Navigating the Framework of an Agreement: An In-Depth Guide

Structure of an Agreement Introduction

The intrinsic purpose of drafting a legal business document is to promote understanding between the parties. Accordingly, it is always best when an agreement is drafted with an appreciation of your reader. Particularly, your reader is apt to be someone who is unfamiliar with contract language and who is unfamiliar with the law. Accordingly, the simpler and more organized (and shorter) you draft your agreement, generally, the better.
With respect to the structure of an agreement, this chapter will generally address the use of headings, paragraphs, bullets, numbering of sections, and so on. It will also present a specific formula, which is used in the sample documentation provided in this book, for structuring written agreements.
There are a few reasons why structuring an agreement in a logical and organized manner is an important consideration . First, because the document is often used by individuals who are unfamiliar with contract language and who may not have the requisite experience, an organized structure helps a person who is reading the Agreement for the first time follow the general terms of the document and how they relate to each other.
Second, an organized structure both enables someone reading the Agreement to follow the terms of the Agreement, and also allows both parties to repeatedly follow and refer to key sections of the Agreement. For example, one term of the Agreement may specify that certain action is required. When referring to that action, it is easy and clear to refer to the scheduled action using a number formula (such as "Section 1.a(i)"). This is superior to performing the reference using a name of a party or what could otherwise be an ambiguous description of the action.

Key Elements of an Agreement

A key aspect of any agreement is formation, and there are four elements to formation: (1) Offer, (2) Acceptance, (3) Consideration, and (4) Mutual Intent to Be Bound.
Offer is a statement by one party that it will enter into an agreement under specifically identified terms. Offer occurs when a person has reasonable expectation that an offer will result in a contract if the terms of the offer are accepted by another.
Acceptance is the unconditional agreement to all of the terms of the offer. Acceptance must mirror or match the terms of the offer without any substantive changes to be effective. If an offeree purports to accept an offer, but proposes a material change in the offer, it is considered a counteroffer instead of an acceptance. In contrast, if the offeree offers to accept the offer, but only on the exact terms offered, that acceptance will be effective and create a binding agreement. An offeror cannot withdraw an offer after the offeree accepts an offer.
Consideration is the value exchanged between the parties pursuant to the terms of the offer and acceptance. Consideration does not need to be monetary. For example, it can be a promise, something given, or an act by a party that benefits the other.
Mutual Intent to Be Bound occurs when the parties have an objective intention to enter into a legally binding agreement that all parties understand. Under certain circumstances, you may require that the intent be in writing.

Title and Preamble

5. Title and Preamble

Not every agreement will have a title and a preamble, so just like any other component of an agreement, you don’t want to be too dogmatic about it. You’ll sometimes see concept agreements (MOUs) and strategic alliance agreements (SAA) that don’t have either. Here’s an example of a title: Intended for GBI Sourcing Agreement – Basic But whether you have these components or not, it’s important to keep them as simple as possible. The title is simply a way to describe the subject matter of the content that follows. It’s often also a product or service name. You also sometimes see the title of the specific product that you’ll be using out of the final contract included in the title. Including it there, for example, can help you narrow down what the contract is when performing a search in a content management system. And the preamble is generally used to identify the parties. It explains who is involved in the contract, and in what capacity they are executing the agreement. Notice how in the above example, only the company’s name is used, and not its legal designation. For example, say Company ABC, Inc. ("ABC") and Company XYZ, LLC. ("XYZ"). Legal designations are typically only used at the signature block. That’s because legal designations can change as states modify their statutes, and if that happens, the title and preamble of the contract are going to be out of date, while the signature block will still provide you with the current information on the legal status of the entities involved. Many people don’t appreciate that fact. Contracts often say things like our company and your company, or licensor and licensee instead of the others’ names. Those typically are not written out until the signature block. However, it’s wise to check with your stakeholders first. You’ll want to make sure that they are comfortable with leaving the language the same in all places where they are mentioned in the contract. But as general rule, the title should state: a. The parties to the agreement b. The subject matter of the agreement This is a pretty straightforward idea. It’s standard stuff, but it’s good to know. The preamble is also quite simple. It should state: a. The date of the agreement b. The parties to the agreement c. The purpose of the agreement The standard preamble to an agreement is generally two sentences. The first sentence states the date of the agreement, and the second sentence states that the parties intend to be legally bound to the terms of the content that follows. This, again, is pretty standard stuff. So, it’s not something that needs a detailed explanation. That said, you will see some agreements that do bring in additional detail. There will be a longer preamble that includes specific information about the intent of the parties. That’s fine. But again, it’s a good idea to check with your stakeholders and make sure that they are comfortable with how their positions are framed up in the preamble.

