Contracts: The Essential Business Desk Reference

A

acceleration clause

It’s true of cars, and it’s true of contracts: An accelerator speeds things up. Acceleration clauses (also known as demand clauses), commonly found in loans, leases, mortgages, or other payment agreements, require the party who borrowed money to speed up the payments. If you’re required to make monthly payments on a loan and miss a payment, an acceleration clause makes the entire amount you borrowed due. In other words, you must immediately pay back the whole loan.

Unenforceable clauses. Courts won’t enforce an acceleration clause that is so grossly unfair as to be unscrupulous (or unconscionable). This issue is more likely to arise in a lease because the acceleration clause forces one party to pay for something not yet received (time spent in the rented space or using the rented equipment), while in other loan agreements, the debtor has already gotten the money, home, car, or another purpose of the loan.

Minimizing the damages. In general, courts don’t like it when acceleration clauses are used as penalties. A court is more likely to enforce a clause that approximates, at least to some degree, the damages caused by the missed payment(s), as estimated when the parties signed the contract.

EXAMPLE: A company leased ATMs. When one of its customers missed a payment, the company tried to enforce an acceleration clause that made all future payments immediately due. An Ohio Court of Appeal ruled that the acceleration clause was unenforceable because it did not impose any obligation on the leasing company to minimize (or mitigate) its damages. For example, if the leasing company repossessed the ATM and then immediately leased it to someone else, the amount it earned from the new rental should have been offset from the amount owed by the first customer. Otherwise, the ATM company is getting paid twice for the use of the same machine.

A similar result may occur if a state statute requires parties to mitigate damages (regardless of the contract). A court will also decline to enforce an acceleration clause if the parties have a genuine dispute about the amount owed.

Mortgages. Most mortgages provide a grace period before the acceleration clause kicks in. During the grace (or cure) period, the borrower has the chance to make up missed payments. If the borrower cannot bring the payments current, the lender can demand full payment and start foreclosure proceedings, or work with the borrower to avoid foreclosure. Other events may trigger an acceleration clause in a mortgage besides a failure to make a timely payment—for example, the sale of the property (sometimes referred to as a due-on-sale clause) or refinancing.

Related term: promissory note.

acceptance

See offer and acceptance.

accord and satisfaction

It might sound like an archaic maneuver from The Three Musketeers, but accord and satisfaction is a relatively simple contract principle: The parties can always agree to modify the terms of their contract. When one party agrees to accept something other than what’s promised in the contract—for example, the seller of a car agrees to accept less money because the brakes need to be replaced—then the parties have reached an accord. When the buyer pays the lesser amount and the seller accepts it, that’s satisfaction. So, an accord and satisfaction is when the parties agree to an alternative way to perform the deal. An accord and satisfaction often involves the payment of a debt. For example, a creditor who loaned money to a failing business and wants to cuts his losses might agree to accept less than the total amount due.

How is it done? The parties substitute one agreement (the new arrangement) for another (the original contract) in an accord and satisfaction. The new agreement (sometimes referred to as a discharge of debt or a mutual settlement and release of debt) spells out the accord and satisfaction and terminates the old agreement.

What about accepting checks that say, payment in full? Let’s say you borrow money from a friend and then have a dispute as to how much is owed—you say $500; she says $1,000. What happens if you send a check for $750 that states payment in full? Your friend says she will cash it, but she thinks you still owe her $250, so she crosses out payment in full on the check. Can she go after you for the rest of the money if she cashes the check? Not according to most court rulings. As one judge put it, What is said is overridden by what is done. This rule only applies if there is a dispute over how much is owed, however. If you and the other party agree on what you owe, you can’t try to scratch out a better deal by writing paid in full on your check for half the amount. Finally, if there is a dispute, but the check is cashed inadvertently, the rule might not apply (courts are split on that issue).

Related terms: amendment, integration.

accretion

When something gradually increases in size—for example, your spouse’s waistline or your boss’s ego—the process is known as accretion. The term appears in the following types of contracts:

•Financial contracts. Accretion refers to the process by which payments or value increases over time. For example, accretion occurs when a bond purchased at a discounted price ($175) matures to its face (or par) value ($250).

•Real estate contracts. Accretion refers to the increase in land size due to the forces of nature. For example, accretion occurs when a river changes course and sediment deposits increase the size of the property.

