A text by Grégory Lancop, a lawyer specializing in business law
Second article in a series where we help you gain a better understanding of contracts.
The structure of a contract can be compared to a funnel. You start with the “macro” of what has been agreed between the stakeholders, covering the most obvious aspects. Then, the further you go, the more you get into the specifics of the agreement in question.
What does it contain?
In order for a contract to exist, it must contain the essential components of the agreement between the parties. For example, if you’re selling something, you’ll need to indicate information such as the price and what’s being sold.
In general, the following elements are found in a written contract:
- Payment terms
- Representations and warranties
- Effective date
- Other clauses
1 — Parties
In the previous article in this series, we saw how a contract in Quebec is a method for a minimum of two parties to express their wishes. It is an agreement in which at least one person makes a commitment to one or more others to do or refrain from doing something.
The first section of a contract identifies the parties involved in the agreement.
Who are the parties? They can be human beings, who are referred to as “physical persons” in the Quebec Civil Code (individuals or “natural persons” in other jurisdictions).
They can also be businesses or organizations. In that case, they are represented by duly authorized individuals.
2 — Purpose
The purpose is the main reason why the contract has been drawn up. The reason may be to provide a service or sell an item. This is the section where the motivation behind the agreement is defined.
Example: In the case of a snow removal service, what is the reason for hiring the company? Is it to remove snow from a specific property’s driveway or to provide some other related service?
- Read more: Contracts in Quebec — An introduction
3 — Consideration
Consideration refers to a form of compensation to be given in exchange for the contract’s purpose or intent.
In most cases, the consideration is an amount to be paid to the party “executing” or fulfilling the contract’s purpose.
Example: In exchange for removing snow at X location, an amount of Y will be paid to the company.
4. — Payment terms
The consideration must be detailed to ensure that it is clearly understood. This section determines how the payment will be made.
Payment may be required immediately the same day. The clause would then read something like: The amount of X is payable on the date this contract is signed.
A series of successive payments is also possible.
The payment method and timing are specified, either the same day, multiple instalments on subsequent dates, etc.
Example: The snow removal company will be paid a total of $1,000 by Interac transfer, divided into five instalments of $200 each, payable on the first of the month starting November 1, 202* up to and including March 1, 202*.
5 — Representations and warranties
This section (which may appear under a different heading such as “Declarations”) can be essential to the contract.
These are facts that the parties declare to be true. They may have an impact on the parties’ decisions to enter into a contract together.
Depending on the type of contract, this section can be very detailed, accounting for a large portion of the contract.
For example, if goods are being sold, the seller may guarantee (“represent and warrant”) that they own the item and have the authority to do what they want with it. The seller may also warrant that the item is free from any encumbrance such as a mortgage or hypothec.
6 — Obligations
These are the obligations or requirements for all the parties involved in the contract, including buyers and sellers. In other words, the contract describes what each party must or must not do. All parties undertake to make it possible to execute the contract.
Example: The property owner must clear obstacles from the area where snow will be removed by making sure no vehicles are parked in the driveway that day. The snow removal company must give 24 hours’ advance notice of when the service will be provided.
7 — Effective date
This is the date that the contract comes into effect. It may be the date the contract is signed, a date in the future, or even be retroactive.
The objective is to make sure the parties agree from the outset on the contract’s terms and conditions. However, it doesn’t mean the purpose must be completed immediately.
Example: The snow removal contract could be signed in July even though the expected service won’t be provided until November.
8 — Termination
Contracts usually indicate when they will end. If the contract covers a service such as snow removal, a termination day may be specified.
On the other hand, in the case of a contract based on a certain number of hours, the contract could end as soon as the total number of hours has been completed.
9 — Other clauses
In line with the parties’ needs, the contract may include other general/generic clauses, interpretations and even definitions of the terminology used in the text.
There may be a clause to stipulate that the contract is governed by the laws of a particular province or jurisdiction. To ensure that the written contract takes precedence, a clause may state that the contract replaces any previous discussions or negotiations between the parties.
Wording can be added to clarify that every clause must be interpreted separately and that if any of the clauses are declared invalid, the remainder of the clauses will not be affected.
The relationships between the parties may also be defined. For example, a clause may state that nothing in the contract may be interpreted as creating an employee/employer relationship between the parties.