Definitions and Interpretations

Definitions: Interpretations and Interpretative Principles
The benefit of including these definitions and interpretative principles is that the drafting of the agreement can be more streamlined. If the terms are clearly defined at the outset, whether in the preamble or a schedule, then the drafter does not necessarily have to repeat the same set of rules in multiple places within the same agreement. Although the definitions are for the purpose of reducing confusion and making interpretation easier, they should not be seen as limiting the scope of the terms. The drafter should use the definitions as a guide to understanding the terms in the agreement but should not feel limited in their use of them. Interpretations is a section that sets out how the contract provisions are to be interpreted. This section is often included after the definition schedule. The interpretations section will often include principles such as: • Headers are for convenience only and do not alter or affect the terms of the agreement; and • The plural will include the singular and vice versa when the context so requires. Even if you think certain interpretations are obvious, it is a good idea to include them in this section because they will: • Save time for those reading the contract, especially if the person knows for certain that the section is included in all the client’s agreements. The person reading the agreement will not have to read through the agreement to determine how to interpret the terms; and • Save you and your office time because you will not have to answer questions about the way the terms should be interpreted.

Terms of an Agreement

The objective of the term and conditions is to specify the particular obligations, rights and liabilities of the parties. The term and conditions provide for the following:
• Steps that each party must take or avoid taking
• Situations that will void the agreement
• Remedies for breaches of the obligations set out on the agreement
• Limitation of liability or caps on damages
• Steps for insurance
• Confidentiality obligations
• Dispute resolution clauses
• Obligations in relation to termination of the agreement
• Compensation clauses
• Obligations upon expiry against the terms and conditions
• Liability for a breach of the term and conditions.
The method of enforcement of the terms and conditions can also be included, such as injunctive relief or specific performance against the relevant party.

Clauses You Must Include

Agreements generally need certain standard terms in order to govern the behavior of the parties and to protect the interests of each party. These terms are commonly referred to as the "clauses" of an agreement.
Some of the most important clauses for any agreement, regardless of topic, are a confidentiality clause, a dispute resolution clause, a damages clause, a termination clause and a severability clause. Thought the terms of such clauses will often vary depending on the subject matter and the way in which negotiations between the parties unfold, certain basic provisions are typically found in each clause.
For example, a confidentiality clause will generally include the following terms: the definition of confidential information, the obligations of the parties in connection with confidential information, definitions and exceptions that will limit the disclosures that are considered confidential information, the purpose(s) for which confidential information will be disclosed and the term of the confidentiality obligations. A sample language could read as follows: "Confidential Information" shall mean any information that is disclosed by a party to the other party that is clearly and conspicuously marked or otherwise identified as confidential to the extent such information is not in the public domain (i.e., did not become publicly available without obligations of confidentiality). Notwithstanding the above definition, "Confidential Information" does not include any information that is in the public domain at the time of disclosure; is publicly available through no wrongful act of the other party; is already known to the receiving party and, at the time of disclosure, was disclosed to such party free of any obligation of confidence; was received from a third-party source with no notice of restriction on disclosure; or is available independent from the receiving party’s receipt of such information. The receiving party will maintain the reasonable controls and procedures in connection with the handling of the information deemed to be confidential in order to restrict access to the personnel , agents and representatives of the receiving party to those persons necessary to achieve the purposes of the agreement. Under no circumstance may the receiving party disclose confidential information to any third party without the express written approval of the disclosing party …"
A dispute resolution clause will generally include the following terms: where disputes will be governed or resolved, who will govern or resolve disputes (e.g., the parties themselves, a third-party such as a judge or arbitrator), who will bear the costs of governing or resolving the dispute, and the time period for a party to bring a claims against another party. The language for this clause will vary with respect to the particular circumstances in which the agreement is entered into. For example, a dispute resolution clause for landlord-tenant disputes will often state that any such dispute will be resolved in a state or municipal court, while a dispute resolution clause for a joint production agreement might state that any dispute will be governed by certain rules of the International Chamber of Commerce and will be resolved in arbitration. For example, a dispute resolution clause might state as follows: "Any dispute or claim arising out of or in connection with the Agreement shall be settled by final and binding arbitration in accordance with the International Chamber of Commerce Arbitration Rules within the City of …"
Each agreement will vary with respect to the clause: the methodology for governing or resolving disputes will depend on the particular analysis used in drafting that agreement, and the permissible exceptions and/or limitations for certain data will depend on the particular circumstances of the agreement. A confidentiality clause, for example, will generally include an exception for data that is in the public domain; nevertheless, if the agreement is for highly sensitive information, the parties may want to include an exception for data only if it is identical to the data in the public domain.

