Building Better Contracts

Binding legal agreements don’t need to be complicated, but you must understand the key elements.

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You're very likely to sign contracts – at least once in a while – in the course of doing business. You may need contracts, for example, to buy or sell goods or services, lease real estate, or hire key employees.

Whether you draw up your own contracts or have a lawyer do it, you want to make sure that you've covered all the bases. Here are the key points to look for in any business contract:

What each party is promising to do. Perhaps it's to pay money, provide a service, or deliver a product. If the contract involves a construction project or a customized machine, it may have a separate attachment labeled "specifications."

When the work will be done or the product delivered. If strict compliance with contract deadlines is important, be sure to include the words "Time is of the essence." Otherwise, a judge may allow reasonable leeway in enforcing the deadlines.

How long the contract will remain in effect. If it's open-ended, list the conditions under which you or the other party can terminate it without penalty.

The price – or how it will be determined. Avoid saying that the price will be negotiated. This wording can lead to arguments and even a lawsuit. If you use a formula for pricing, include an example for clarity.

When payment is due. Will there be installments? Will interest be charged? In contracts for consulting and other services, it's common to have a payment schedule tied to interim completion dates.

Warranties. If a party guarantees labor and materials for a certain period of time, how will problems be handled? By repair, replacement or refund?

"Liquidated damages" if performance is delayed or defective. Sometimes actual damages for breach of contract are hard to compute. The parties can agree in advance on a fixed amount (liquidated damages) that a party who breaches the contract must pay.

Whether either party can transfer (assign) the contract. Depending on what the contract is about, you may or may not have concerns about dealing with a stranger in the future.

How disputes will be resolved. Lawsuits can be costly and slow. Consider stating that disputes about the contract won't go to court. Instead, an arbitrator will settle them.

Legal fees. You can say that a party who breaches the contract will pay the other party's legal fees and related costs.

Notices. Specify where notice of default and other communications should be sent – and whether email notice is sufficient.

Which state's laws will apply. This clause will help avoid problems if the parties operate in separate states, or if the contract is to be performed in more than one state.

Getting a contract signed

So much for the contents of a business contract. Let's turn now to how to nail down a binding legal agreement.

Many contracts consist of a single document containing numbered clauses. Both parties sign in duplicate, and each keeps a copy. But some contracts are less formal.

You can have a contract in two or more parts. For example, A sends B an offer, and B accepts in a separate letter, fax or email message. Or A sends B an offer, B sends back a counter-offer, and A accepts the counter-offer. As long as there's a meeting of the minds, a contract involving several documents is valid.

You can also create a contract by writing a letter that contains the details of a proposed deal. If the person you wrote signs an acceptance at the bottom of the letter, you have a valid contract. This technique might work well if you've reached a deal over lunch. You can send your letter to the other person, and ask him or her to confirm at the bottom of the letter that you've correctly stated the terms the two of you have agreed on.

There may be several drafts of a contract before it's final. The computer makes it easy to change the wording. You can also write in changes using a pen, but if you do this, each party should initial the changes.

You can also make changes in an addendum – a page added to the main contract. If you do this, state specifically that the addendum prevails if there's a conflict between it and the main contract.

Make sure that the right person signs on behalf of each party. A partner can sign for a partnership. A corporate officer can sign for a corporation, and a member or manager can sign for an LLC. If you're dealing with a small corporation or LLC, consider asking the owners to guarantee performance of the contract.

Contracts needn't be witnessed or notarized to be legal.



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