The Good Contract
You may have heard the war stories. “We just shook on it.” “They made the deal on the back of a napkin.” “I give you my word.” So is that handshake agreement or scribbles on a Kleenex good enough to protect your business interests? Oral agreements may be enforced in court, especially if either party has received a benefit, but it is not an easy case to win. Even if you are able to establish that an agreement existed, the “who said what” details are much harder to determine. Often, the parties themselves may not recall the exact terms to which they agreed. Moreover, certain types of contracts must be in writing. Generally, agreements involving land, transactions that cannot be performed within one year or that involve more than $500 may not be enforceable without a written contract. So, to avoid costly misunderstandings, it is best to get those terms down on paper.
However, a written agreement is just the start. A poorly written contract may not be worth the paper it is written on. The main purpose of a contract is to identify and resolve potential issues before they become problems. Executing a contract, even a relatively simple one, can help the parties think through the terms and conditions before they get too entangled. A good contract does not necessarily need to be formal or lengthy; rather, the most important characteristic of a good contract is clarity. Keep it simple and specific. Written contracts vary significantly but there are common elements that are important in all:
1. Identify the parties. It may sound basic, but make sure you are entering into an agreement with the right party. Take the time to ask the questions and verify the identity of the people. Does the Seller in your real estate purchase agreement own the land? Is the family member signing the contract authorized to sign for the corporation? If you are not well acquainted with the person ask to see identification. When dealing with a corporation or other legal entity make sure to use the exact name.
2. Be clear about each party’s obligations. Define roles, responsibilities, accountability and expectations of each of the involved parties. Set timeframes and the scope of work that needs to be done in clear and concise terms. Read the contract as if you are a third party. Better yet, ask a third party to read it for you. What may be obvious to you may have more than one reasonable interpretation and cause disputes down the road. Be sure to define any technical terms used within the contract.
3. What would excuse performance? Time is money. Be sure to limit or list all the reasons that a party may be excused from their obligations. Standard provisions include delays due to "weather, acts of God and acts of others." Current contracts include language that excuses delays caused by “acts of terrorism or those resulting from a pandemic.” If you are the party required to perform, include any expected problems in the contract.
4. The consequences of an unexcused failure to perform. Using the courts to recover contract damages can be extremely expensive and time-consuming. Some provisions that can speed up litigation and settlement proceedings include: liquidated damage clauses, caps on damages, late fees, interest rates, attorneys’ fees, and collections costs. It is difficult to ask for damages if they are not part of the contract. However, be realistic; if a damage clause is unreasonable, a judge may just ignore it.
5. Pick Your Battlefield. The contract should also specify the settlement procedure for disagreements. Understand the differences and then choose between mediation (binding or non), arbitration or regular litigation. Also, the laws governing business dealings can vary widely from state to state. Make sure the contract identifies the state, county and courthouse. Generally it is much easier and less expensive to resolve disputes in your home state, so keep it local if possible.
A well-drafted contract can protect you against litigation by discouraging it in the first place. The clearer the terms, the less likely the disputes. If litigation does occur, a good contract can increase the chances of obtaining a favorable result, either at trial or in settlement discussions. Without a formal agreement you could be left without an adequate remedy. Most importantly, the contract is going to be read, analyzed and interpreted by strangers—a mediator, judge, jury or arbitrator. Therefore, the more specific you make your contract, the more likely you are to get the result you want when and if things don’t turn out as planned.
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