In business, the importance of forming quality contracts cannot be underestimated. A well-written contract can protect all parties involved, whereas a poor contract can lead to disaster. Contracts are entered into often, whether they are oral or written. In fact, every time a promise is made to exchange property or services, a contract is formed.
Contracts can be unclear and difficult to enforce. More importantly, these agreements can be tough to prove in court if not explicitly written. Because contracts are entered into so regularly and can have such a large impact, it is crucial that they are formed to protect the parties involved. Before signing a contract, here are a few important issues to understand:
- Put the contract in writing. If a contract isn’t in writing, it can be very difficult to prove what an agreement might have been. If an arrangement is discussed over the phone or in person, jot it down and have both parties sign.
- Make sure the terms are satisfactory. If the proposed terms of a deal are not to your liking, propose a counter-offer. Once the contract is signed it becomes enforceable, so don’t be afraid to ask for modifications before signing anything.
- Be specific and clear. Make sure all facets of the agreement are covered and easy to understand. If the contract is based on an earlier verbal agreement, be sure the terms agree to what was originally discussed. Use simple language to avoid confusion and misunderstandings. Confusion can lead to incorrect assumptions, which can ultimately result in a lawsuit.
- Be consistent. If a certain item is used more than once in the agreement, don’t change the term unnecessarily. For example, it could be confusing if “cargo” was used in one paragraph, “goods” in another paragraph, and “freight” in yet another.
In addition to the above general guidelines, there are also several specific items that should be taken into account:
- Duties and responsibilities. Be sure to include a specific description of the duties and responsibilities of each of the parties involved, and the date by which the item should be completed. Each item to be completed should be easy to understand and specific.
- Warranties. In contract law, a warranty is a promise by one party to another party that certain facts are true. Typically, these warranties deal with issues such as the ownership of goods and the right to sell or designate them. For contracts which include the sale of goods, certain warranties are implied under state law unless they are expressly disclaimed. It is important to watch for these warranties when signing a contract.
- Termination. A termination clause explains how either party can end the contract and the steps that must be taken to do so. Generally, a breach of contract by one party will grant the other party the option to terminate. The contract should also explain specifically how to give notice that the right to terminate is being exercised, and if the person at fault has any opportunity to resolve the issue.
- Remedies and arbitration. When a contract is broken, a remedy clause can be used to name the rights of the party who was not at fault. Many times, this clause is designed to limit the liability for damages of the party who was not at fault. An arbitration clause provides that a dispute must be resolved outside of court. Typically, the clause will indicate the name of the organization that will handle the arbitration and who will be responsible for the cost.
- Merger clause. A merger clause helps to prevent evidence that is not included in the contract from being used in court to replace the terms of the agreement.
Contract law is a complex and complicated subject. When in doubt, it is always best to consult an attorney before signing or verbally agreeing to a contract that requires certain acts to be performed.
By Michael J. Arens, CPA