Legal-Ease: Three components when analyzing a contract

Contracts tend to involve people who make different promises to and agreements with each other. Those people who agreed with each other and are making different promises and agreements are called the “parties.”

Usually these promises and agreements or at least some aspects of most contracts are negotiated. Even if a standard form is used (like a realtor’s purchase agreement for a house), there is typically some wiggle room for the parties to negotiate various aspects of the terms. So when disputes regarding contracts arise, they are usually resolved by determining the intentions of the parties when the contract was signed or confirmed.

In a world full of lawsuits, disclaimers and warranties, we are constantly coming across written contracts. As a practical matter, it would be impossible for us to hire an attorney to interpret every written contract we come across. However, hiring an attorney is advisable if the contract involves significant or big promises/payments, such as a purchase of real property.

But when reviewing and analyzing contracts, it’s important to understand there tend to be three main components of most well-written contracts.

The first component will define the players/parties who are making the promises to and agreements with each other in the contract. The parties to a contract can be people, a trustee of a trust or entities like LLCs and corporations. If a party is an entity, a well-written contract will describe the state of organization for that particular entity.

The second component of a contract is usually called the “recitals,” which are facts that the parties to the contract understand but are not necessarily guaranteeing. Recitals help the parties and those interpreting the contract provide context and can help to explain some or all of the reasons for the parties entering into the contract. Typically, the recitals will tell those interpreting the contract what the contract is about and why there is a contract in the first place.

It is usually easy to identify the recitals in older forms or templates, since each recital in older contracts used to begin with the word “Whereas.”

The third component of a contract is the “terms and conditions.” This component of the contract is where the promises and agreements are identified in great detail. As expected, this is also typically the longest section of a contract. This section should answer the questions of those interpreting the contract, telling them what, where, when and how various promises are to be undertaken/achieved.

The terms and conditions section of a contract is usually organized chronologically, spelling out step by step what the parties are agreeing to. But the terms and conditions can also be organized by party or by subjects. Regardless of how the terms and conditions are organized, a well-written contract will ensure that the terms and conditions tell a very detailed story that explicitly outlines what the parties need to do in order to fulfill their promises and agreements under the contract.

No matter who is reviewing and analyzing a written contract, it is important to realize that well-written contracts tend to have at least three distinct components that help interpreters to break down the contract.

Nichole Y. Shafer is an Ohio-licensed attorney at Schroeder Law LTD in Putnam County. She limits her practice to business, real estate, estate planning and agriculture issues in northwest Ohio. She can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.