•Labor union contracts. An accretion clause dictates what happens to employees in one company if they are transferred to another company whose employees are already represented by a union.

An accretion clause spells out how the extra money, property, or people will be treated (for example, who will own the land created by sedimentation).

acquisition agreement (federal government)

The federal government needs to buy a lot of stuff, from jet engines and highway signs to paper clips and those nifty baseball caps with the presidential seal. It purchases these things via contracts known as acquisition agreements. All federal acquisition agreements must meet two criteria:

•Their purchasing power must come from a specific legislative source of funding. In other words, Congress—which holds the power of the purse—must have approved the expense or department budget.

•The agreement must follow the federal acquisition rules, most of which are derived in some way from the Federal Acquisition Reform Act (FARA) or the Federal Acquisition Regulation (FAR, found in Title 48 of the United States Code of Federal Regulations). These laws set guidelines, safeguards, fees, whistleblower protections, administrative rules for contracts, and many other regulations.

Also, federal contracts must be executed or authorized by a contracting officer (usually the head of the appropriate agency), who has the authority to bind the federal government. Both goods and services can be the subject of federal acquisition contracts, although special performance-based rules apply to service agreements.

The acquisition regulations and process are listed in detail at www.acquisition.gov.

acquisition agreement (sale of business)

A company uses an acquisition agreement when buying another business. It’s a rule of the corporate food chain that bigger companies devour smaller ones—for example, Google purchased YouTube, Coca-Cola bought Odwalla, and General Motors acquired Hummer. All such deals, whether big or small, are made possible by acquisition agreements. These agreements occur in two ways:

•Entity purchase agreements (also known as stock purchase agreements). In this arrangement, a buyer purchases a business entity by buying a majority (or more) of its stock. The new owner generally steps into the shoes of the previous owners, assuming all debts and obligations.

•Asset purchase agreements. In this arrangement, a buyer purchases all of a business’s assets, both its tangible property (inventory, real estate, office equipment, and so on) and intangible property (copyrights, patents, trademarks, and trade secrets). The company’s shell—its corporate or LLC ownership—remains in place with the same owners, even though, as a practical matter, there is no business to run anymore. This is a popular arrangement for the purchase of a sole proprietorship or a partnership, because the business has no shell to speak of: Once the assets are gone, there’s no structure left to worry about.

Which is better? There are two issues to consider when choosing an acquisition model: taxes and liabilities for debts and obligations. Taxwise, an asset sale is usually better for a buyer because the buyer can begin depreciating the assets sooner. A seller usually prefers an entity purchase because the seller pays taxes only at the low, long-term capital gain rate. Sellers are especially wary about using an asset sale for a C corporation because that will leave them at risk for double taxation, once for the corporate entity and then again for the shareholders.

As for debts and liabilities, an asset sale is usually preferable for a buyer because the buyer won’t be responsible for the existing debts of the business unless the buyer agrees to take them on. That’s not the case with an entity sale, in which it’s assumed that all liabilities are included in the sale. (To make the deal happen, the selling shareholders or LLC members might have to accept responsibility for some specified liabilities, such as a recent bank loan.) The choice of acquisition arrangement also affects how ownership is transferred and whether a business lease can be transferred or assigned to the new owners.

Related terms: assignment (of contract); due diligence; merger; reformation; remedies; rescission (court ordered); restitution; successors and assigns; void (voidable).

act of God

See force majeure.

addendum

An addendum (plural: addenda) is simply any document attached to—and made part of—a contract. If you’re a busy manager who uses the same contract repeatedly with multiple clients, then addendums are your best friends. Using an addendum makes it easy to change schedules, prices, standards, product lists, or any other information that might vary regularly over time or from customer to customer. In some cases, the addendum is also known as a rider, an exhibit, or a schedule (although technically, the latter two terms are specific types of addenda).

How can you be sure the addendum is binding? Because an addendum is attached after the signature page, parties often initial each page of the addendum to guarantee that it will be considered part of the agreement. Another (or complementary) approach is to include the words incorporated by reference the first time an addendum is mentioned in a contract (for example, The parties shall abide by the delivery specifications in the attached Addendum, incorporated by reference). You can also use a special clause within the contract’s main body to make this point, as shown below.

