Anatomy of A Contract: The Definitive Contract Checklist
Anatomy of A Contract: The Definitive Contract Checklist
The key obligation of the parties (e.g. license of intellectual property in a
work/performance of services, etc.) and the consideration for the same
(in the above examples, the license fee or the remuneration) must be
specified.
8. Term ❏
Mention the duration of the agreement - i.e. how many months, years,
etc. It is closely tied to the termination and renewal clauses.
9. Termination ❏
Mention circumstances under which the agreement can be terminated.
Make sure you mention termination for convenience (i.e. no reason and
at the free will of either party, and termination for breach). Defining
breach is critical and gaps here can often lead to disputes in future.
10. Covenants/Duties of Each Party ❏
Every action that each party commits to undertake or abstain from must
be mentioned here. Breach will lead to a default situation, leading to a
release of the non defaulting party from its obligations and the right to
claim compensation/seek specific enforcement.
11. Representations and Warranties ❏
Every transaction is based on a set of underlying statements of fact (such
as having ownership and title), or assertions about the quality of
something (i.e. Factory X is fit for the manufacture of semiconductor
materials) - this clause lists down all such ‘representations’ and
‘warranties’ by the parties. Breach of these triggers the right to seek
compensation. It can also lead to a release of the other party from its
obligations.
12. Indemnification ❏
Sometimes, breach of responsibility by one party can lead to losses for
the other. Will these losses be made good and to what extent? For
example, if you license IP you don’t own, the licensee may end up paying
damages to the owner. He will want to be ‘indemnified’ by you. To what
extent will ‘indemnification’ be applicable?
13. Method of Payment ❏
This clause lays down the mechanics of payment, such as the date of
payment, mechanism (bank transfer, cheque, etc.), invoicing, etc.
14. Governing Law ❏
The law applicable to the contract. Selection of a governing law is very
important in international contracts.
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Anatomy of a contract
The Definitive Contract Checklist
How can the contract be amended? This clause describes the procedure.
23. Breach, Consequences of Breach and Remedies ❏
What amounts to breach and what are the consequences of breach?
Many agreements have an ‘Event of Default’ (or EOD) clause explaining
what is considered to be a breach. Consequences of breach also need to
be defined. For example, in loan agreements, an ‘Acceleration’ clause,
triggered at the time of an EOD typically states that all loans plus interest
due needs to be repaid immediately.
What kind of remedies can be sought in case of breach? Are damages the
only remedy or can a defaulting party be compelled to perform the
contract, or be prevented from taking a specific action? The specific relief
statutes state that specific performance of a contract can be insisted
upon if monetary compensation is inadequate. Parties tend to include a
specific term stating that they ‘agree’ that in case of a breach, monetary
damages may not be adequate.
24. Entire Agreement ❏
This clause states that the contract captures the entire understanding
between the parties and that no evidence of there being any other terms
in the transaction will be accepted.
25. Notices ❏
What is the specific procedure to give a notice? This clause serves the
advantage that if you serve a notice as per the procedure specified under
the contract, then the notice is considered served and is not dependent
on actual receipt.
26. Jurisdiction ❏
Which courts have jurisdiction to deal with disputes? Make sure you write
the words ‘exclusive jurisdiction of the courts of X only’ if you want to limit
the jurisdiction to one place.
27. Liquidated Damages/Limitation of Liability ❏
The liquidated damages clause specifies a particular amount of money
that will be payable in the event of default.
The Limitation of Liability clause limits the liability for breach to a
pre-specified amount. It is very often included in software and technology
contracts.
(The difference is that the Liquidated Damages attempts to quantify
damages on the higher side, a Limitation of Liability clause limits the
quantum of damages. Both are included with a view to avoid uncertainty).
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Anatomy of a contract
The Definitive Contract Checklist
28. Force Majeure ❏
This clause specifies situations which are outside the control of parties
and are unforeseeable, and under which the parties cannot be compelled
to perform under the contract.
29. Exclusivity (in some contracts) ❏
This clause states that both parties will be in an exclusive commercial
relationship, or if a term-sheet is being signed, in exclusive discussion
about crystallizing a final commercial relationship. This clause may state
some period as ‘period of exclusivity’.
28. Signature sections (for execution of a contract by the parties) ❏
Typically, the first and last pages contain full signatures, and all the others
are initialled by the parties. Certain contracts (e.g. for transfer of
immovable property) may require ‘attestation’ by a witness, who will also
need to place his signature in the same way as the parties.
29. Schedules or Annexures (in some contracts) ❏
These can be used for describing the subject matter of a transaction or
providing details for payment or wherever in the contract there are
details which are too lengthy to be used at various places in the contract -
for example details of a property being sold or details of contents in an
apartment or details of shares being transferred or details of bank
accounts to which payment is to be made etc.
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