Signature Execution

One of the final sections of any written agreement is the signatures and execution page, which typically looks like this:
"IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first written above."
After negotiating what could be a long and arduous process, many clients want to know at which point the agreement is binding. Most agreements are not binding until they are fully executed, meaning, they are signed by both parties. However, certain contracts can be binding on parties orally or where one is asked to perform under the terms of a contract. Some of the most prominent cases of this have been in the entertainment industry where someone’s name or likeness is used while they have not signed the contract. In those cases, once there is evidence that you have been using the likeness of someone who has not signed the agreement or performed under an oral agreement to that effect, the contract becomes binding.
This section does not just mean that the parties are signing their names, it means that there is an official representation that this individual is authorized to sign the contract. Even if your name appears on the contract, if you are not authorized to sign the contract, you cannot be held liable under the terms of the contract. Similarly, if I have my assistant sign my name, unless my assistant is authorized to execute the agreement on my behalf, it will not be binding on me.

Appendices and Schedule

Appendices and schedules form an important part of many agreements and will need to be carefully drafted, negotiated and referenced in the main body of the agreement.
Appendices and schedules may be used for a variety of reasons including:
Having (or not having) appendices and/or schedules will be a matter of contractual negotiation. In some cases it will be appropriate to include the relevant terms in the main body of the agreement and to omit appendices or schedules. In others it will be appropriate to set out in the appendices or schedules only provisions which are ancillary to the main obligations or key commercial matters when these are not required to be included in the main body of the agreement.
Whilst it may be important to have a clear structure to the agreement (both for physical and electronic storage and for ease of reference), it is also important not to lose track of the relevant provisions during negotiations. In many negotiations parties will agree large amounts of the main body of the agreement before the appendices or schedules are even agreed. Where this is the case, it is appropriate to "flag" in the main body of the agreement that the relevant clause will be amended to require the counterparties to agree the text to be inserted in the appendix/schedule, once the appendix/schedule is agreed by both sides. However, it is still necessary to ensure that the relevant parties all update their copies of the agreement.

Mistakes to Avoid

Often the result of a failure to keep in mind the general provisions discussed above, agreements with poor structure are commonplace. A few of the most common mistakes are: Failing to use a sufficient level of detail in the provisions governing the key parts of the transaction and failing to address what happens when things go wrong. People rarely read contracts intently before signing. But once a dispute arises, it is the contract that controls. So in dispute resolution provisions and most other places in a contract, more detail is better. Gaps in the contract will generally make the result less favorable to you. Failing to include contractual provisions that are necessary or useful to your specific circumstances. The standard "boiler plate" provisions included in most contracts are seldom sufficient on their own to avoid problems. Even more rarely are the conflicts of law provisions that are inserted into contracts understood by the parties. In many cases, it would have been better if the parties had not agreed to what is generally unacceptable in their state and further away from home. Offering too much detail in areas where too much detail is not necessary. At times agreements become longer and longer due to proposals for a treaty rather than an agreement. If there are lots of exceptions to a contract provision in favor of one party or the other, the new exceptions may create additional holes if they are not worded in the same way as previous exceptions. Not being mindful of how the agreement will be interpreted in different states or countries. When possible use the same terms in similar contracts. The meaning of various words is different around the world and even within the United States. If you must use the same term to mean different things in different contexts, define the term in the contract so that the intent is clear. Ignoring the applicable law entirely. There isn’t much reason to deviate from the law that applies directly to you. The general state or federal or local law where you are, or at least where the agreement is required to be performed, is still preferred to using the laws of a long distance away.

Conclusion and Best Practice

In conclusion, understanding the key components of an agreement, including the Preamble, Body, and Signature Blocks, is essential for creating contracts that are clear, concise, and enforceable. This knowledge enables parties to effectively communicate their intentions and allocate risks and responsibilities clearly. Ultimately, a well-structured contract reduces the likelihood of future disputes and litigation, saving time and resources for all parties involved.
For best practices, it is essential that every agreement produced is carefully crafted to ensure that it is legally sound and serves its intended purpose. Parties should consider the following recommendations when drafting and reviewing contracts:
• Make Use of Provisions: The Preamble and Body provide specific provisions and conditions for the performance of the agreement and should be drafted with precision to minimize ambiguity. Adherence to these provisions will help ensure the parties’ interests are protected.
• Appropriately Address the Purchase and Sale of Real Property: The requirements for conveyancing real property differ from those of other types of contracts. For example , the agreement should include local recording requirements and provide specific requirements to ensure title is transferred properly.
• Include the Required Signatures: Both parties should be bound to the terms of the agreement. A failure to add an official signature to the contract or an incomplete signature can prevent a party from enforcing the contract against the signer. When a corporation is a party to the agreement, a corporate officer must sign the document as is required by law.
• Consider Using a Signature Page: Incorporate a signature page that the parties can use to legally bind themselves to the contract and eliminate potential issues associated with invalid signatures.
By following these best practices and ensuring the appropriate elements are present in a contract, parties can draft effective and legally enforceable contracts that will accomplish their strategic objectives.