Addendum: Sample language

Addendum. Any attached Addenda and any other attachments or exhibits to this Agreement are incorporated in this Agreement by reference.

Related terms: boilerplate; incorporation by reference.

additional insured

Being named as an additional insured allows someone to be protected from liability under another person’s or company’s insurance policy. When an entertainer like Taylor Swift appears at the Hard Rock Café, she requests (probably through her lawyer), as a condition of her contract, that she be named as an additional insured under the Hard Rock’s liability insurance policy. That way, if anyone is injured during her show, the insurance policy will protect her—along with the club—from liability. Similarly, a toy designer will want to be named as an additional insured under a toy company’s product liability insurance.

Additional insured versus named insured. Do not confuse the term named insured with additional insured. If you are added to a policy as a named insured, the protections of the policy extend beyond you to your partners, officers, employees, agents, and affiliates. Because the coverage is so broad, it might cost as much as 50% of the original premium to add a named insured to a policy. That’s why being added as an additional insured is relatively inexpensive; it covers only the individual whose name appears on the certificate.

How is it done? A contract clause—commonly entitled Insurance—establishes the type and amount of insurance coverage required, how proof will be provided that the party has been named, and other details. These clauses can be quite lengthy. Below is an example of an abbreviated version.

Insurance: Sample language

Insurance. Company shall obtain and maintain during the term of the agreement, at Company’s sole cost and expense, standard product liability insurance coverage naming Customer as an additional insured.

Related terms: beneficiary; insurance contract (insurance policy); product liability; third-party beneficiary; underwriter.

ADR

See alternative dispute resolution (ADR).

agent

An agent is authorized to act on behalf of someone else (the principal). Remember Tom Cruise as a sports agent in Jerry Maguire or Jeremy Pivens as the Hollywood agent Ari Gold in Entourage. In return for their dealmaking, agents usually receive a cut of the money the principal makes on a deal. Because an agent commonly has authority to negotiate contracts that are binding on a principal, the agent has a legal duty to be scrupulously loyal and honest to the principal, fully disclosing all of the information the principal needs to make a fully informed decision. (This higher standard is known as a fiduciary relationship.) For example, it would be a breach of your agent’s duty if she failed to disclose that she also represented your competitor.

An agent is not the principal’s employee because the principal does not control how the agent performs (a standard requirement for employees). Also, most agents typically represent a number of clients. To ensure that a court does not misinterpret the relationship, agency contracts often contain a clause like the one below. Note, this clause references other relationships besides agent-principal, including joint ventures (any joint economic activity between two or more people) and partnerships.

No joint venturer: Sample language

Nothing contained in this Agreement is deemed to constitute either agent or company as a partner, joint venturer, or an employee of the other party for any purpose.

When an agent can bind the principal (actual authority). The agent’s power to enter into contracts and make promises that the principal must keep usually happens in one of two ways:

•By contract. The agent and principal sign an agency contract, establishing the agency’s power to bind the principal.

•By law. Either a statute or case law establishes the relationship. For example, in a general partnership, any partner can bind the other partners.

When a law or contract explicitly spells out an agent’s power to bind the principal, the agent is said to have actual authority. This means that the agent and principal both know and agree to the agent’s role in acting for the principal.

Apparent authority. In some cases, someone can be led to reasonably believe that an agent who lacks actual authority has the power to enter into contracts. This is called apparent authority. To protect a party that was misled, a court will uphold the agreement if that party reasonably believed that the principal endorsed the deal because of statements, actions, or even inaction.

EXAMPLE: A former insurance agent, recently fired by SLYCO, arrives at Max’s home. The ex-agent was supposed to turn in his company car (emblazoned with the SLYCO logo) but kept it for an extra week. The ex-agent convinces Max to pay several thousand dollars for a newer policy. The agent pockets Max’s money and disappears, never informing SLYCO. Later, after a car accident, Max asks for coverage under his policy. Max reasonably relied on the fact that the ex-agent had a company car in assuming that he still worked for SLYCO. Because Max’s assumption was reasonable, SLYCO would probably be obliged to provide the coverage purchased by Max. Courts refer to situations like this, in which someone who once had actual authority but no longer does, as lingering apparent authority.

How to avoid apparent authority problems. To avoid being bound to contracts by someone with apparent authority, the principal should:

•Provide notice. Alert third parties that an agent no longer has authority. For example, if you’ve switched agents, notify your customers.

