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.