Contracts

Relationships between businesses and consumers are controlled bycontracts, either verbal or written. Contracts clarify what eachparty expects and what each party is willing to give in exchangefor the expected results.

The essential elements of a business agreement are:

1. The parties to the agreement. In other words, thecontract 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 eachparty is promising to do. Obviously, it’s extremely important thatthis part of the contract be very specific and include such thingsas the work to be performed, the price to be paid for the work, howand when payment will be made, when the work will be completed, howlong the contract will be in effect, and whether either party is”warranting” anything.

4. Additional terms. These should probably includeconditions under which either party can terminate the contract,whether either party can transfer or assign the contract to anotherperson or company, whether disputes arising from the contract maybe arbitrated or mediated, payment of attorney’s fees if one partybreaches the contract, an address where legal notices can be sentto each party, and which state law applies if questions about thecontract arise.

5. Execution. Be sure both parties sign the contract andthat 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 thefinal signed agreement.

7. Date. This is the date the contract is signed.

If you’re going to attempt to save some legal fees by draftingcontracts on your own, the first step is to gather sample contractsfrom other people in your industry, your trade or professionalassociation or from contract form books you can find in your locallibrary or bookstore. Some industries require special state rulesfor their contracts. It’s a good idea to research this with alawyer before drafting your own contracts.

The second part of any contract contains the legal boilerplate,or the fine print. Understandably, most business owners concentratetheir efforts on the first part of the contract because the deal isultimately what’s most important to them. But it’s also vital youpay attention to the fine print part of the contract, becausethat’s where you can obtain or lose a competitive edge, regardlessof what the deal is.

To boost the performance of your contracts, you need tounderstand the following two fine print sections and why these maybe very important to you and your business:

“Force majeure” clauses. The force majeure clause is avery important provision. It’s actually a legal escape hatch in theevent something goes wrong with the contract.

Typical boilerplate or fine print language in a force majeureclause allows the other party to the contract to walk away fromtheir 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 beyondthe reasonable control of such party.”

Adding a force majeure clause to your contract provides a hugeloophole to legally excuse contract performance. But, like anythingelse, the force majeure clause can cut both ways. If your businessis the one that has to perform most of the duties under thecontract, then adding a force majeure clause gives your business anescape hatch in the event that something outside of your controlprevents your business from fulfilling all the duties andresponsibilities in the contract. Similarly, when you don’t havesignificant duties to perform in a contract (other than payingmoney), then deleting a force majeure clause gives your businessmore legal rights to enforce the contract if the other party failsto live up to its end of the contract.

Applicable law clauses. In its most basic form, theapplicable law clause lays out exactly which state’s laws thecontract is governed by. For example: “This contract shall begoverned 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 thecontract to follow the law of the state of New York. This may notsound like a big deal, because the laws of various states aresimilar in many respects. But a smart business owner never assumesthat the laws of New York will be exactly the same in all respectsas the laws of Missouri, for example. If at all possible, you wantto have your own state’s law be the applicable law, for at leastthree reasons:

• First, you’re almost always more familiar and comfortable withthe laws of your own state than with those of another state.
• Second, it eliminates the possibility that you need to hire alawyer who practices in the other state to review the contract foryour business.
• Finally, it can cut down on nasty surprises due to variationsin state laws if you have to go to court.