A Brief Introduction About the Articles of Agreement
Articles of Agreement lays down the provisions governing several aspects related to the founding of an entity like the voting rights of members, the purpose of the company, the powers, and limitations of the company, its capital, and several organizational and management functions. These articles can be related to personal or real estate. The articles are the written crux of an agreement between two or more parties, very similar to articles of incorporation. The articles of agreement are usually related to the formation of a non-governmental organization.
It is similar to articles of incorporation, but more commonly used to refer to the founding document of a non-profit organization.
While forming an organization, a set of documents is required. These articles are one of them. They are a written minute or a memorandum of an agreement, used for the modification or disposal of property. Such articles are usually a part of a much broader agreement.
People Involved in the Articles of Agreement
There can be two or more parties to such a contract. A party/parties give(s) conveyance of a piece of land or releases rights concerning the property or carry out some other kind of disposition with such real or personal property, to another party (a person or an entity).
The articles of agreement are entered into by people who are founding a company, i.e., its future members. Articles of agreement for deed are preparatory documents to the execution of a formal deed between the parties. Anyone can be a part of the document. As this document is very similar to the articles of incorporation, the signing of such a document, along with other requirements may lead to the formation of an entity, that can be treated as a fake person in the eyes of the law.
Purpose of the Articles of Agreement
The document serves several purposes:
- Lays down the voting rights of the members (all the founding members).
- Sets the limitations and powers of the organization or company (what the entity can or cannot do).
- Lists down the members and their roles (all the members are given a position to perform in the organization).
- Gives clear instructions about the management of the organization or company and its organizational functions (how the entity is supposed to run).
The document serves as a record for what is agreed upon between parties and is a good reference in case of dispute in the future. The main purpose of the document is to bind all the parties to obligations that they are expected to carry out in different capacities for the management of an organization. The document is like a guiding light for an entity that is recently founded.
Contents of the Articles of Agreement
When forming a business entity, you need a range of documents, including the articles of agreements. Articles of agreements are more often used by non-profit organizations.
Well-drafted articles of agreement contain the names and details of all the parties, covenants that bind the parties as a result of the contract, the subject matter of the agreement and at the end, the signature of all the parties including the date of the execution of the agreement.
Typically, Articles of Agreement will be related to either personal estate or real estate. Articles are best understood as a part of an agreement and can either be a minute or a memorandum. Generally, an article will be in writing, and it will be used to modify or dispose of a piece of property. When used in relation to property, an article, or instrument, the agreement should cover a variety of information, which includes but is not limited to:
It also contains:
- Purpose of the entity: Every entity is formed for a purpose. The purpose can be anything like helping local women, selling apples – anything at all. The purpose must be mentioned first.
- A list of its members: This is very important, and none of the important names must be missed in this list.
- A list of the capital that the entity owns: This helps in assessing the entity’s financial strength and adds transparency.
- Comprehensive details about the organization and management of the company: Clarity about who is supposed to do what and how to ensure the smooth functioning of the entity formed.
- Rules regarding withdrawal or suspension of membership: How can a member withdraw from the entity? The grounds on which a member be suspended from the entity.
- The status, the privileges, the immunity, the power, and the limitations of the company and members: Are there some privileges the members of the company enjoy? What areas can the company not venture into? Does the document grant immunity to the entity or its members in any way?
- Amendments and provisions: Provisions about how the articles can be amended and the procedure that is to be followed must be written.
- Arbitration in case of a dispute: In case a dispute arises, the parties can first go for arbitration.
- Miscellaneous clauses: This includes other clauses that may need to be a part of your document.
This is the general structure of the document. However, in the case of articles of agreement for LLC or any other entity, the structure may be slightly altered and customized. LLCs generally use operating agreements instead of articles of incorporation.
How to Draft the Articles of Agreement?
The following points can be kept in mind while drafting the document:
- Be clear and concise.
- Don’t use ambiguous or vague words that may lead to misinterpretation.
- Define complex legal terms.
- Mention a specific date to ensure the completion of the contract.
- Include and write down the responsibilities of every party. This is a crucial point as not defining the obligations of a party will result in them failing to uphold them. Mentioning what is expected from each party makes it easier for the functioning of the entity.
- Mention the governing law of the contract.
- Mention the alternative dispute resolution procedure to be adopted along with the place of such dispute resolution.
- Mention the boilerplate legal clauses like the entire agreement, indemnity, severability, confidentiality, force majeure, etc.
A company or organization is run by a team of individuals. As every human mind is unique, so is every person’s suggestion about the organization should function. Negotiating together can help everyone agree to the same thing, without any member feel that their voice was not heard. Negotiating can also help create a better, stronger, and a more comprehensive document. Almost all the articles can be negotiated before they are put into writing and signed.
Benefits & Drawbacks of the Articles of Agreement
Like every agreement, even this document has its pros and cons.
- It lists down everything on paper – the name of the members, their roles, their responsibilities, and rights.
- It lists the capital the company has.
- It lays down how an organization is to be managed and run.
- It brings in transparency and clarity at the time of the founding of an entity.
- It is binding on all the parties and works as a record, making every party uphold their obligations.
- It is a good reference in case of a dispute.
- It is a very time-consuming process.
- It can be an expensive task as the complicated nature of the document generally requires professional legal help.
- The document is prone to misinterpretation if not drafted correctly, which may lead to long disputes that may burn a hole in a person’s pocket.
What Happens in Case of Violation of Articles of Agreement?
The party who violates the agreement may cease to be a member of the entity or face disciplinary action. The other affected parties to the contract and the entity as a whole can sue the breaching party in the courts of law and demand the basic remedies for breach of contract including, monetary damages, specific performance, restitution(1), reformation, etc. The breaching party may be liable to pay massive compensation to the other parties due to the violation of the terms of the contract.
The violation can occur as a result of a party not fulfilling the obligations, or violating any clause that was previously agreed upon.
The articles of agreement are crucial to the founding of an entity and can credibility, transparency, and clarity for the smooth functioning of the company or the organization. The document forms the foundation of the entity is covers everything from A to Z – right from the management of the company to the voting rights of all its members. Having a legally binding document like this provides a layer of protection for all the parties to the contract.
As this is a complicated document, it could seem complicated while drafting it. Thus, it is advisable to consult an attorney for drafting a loophole-free agreement or have a look at an article of agreement template.