are these reasonable? Too heavy? Too
light?
4. ETHICS Sophia negotiated a contract with Pete under which she would buy his company for $10
million plus the amount of the company’s outstanding debt (approximately $1 million). But when
Pete sent a draft of the contract, it stated that the purchase price would be $10 million less the
company’s debt. What is Sophia’s ethical obligation to Pete? Should she tell him about the mistake?
What Life Principles would you apply in this situation?
5. Blair Co.’s top officers approached an investment bank to find a buyer for the company. The Bank
sent an engagement letter to Blair with the following language:
If, within 24 months after the termination of this agreement, Blair is bought by anyone with
whom Bank has had substantial discussions about such a sale, Blair must pay Bank its full fee.
Is there any problem with the drafting of this provision? What could be done to clarify the language?