Definition: A legal document between parties that clearly spells out just what
is expected and required of each party
Relationships between businesses and consumers are controlled by
contracts, either verbal or written. Contracts clarify what each
party expects and what each party is willing to give in exchange
for the expected results.
The essential elements of a business agreement are:
1. The parties to the agreement. In other words, the
contract lists your business name and the name of the other party,
whether that's a customer or a vendor.
2. What each party is going to gain from the agreement.
This is referred to in legal vocabulary as "consideration."
3. The main terms of the contract. For example, what each
party is promising to do. Obviously, it's extremely important that
this part of the contract be very specific and include such things
as the work to be performed, the price to be paid for the work, how
and when payment will be made, when the work will be completed, how
long the contract will be in effect, and whether either party is
"warranting" anything.
4. Additional terms. These should probably include
conditions under which either party can terminate the contract,
whether either party can transfer or assign the contract to another
person or company, whether disputes arising from the contract may
be arbitrated or mediated, payment of attorney's fees if one party
breaches the contract, an address where legal notices can be sent
to each party, and which state law applies if questions about the
contract arise.
5. Execution. Be sure both parties sign the contract and
that the person signing (if he or she is representing a company)
has the authority to sign.
6. Delivery. Make sure each party receives a copy of the
final signed agreement.
7. Date. This is the date the contract is signed.
If you're going to attempt to save some legal fees by drafting
contracts on your own, the first step is to gather sample contracts
from other people in your industry, your trade or professional
association or from contract form books you can find in your local
library or bookstore. Some industries require special state rules
for their contracts. It's a good idea to research this with a
lawyer before drafting your own contracts.
The second part of any contract contains the legal boilerplate,
or the fine print. Understandably, most business owners concentrate
their efforts on the first part of the contract because the deal is
ultimately what's most important to them. But it's also vital you
pay attention to the fine print part of the contract, because
that's where you can obtain or lose a competitive edge, regardless
of what the deal is.
To boost the performance of your contracts, you need to
understand the following two fine print sections and why these may
be very important to you and your business:
"Force majeure" clauses. The force majeure clause is a
very important provision. It's actually a legal escape hatch in the
event something goes wrong with the contract.
Typical boilerplate or fine print language in a force majeure
clause allows the other party to the contract to walk away from
their contractual duties to you in the event of "acts of God, fire,
windstorm, flood, explosion, collapse of structures, riot, war,
labor disputes, delays or restrictions by governmental bodies,
inability to obtain or use necessary materials, or any cause beyond
the reasonable control of such party."
Adding a force majeure clause to your contract provides a huge
loophole to legally excuse contract performance. But, like anything
else, the force majeure clause can cut both ways. If your business
is the one that has to perform most of the duties under the
contract, then adding a force majeure clause gives your business an
escape hatch in the event that something outside of your control
prevents your business from fulfilling all the duties and
responsibilities in the contract. Similarly, when you don't have
significant duties to perform in a contract (other than paying
money), then deleting a force majeure clause gives your business
more legal rights to enforce the contract if the other party fails
to live up to its end of the contract.
Applicable law clauses. In its most basic form, the
applicable law clause lays out exactly which state's laws the
contract is governed by. For example: "This contract shall be
governed by and construed under the laws of the State of New York."
The effect of this clause is to bind you and the other party in the
contract to follow the law of the state of New York. This may not
sound like a big deal, because the laws of various states are
similar in many respects. But a smart business owner never assumes
that the laws of New York will be exactly the same in all respects
as the laws of Missouri, for example. If at all possible, you want
to have your own state's law be the applicable law, for at least
three reasons:
- First, you're almost always more familiar and comfortable with
the laws of your own state than with those of another state.
- Second, it eliminates the possibility that you need to hire a
lawyer who practices in the other state to review the contract for
your business.
- Finally, it can cut down on nasty surprises due to variations
in state laws if you have to go to court.