•List actual agents. Periodically distribute a statement to customers and clients on company letterhead indicating the agents who have actual authority, and update the list quickly.

•Keep the agent informed. Let the agent know, in writing, whether or not you have conferred actual authority and as to which issues.

Related terms: authority to bind; escrow; fiduciary (duty, relationship); power of attorney.

agreement in principle

An agreement in principle (like a letter of intent) is an agreement to agree—the parties want to make a deal but they haven’t agreed on all of the details. Because it doesn’t contain all of the essential elements for a contract, an agreement in principle cannot bind the parties to particular terms. However, most courts agree that once an agreement in principle is made, the parties have a duty to act in good faith as they proceed to finalize the agreement. If one party fails to negotiate in good faith, the other may sue for damages. On the other hand, if the parties reach an agreement in principle and then take action on it—that is, they act as if a contract is in place—courts will presume that a contract exists and will do their best to determine and enforce its terms.

Related term: letter of intent.

aleatory

An aleatory contract is one in which the consideration paid by each party is usually unequal because the outcome is dependent upon chance or a future event—for example, a wager or an insurance contract.

Related term: insurance contract (insurance policy).

algorithmic contracts

Financial institutions, particularly those engaged in high-speed trading, sometimes use software algorithms for creating contracts. For example, a computer can be programmed to accept offers when an offer meets the algorithm’s criteria. The resulting contracts are referred to as algorithmic contracts and come in two forms: agent algorithmic contracts, in which one or both parties use an algorithm to choose terms; and term algorithmic contracts, in which all parties agree to contract before knowing the terms that the algorithm will yield. Because of their novelty, legal experts have not resolved one issue affecting enforceability—that is, how to know whether a person (or a computer) has consented to the arrangement.

alternative dispute resolution (ADR)

Alternative dispute resolution (ADR) is an umbrella term for various ways to settle a legal dispute short of full-blown litigation. For example, in 1992, Herb Kelleher, president of Southwest Airlines, offered to arm-wrestle a rival airline company’s president for the right to use the slogan, Plane Smart. Kelleher lost, but he demonstrated the outer boundaries of ADR. Few executives have followed Kelleher’s lead; most prefer more common ADR procedures, such as:

•Mediation. A neutral third person helps the parties talk through their dispute and come up with a mutually acceptable solution. Some mediators suggest possible outcomes, but a mediator generally can’t impose a resolution on the parties.

•Arbitration. Much like a judge, an arbitrator hears from both parties, sometimes in a trial-like proceeding. The arbitrator then announces a decision, which can be enforced by the courts.

•Negotiation. The parties resolve the dispute themselves, with or without the aid of a third party.

•Collaborative law. Lawyers trained in special, less adversarial procedures represent each party and work together to reach a mutually acceptable resolution. Collaborative law is used most commonly in divorce proceedings.

Although ADR is considered an anything-but-court approach, many courts have incorporated ADR-type programs. For example, the federal courts use Early Neutral Evaluation (ENE), a variation on mediation—to alleviate their increasing caseloads. Except for court-ordered ADR procedures, all ADR is voluntary.

Contracting parties who want to resolve potential disputes by ADR rather than litigation should include a clause in their contract to that effect. Although the parties could decide to use ADR after a dispute arises, it’s better to put an ADR clause in the contract ahead of time. Once the parties are engaged in a contract dispute, it will be much harder for them to agree on dispute resolution procedures.

Related terms: arbitration; boilerplate; mediation; negotiation.

ambiguity

Ambiguity occurs when contract language can be reasonably interpreted in more than one way. For example, if an artist-model agreement states, The artist shall paint the model nude, is it the artist or the model who should appear sans clothing? Although some ambiguities are semantic—a word has multiple meanings—most are the result of misuse or improper placement of words, making the language confusing or inconsistent, or in some cases, producing an absurd result. For example, one employment contract we’ve seen states that the employee must wear the uniform in the employee locker. (Claustrophobic applicants need not apply.)

Consider a contract between a lawyer and a client that provided for payment of the attorney’s out-of-pocket expenses. The clause stated:

These [out-of-pocket] expenses include court-reporting services, expert witness fees, reasonable travel expenses, if any, fees paid to trial witnesses, and the cost to create demonstrative trial exhibits.

