Common Elements of Business Contracts, Part 5: Closing Provisions and Contract Term

This is the fifth in a series of articles [1] presenting an overview of various provisions commonly found in business contracts, primarily from the point of view of the drafting attorney. [2]

Closing Provisions

The essential covenants of asset purchase agreements, stock purchase agreements, real estate purchase agreements, many loan agreements, and other similar contracts obligate the parties to consummate one or more transactions later, at a closing. However, the obligation to complete the transaction is often subject to a number of conditions that must be satisfied before or at the closing. If not, at least one of the parties will have the right to refuse to complete the transactions. Drafters typically place provisions addressing the closing conditions and requirements right after the essential covenants.

Contract Term

All contracts have a time at which they take effect. Some contracts [3] also have a time at which they expire. For such a contract, the “term” is the period between the time it takes effect and the time at which it expires is commonly called the “term.”

DRAFTING TIP: When specifying the contract term, consider specifying the time at which the contract expires rather than the duration of the term because it is less likely to be misinterpreted. For example, if a contract takes effect on October 14, 2011, and is to have a term of one year, many people will conclude that the last day of the term is October 14, 2012; in fact, the last day of the term is October 13, 2012.

As mentioned in footnote 1, there are no real standards for organizing contracts, and the placement of the specification of the contract term varies even more than most. Some drafters place it very early in the agreement, as early as the first section. Others leave it until almost the end. This outline take a middle-of-the-road approach, placing it after the essential covenants and closing provisions, but before other substantive business terms.

Does a contract “terminate” or “expire” at the end of the term?

Consider these two ways to specify the end of the contract term.

This Agreement terminates at the end of December 31, 2011, unless it is terminated earlier in accordance with Section 11.

This Agreement expires at the end of December 31, 2011, unless it is terminated earlier in accordance with Section 11.

By dictionary definitions, both are correct. Terminate means to come to an end, and expire means to come to an end as a result of the passage of time. But which version is better?

One school of thought is that the second is better, that it is better to use different words to distinguish between a contract coming to an end by an action of the parties and the contract coming to end by the mere passage of time. The results of those two situations will almost certainly be different, and there are often other contract provisions that distinguish between the two. Using two different words makes it easy to distinguish between the two.

The other school of thought [4] is that the first approach is better because it avoids the need to write “terminate or expiration” for provisions in which the result of the two situations is the same. According to the adherents of this school, when it is important to distinguish between the two situations, one can easily do it in other ways. Moreover, using two different words makes drafting errors more likely, for example the omission of one of the two words when both should have been used.

As mentioned in footnote 2, the nice thing about standards is that one has so many from which to choose, and this is an example. However, once the drafter has chosen the standard he or she wishes to apply, applying it consistently is paramount.



[1] These articles are adapted from materials prepared by the author for a continuing legal education seminar, “Business Contracts from A to Z,” sponsored by National Business Institute, and presented by Michael Ray Smith of Smith Rayl Law Office, LLC; and by Trevor J. Belden and Robert K. Stanley of Faegre Baker Daniels, LLP. Used by permission of National Business Institute.

[2] There is no universally accepted structure, format, or style for writing business contracts. In contract drafting, as in computers, “The nice thing about standards is that you have so many to choose from.” Andrew S. Tannenbaum, Computer Networks, 4th ed., quoted at http://en.wikiquote.org/wiki/Andrew_S._Tanenbaum. Two references sometimes used by the author are Kenneth Adams, A Manual of Style for Contract Drafting (2008). Another reference for specific provisions is Tina L. Stark (ed.), Negotiating and Drafting Contract Boilerplate (2003). These two sources are subsequently referred to as “Adams” and “Stark.”

[3] Examples of contracts that expire include most service contracts, supply contracts, employment contracts, and option agreements. Contracts that do not expire include most construction contracts and asset or stock purchase agreements.

[4] To which Adams subscribes, see pp. 300-302.