By Entrepreneur Staff


Contracts 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.

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