In this case, the client argued that the word include was a term of limitation that should be interpreted as include only. Therefore, he shouldn’t have to pay for anything that wasn’t on the list, such as photocopies and online research. The lawyer argued that include was a term of expansion, used to preface a few common examples. In other words, the client had to pay for all reasonable out-of-pocket expenses, whether or not they were on the list.

The court agreed that both interpretations were reasonable but concluded that as a matter of public policy—and perhaps, poetic justice—ambiguities in attorneys’ fee agreements should be construed against the attorney, who after all wrote the agreement. The client didn’t have to pay the extra fees, and the lawyer learned to use the phrase, including but not limited to . . . .

How do courts interpret ambiguity? Some ambiguities might not be obvious to the ordinary observer but can arise because the contract language has an unusual meaning under the circumstances. For example, in one historic case, a contract for horsemeat provided a discount if the meat was less than 50% protein. This seems clear enough on its face, but the supplier successfully claimed that trade custom in the horsemeat business was that 49.5% protein meets a 50% standard. In other words, the term 50% was ambiguous in this context in that it could actually mean 49.5%.

What evidence is considered? Courts differ as to what types of evidence they will consider when resolving ambiguities in a contract. For many years, courts looked only to the four corners of the document and to the plain meaning of its words. In a 1968 case, however, the California Supreme Court broke with the past and considered evidence outside of the contract in interpreting its meaning.

EXAMPLE: A contractor agreed to indemnify a public utility for any harm caused during the replacement of a turbine cover. (Indemnify means that the contractor would compensate the utility for damages.) When the contractor caused $25,000 in damage, the public utility sued to get the money back under the indemnity clause. The contractor argued that the indemnity clause was meant to insure only against harm to third parties, not to the utility itself. The words third party didn’t appear in the contract, but other evidence of trade practices by the parties proved that the contractor’s interpretation was correct. The California Supreme Court ruled in favor of the contractor stating that evidence outside a contract (extrinsic evidence) should be admitted as long as it is offered to prove a meaning to which the language of the writing is reasonably susceptible.

In summary, although courts sometimes differ, external evidence—for example, previous contracts between the parties or previous courses of action between the parties—can generally be used to clarify or explain an ambiguity, as long as that evidence does not vary or contradict the terms of the contract. A different result may occur, however, if similar evidence is used to contradict the meaning of the agreement. In that situation, the parol evidence rule—a principle governing the admission of prior negotiations—is applied.

Two other things to consider about ambiguity are:

•Vague language is not necessarily ambiguous. Common contract terms—for example, reasonable, satisfactory, and immediately—are vague but not necessarily ambiguous within the context of an agreement.

•Plain language can avoid many ambiguities. Lawyers have a fondness for unusual word order (as in this deed provided) as well as obscure language (therein referenced). In addition, paranoia among lawyers leads to over-drafting—for example, saying shall not now, or in the future instead of just saying, shall not. The solution is unambiguous: Use plain language whenever possible.

Ambiguities clause. Sometimes—as in the fee agreement mentioned above—ambiguities are interpreted against the drafter of the contract. In other words, if terms could be reasonably interpreted in different ways, a court will likely rule in the way most beneficial to the person who didn’t write the contract. After all, the drafter was responsible for writing the ambiguous language in the first place and shouldn’t get to benefit from a lack of clarity. Parties who don’t want this default rule to apply can include the following clause (sometimes referred to as an ambiguities clause) in their contract.

Ambiguities: Sample language

Ambiguities. Both parties and their attorneys have participated in the drafting of this Agreement and neither party will be considered the drafter for the purpose of any statute, case, or rule of construction that might cause any provision to be construed against the drafter of the Agreement.

Related terms: any/each; interpretive provisions; mistake; parol evidence rule; plain meaning rule; rules of interpretation (rules of construction).

amendment

Didn’t get your contract exactly right? Amend it.

Amendments are ideal when you and the other party want to modify some of the elements of a contract—for example, one party wants to make an addition, deletion, correction, or similar change. An amendment doesn’t replace the whole original contract, just the part changed by the amendment (for example, the delivery date or price for goods). If a contract requires extensive changes, it’s generally wiser to create an entirely new agreement or, alternatively, create an amendment and restatement, an agreement in which the prior contract is reproduced with the changes included.

