Reading English-Language Contracts: Structure, Modal Verbs and Liability Clauses

Hello, I’m Noriaki Asato, Managing Partner of LegalAgent.

When reviewing an English-language contract, even checking the agreed price and delivery date may require moving between definitions and schedules. A short sentence can impose a different obligation once its defined terms and exceptions are taken into account. A fluent Japanese translation therefore still requires checking how the contract fits together.

I believe a useful approach is to identify the parties and the transaction, then connect the obligations with the consequences of breach and the conditions for ending the contract. English-language contracts vary by jurisdiction and transaction type; they do not all follow a fixed order. Headings and defined terms nevertheless help locate the provisions that need attention.

Structure and the scope of defined terms

English-language contracts often contain the following elements. Their arrangement and relevance differ across sales, services, licensing and M&A transactions.

• Title and Parties: the agreement’s title and identification of the parties
• Recitals: the background and purpose of the transaction
• Definitions: the meanings assigned to particular terms
• Operative provisions: performance, payment, representations and warranties, covenants and conditions
• Indemnification and Limitation of Liability: compensation obligations and liability restrictions
• General provisions: entire agreement, assignment, notices, governing law and dispute resolution
• Signatures, Schedules and Exhibits: execution and supporting documents

Recitals sometimes begin with “Whereas.” Their description of the transaction’s purpose and circumstances may affect interpretation of the operative provisions. Their effect depends on the governing law and drafting. Rather than skipping them because they describe the background, check their consistency with the agreed services and rights.

Defined terms may carry meanings different from their ordinary dictionary meanings. Capitalized expressions such as Confidential Information and Effective Date are useful signals to check for a definition, although capitalization does not guarantee that one exists. Some contracts define terms within individual clauses rather than in a central definitions section.

Translating Affiliate simply as “related company” does not establish which entities are included. The definition of control, voting thresholds and treatment of entities under common control need examination. Where disclosure to Affiliates is permitted, read that definition together with the confidentiality obligations imposed on recipients.

Schedules may contain specifications, fees, covered entities and exclusions. Check which version is incorporated and which document prevails if it conflicts with the main agreement. If online terms are incorporated by reference, their content and amendment mechanism also require review.

Representations, covenants and conditions

Representations and Warranties, Covenants and Conditions all allocate transaction risks, but they perform different functions. Separate the subject of each provision, the time at which it must be satisfied and the consequences if it is not.

Representations and warranties address matters such as the truth and accuracy of specified facts. They may cover authority to enter the agreement, intellectual property rights or compliance with law. The relevant time is not necessarily limited to signing. A statement may cover a historical period or be repeated at closing, so its wording and dates must be checked together.

An inaccurate statement does not automatically establish a right to terminate or recover an indemnity. Review the remedies provided, knowledge or materiality qualifications and exceptions for disclosed matters. M&A issues are discussed further in our article on representations and warranties in share purchase agreements.

Covenants are promises to act or refrain from acting. They may impose continuing reporting duties or a single obligation, such as obtaining an approval by a specified date. Check whether the responsible department can perform the obligation and whether the deadline and required cooperation are clear.

Conditions precedent to closing specify prerequisites for completing the transaction. The consequences of an unsatisfied condition must be distinguished from obligations to help satisfy it. Failure of a condition is not necessarily a breach; a separate cooperation covenant may instead be relevant.

Also check who may waive a condition, how waiver must occur and whether a termination right arises if the condition remains unsatisfied by the final deadline. Translating the conditions alone will not establish when a party can decline to close or whether obligations already incurred survive.

Indemnities and liability caps

Indemnification provisions allocate losses arising from specified events. Start with the triggers and the persons entitled to claim. Depending on the contract, these may include breaches of representations, contractual obligations or third-party intellectual property claims.

Then examine defined terms such as Losses. The scope may differ depending on whether legal fees are covered and whether the clause includes direct claims between the parties as well as third-party claims. For third-party proceedings, check control of the defense, selection of lawyers, settlement consent and the consequences of delayed notice.

Read Limitation of Liability alongside the indemnity. Knowing the cap amount does not establish whether the indemnity is subject to it. Check the language covering contractual liability, indemnification obligations and other grounds of liability, such as tort.

In calculating a cap, “fees paid” differs from “fees paid or payable.” Examine the reference period, whether the limit applies per claim or in aggregate, and any excluded categories. An exception for confidentiality breaches, for example, may disapply the monetary cap without necessarily disapplying a separate exclusion of particular losses. The placement and cross-references determine what must be examined.

The UK government’s explanation of changes to the Model Services Contract includes clarification of the relationship between indemnities and liability caps. Although specific to that contract, it illustrates why an indemnity heading alone cannot determine the application of a cap.

General provisions and shall, may and will

General provisions contain conditions that affect practical decisions. For Notices, check permitted delivery methods and when notice becomes effective, as well as the address. Emailing a business contact may not satisfy contractual notice requirements. For Assignment, examine consent requirements and exceptions for reorganizations or other events.

Entire Agreement provisions address which documents record the agreement and how earlier agreements or communications are treated. Promises made during negotiations should be checked against the final contract and incorporated schedules. An entire agreement clause does not, by itself, necessarily exclude every form of liability for misrepresentation. Other exclusion language and the governing law also need consideration.

Shall is often used to impose an obligation, while may commonly grants a right or discretion. Will can also express a contractual undertaking and should not automatically be treated as a mere prediction. Read the subject, verb, conditions and exceptions together rather than deciding legal effect from the modal verb alone.

For example, may terminate ordinarily indicates an option to terminate. If breach and a cure period are specified immediately before it, however, the right is conditional. In addition to translating may, check when termination may occur, the required notice and the treatment of outstanding fees and other obligations.

Governing law and dispute resolution also require separate review. The applicable law differs from the forum and procedure for litigation or arbitration. Drafting a contract in English does not establish that US or English law governs it.

Reading order and checking translations

Begin with the parties, purpose, performance, price and duration. One approach is then to read the main definitions, indemnities, liability restrictions and termination provisions before matching them to the operative obligations. If a short notice period or automatic renewal deadline is approaching, flag it to the responsible person before it passes during the review.

For negotiation, record the clause number, required action, deadline, consequences of breach and reason for the requested change. This makes discussion with the business team more concrete. Our article on contract structure and reading methods provides further background.

Before entering a contract into a translation tool or generative AI service, check that the environment complies with confidentiality obligations and internal rules. Compare the output with the original for consistent defined terms, negatives, exceptions and clause references. Summarizing an indemnity in isolation may omit exceptions in the liability clause or the definition of Losses.

When a translation makes a provision appear unfavorable, I return to the original together with its related clauses. Before requesting a revision, I believe it is important to determine whether changing one word is sufficient or whether the definition and exceptions must also change.