What Is a Contract? The Structure and How to Read It in Corporate Legal Practice

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Contracts are the most frequently handled basic documents in day-to-day corporate legal work. Yet in contract practice, there are many situations in which people are satisfied merely by the formal existence of a document, thinking, "We've exchanged a contract, so we're safe."

The existence of a contract is of course important in itself, but what really needs to be determined is whether the document accurately reflects the reality of the transaction, the payment terms, the scope of liability, and other actual circumstances. No matter how well formatted a contract is, if it diverges from the reality of the transactions taking place in the business, it becomes difficult to explain what was agreed when a dispute arises.

The Function of Clarifying the Agreement and the Basic Structure of a Contract

A contract is a means of preserving the commitments agreed between the parties as evidence in the form of an objective document. Under the principle of Article 522 of the Civil Code, a contract is formed when the manifestations of intention to offer and to accept coincide, so it can be validly formed even through oral exchanges or email alone. However, for certain contracts where laws and regulations make a written or similar form a requirement for formation or effectiveness, separate procedural care is needed.

The reason companies still prepare contracts in business-to-business transactions is to clarify the content of the agreement, the division of roles, and the payment terms, and to leave guidance for decisions when trouble occurs. In addition, the contract serves as supporting documentation for internal approvals and audits, allows the details of the transaction to be accurately handed over to successors and related departments when staff are reassigned, and also functions as review material for due diligence in future M&A transactions or fundraising. When reading a contract, it is important to keep in mind the perspective of "whether a third party who looks at this document later can correctly understand the reality of the transaction."

The specific structure of a contract varies by type of transaction, but general business-to-business contracts widely include the following items. However, not all of these items are legally required in every contract; they are selected according to the purpose and scale of the transaction.

• Title
• Preamble
• Definitions
• Purpose
• Scope of services or transaction details
• Consideration and payment terms
• Term of the contract
• Obligations of the parties
• Representations and warranties
• Confidentiality
• Handling of personal information and data
• Intellectual property rights
• Subcontracting
• Damages and limitation of liability
• Termination and early cancellation
• Exclusion of antisocial forces
• Post-termination handling
• Governing law and agreed jurisdiction
• Signature block
• Exhibits

When reviewing, rather than starting to read every word in detail from the beginning, first look at the overall structure and identify which provisions form the core of the transaction and which are common general provisions; this makes it easier to prioritize what to check. In a service agreement, focus on the scope of services, deliverables, acceptance, intellectual property, subcontracting, and damages. In a sale of goods, the focus is on the subject matter, delivery, acceptance, transfer of ownership, risk of loss, and contractual non-conformity liability. For SaaS, check service suspension, data and personal information, limitation of liability, and post-cancellation handling.

Confirming the Reality of the Transaction and Extending the Review to Exhibits, Internal Approvals, and Operations

When reading a contract, you must avoid hastily determining the contract type from its title alone. Even if it is titled "Service Agreement," whether it is in substance closer to a contract for work aimed at completing a piece of work, closer to a quasi-mandate entrusting the handling of affairs, or closer to worker dispatch or joint development is judged according to the reality. Even a document titled "Memorandum" may be an agreement that changes important terms of an existing core contract.

After identifying the parties and the scope of services, confirm whether the contract is one for delivering deliverables and whether there is an obligation to complete the work. What the fee is consideration for and how the contract term is set also bear on the judgment. Check, in line with the reality, whether the relationship involves receiving direct instructions and orders from the other party, whether intellectual property or data will be created, and what will remain after termination. If the title and the reality diverge, start by reorganizing the contract type.

Another point that is easily overlooked is the handling of attachments such as exhibits and specifications. Some contracts place only abstract basic provisions in the body and leave the specific scope of services and delivery dates to exhibits. Acceptance criteria and fee schedules may also be placed in exhibits. Check whether there is a provision deeming the exhibits to be part of the contract, the order of priority if the body and exhibits conflict, the procedure for revising exhibits, whether fee schedules and specifications are up to date, whether excessive obligations or warranties have slipped into the exhibits, and whether the security and personal information management standards are feasible for your company. Even when using AI to assist with the review, include the exhibits, and do not treat a review of the body alone as a review of the whole.

Internal Approval and Handover to Related Departments

Contract provisions are also cross-checked against internal decision-making documents. If the approval request (ringi) or application form sets out the contract amount, term, and purpose, but these are vague in the body of the contract, or conversely, if the contract contains heavy liability for damages or long-term obligations but the risks were not disclosed in the internal approval request, this will lead to internal trouble later. In the review, match important provisions such as the liability cap, the scope of exclusivity, and ownership of intellectual property against the premises of the internal approval. Also check whether the contracting parties, payment terms, and renewal and termination conditions are clear, whether obligations are excessively one-sided, and whether the liability cap fits the size of the transaction.

A common mistake is getting caught up in minor wording revisions and overlooking the connections between provisions, such as the definition of the scope of services and deliverables and the acceptance conditions, or damages and the contract term. A practical procedure is to look first at the overall picture, then at the important terms, and finally at fine-tuning the wording.

Furthermore, a contract is not something that is completed by the legal department alone; it only functions soundly once the business department understands the scope of services and delivery dates, the accounting department understands the payment terms and late payment charges, and the IT department understands the conditions for security and data deletion. It is important to share the key points with related departments so that the same operations can be maintained even if the person in charge changes six months or a year later. The key to practice is to position the contract not as a document to be filed away, but as an operational document that governs day-to-day business activities.