Can you prohibit oral amendments? Some contracts contain clauses (such as the one below) that require that any amendments be made in writing and signed by both parties.

Prohibition against oral amendments: Sample language

Entire Agreement. This is the entire agreement between the parties. It replaces and supersedes any and all oral agreements between the parties, as well as any prior writings. Modifications and amendments to this agreement, including any exhibit or appendix, are enforceable only if they are in writing and are signed by authorized representatives of both parties.

Surprisingly, courts don’t always enforce the prohibition against oral modification provided in this clause. The reasoning, as expressed by one court, is this: Parties to a contract cannot, even by a written provision in the contract, deprive themselves of the power to alter or terminate that contract by a later agreement; so a written contract may be modified by the parties in any manner they choose. In other words, a contract clause requiring written amendments will not always be enforced. The chances of it being enforced go down if one or both parties relied on the oral modification, and would be harmed if the court were to disregard the modification.

EXAMPLE: An insurance company had an employment contract with an agent that required any modifications to be in writing. The agreement also stated that if the company wanted to terminate the agent’s employment, the company had to do so in writing. The company orally offered the agent $500 to resign. When he refused to resign, his boss said, You are fired. The agent left the job, accepted his severance pay and accrued vacation pay, and stopped coming to work. However, he argued that he was still entitled to collect commissions because his employment was never terminated in writing, as required by the contract. A federal court of appeal did not agree. Despite the contract language requiring modifications in writing, the court determined that the agent and the insurance company had accepted, through their statements and actions, an oral amendment to the contract regarding notice of termination. Most importantly, the insurance company had reason to rely on the agent’s behavior after he was told he’d been fired.

This is not to say that you should disregard clauses prohibiting oral amendments or avoid using such clauses in agreements. Written amendments—like written agreements in general—have many advantages over oral agreements, and a party seeking to enforce an oral modification despite a clause prohibiting them will face an uphill battle in court. In addition, the law requires that some amendments be in writing—for example, amendments for transfers of real or intangible property and certain financial contracts must be in writing.

Amendments, consents, and waivers. There are times when parties want to deviate from an agreement but don’t need to modify it. For example, one party to a nondisclosure contract might give the other party permission to disclose certain facts to certain people, even though that might technically violate the language of the contract. These deviations—in which a party waives a provision or permits something that is otherwise prohibited—are sometimes considered amendments, although they are more properly defined as waivers or consents. Unlike an amendment, consent or waiver doesn’t modify the agreement itself; instead, it excuses or permits otherwise prohibited activities by the contract. Consents and waivers should be in writing.

Creating amendments. The goal when creating a contract amendment is to be as specific and concise as possible. As James Brown might have stated, You should hit it and quit it. The document can appear informal—for example, like a letter agreement—or it can resemble the original contract in font and layout. Generally, amendments come in a few different styles, as shown below.

Redlines and strikeouts. Additions and deletions are shown visually, with additions underlined and deleted text crossed out. (Most word processing programs allow you to choose strikeout as a font.) Usually, a statement describing the process precedes it.

The parties agree to amend the Agreement by the following additions (indicated by underlining) and deletions (indicated by strikethroughs):

Section 7 is amended to read as follows:

7. Term. The Term of this Agreement is from July 31, 2018 to July 31, 2019 2020. The Agreement may be renewed on an annual basis for additional two-year terms following the initial term, upon written agreement of the parties. The parties must mutually inform each other of their intention to renew the Agreement no later than January 31 June 1 of each year in which the Agreement is set to terminate.

Replaced in its entirety. In this manner, you simply state that a whole clause has been replaced and provide the new clause.

Section 7 is replaced in its entirety by the following:

7. Term. The Term of this Agreement is from July 31, 2018 to July 31, 2020. The Agreement may be renewed for additional two-year terms following the initial term, upon written agreement of the parties. The parties must mutually inform each other of their intention to renew the Agreement no later than June 1 of each year in which the Agreement is set to terminate.

Describing without restating the amendment. Using this approach, the changes are described. This is often shorter but requires the parties to check against the existing text of the contract.

The first sentence of Section 7 is amended by modifying 2019 to 2020. The second sentence is amended by striking on an annual basis, and replacing it with for additional two-year terms. The date in the last sentence is modified from January 31 to June 1."

You can choose whichever method suits you or combine them if you wish. The important thing, as with all contract drafting, is that your intentions are clear to all parties as well as to third parties reading the amendment. In addition, be sure to change any cross-references, if necessary.

TIP

Modifications before the contract is signed. If a contract is modified before it is signed, such changes are not amendments. If you wish to handwrite a change into an agreement that has been printed out for signature—for example, because you noticed a typo at the last minute—you can use a pen to do so and have both parties initial it. Although not technically an amendment, these modifications are sometimes labeled as such.

CAUTION

Amending certain assigned UCC agreements. If your contract is a secured transaction—a loan or a credit transaction in which the lender acquires a security interest in collateral you owned—then there might be complications involving amendments to assigned agreements under Section 9-405 of the Uniform Commercial Code (UCC). You should consult with an attorney before amending an assigned contract for a secured transaction.

Completing the amendment. Here’s how to complete the sample amendment shown below:

•Introductory paragraph. Type your name or the name of your company and the other side’s name (an individual or a company).

•Describe the amendment(s). Type in the amendments to the existing contract using any one of the three methods described above.

•The concluding paragraph. This paragraph should be included to guarantee that other than the amendment, the contract remains as it is written.

•Proofread and sign your amendment. Under the printed party names, each of you should sign and write in the date. Below, each should print his or her name and title, such as Chief Operating Officer or General Partner. You’ll want to make sure the person signing the agreement has the authority to do so, and equally important, that you have fulfilled any signing or notice requirements included in the original agreement. Generally, agreements require the contracting parties to sign all amendments. However, in some cases—for example, corporate amendments or amendments to financial agreements—other signatures or notices may be required.

•Manage amendments. Contracts can undergo multiple amendments, so it’s usually a good idea to number each amendment—for example Amendment No. 1 or First Amendment. In addition, amendments should be filed and maintained with the original agreement so that anyone viewing the file will know that the agreement has been amended.

Related terms: accord and satisfaction; addendum; integration.

amortization

Using an amortized payment plan, the borrower—for example, in a mortgage or car loan—gradually pays less interest (and more principal) as the payment plan progresses.

Sample Amendment to Contract

Amendment to Contract

1. This amendment (the Amendment) is made by _______________________________ and _________________________, parties to the agreement __________________________ dated (the Agreement).

2. The Agreement is amended as follows: _______________________

3. Except as set forth in this Amendment, the Agreement is unaffected and will continue in full force and effect in accordance with its terms. If there is a conflict between this Amendment and the Agreement or any earlier amendment, the terms of this Amendment will prevail.

A little history. During the 1930s, homeowners purchased homes with much shorter mortgages (three to five years) than today’s 20- to 30-year loans. Down payments for these short mortgages ranged from 50% to 80% of the purchase price and ended with a large balloon payment. That may explain why more than half of the population rented and most of the rest were in danger of losing their homes during the Great Depression. In 1934, the Federal Housing Authority stepped in with a new system of government-backed mortgages, which required a lower down payment, and spread the repayment of the loan amount (the principal) and the cost of the loan (the interest) over a longer period, using a system that was called amortization.

EXAMPLE: Jake borrows $100,000 to purchase a condo at 8% interest and plans to pay it back over ten years. Although each of his 120 monthly payments will be for the same amount ($1,213), less than half of his first payment will go toward paying off the principal; the rest will pay the interest on the loan. As the principal is paid off, the interest owed decreases, and the amount of each payment that goes toward the principal increases over the life of the loan until only $8 of his final payment goes toward interest.

Related terms: APR; compounding (compound) interest; debt; equity; interest rates (usury); mortgage; promissory note.

antecedent, rule of the last (also last antecedent rule, last antecedent doctrine)

In 1891, attorney Jabez Sutherland wrote a book on interpreting contracts and statutes. He created a simple rule for deriving the meaning of contract clauses that contained multiple obligations or conditions. Sutherland said that when a qualifying word or phrase is used with a group of obligations or conditions, the qualifying terms are presumed to modify only the condition or obligation that immediately precedes it (the last antecedent).

Rule of the last antecedent: Sample contract language

Subject to the termination provisions of this Agreement, this Agreement is effective from the date it is made and will continue in force for a period of five (5) years, and