LIFE
How to Review Your Business Contracts
As an adult, you will sign more than a few contracts in your lifetime. When you run a business or you are a creative person, the contracts you sign are the lifeblood for your bottom line. Contracts define how money comes in and goes out of your business. But contracts are not just about money. Contracts are about obligations, the performance of which is paid for by money. Contracts are also about rights. Although the money is probably the first thing you look at in a contract, the value of the contract goes beyond its dollar amount.
What is a Contract?
A contract is simply a mutual agreement between two or more parties. A contract’s formation is critical to its validity. A contract is formed when the following elements are present:
Mutual assent: also referred to as a meeting of the minds, is where both parties capable of entering into a legal contract (over the age of majority or 18 years, and of sound mind) voluntarily agree to enter into an agreement, and be legally bound by it.
Offer and Acceptance: a firm offer to enter into a contract, which is different from a proposal for discussion to enter into contract, and a mirror acceptance of the terms offered. If an offer is rejected or a counteroffer is made, then the original offer is no longer open for acceptance. The party making the offer can also revoke their offer at any time before it is accepted.
Consideration: each party has to give something of value in exchange for the other party’s performance. You cannot have a gratuitous contract. An agreement with no consideration is not an enforceable contract.
The terms of a valid contract should be sufficiently certain. Ambiguities will only lead to disputes down the line. At the very least, it must be certain, from a reading of the contract, the parties involved, the subject matter of the contract, the time for performance, and the price of the contract.
Do All Contracts Have to be in Writing?
Contracts can be oral or written but there are certain contracts that must be in writing to be valid. Contracts related to an interest in land (real estate sales, leases, etc.), and contracts that take over a year to complete are examples of contracts that must be in writing. However, although contracts do not have to be in writing, there are many advantages to doing so. There is nothing like words in print to counter our fading memories.
Contracts include protections for the parties based on past experiences. This is why it is often advisable to use a lawyer with experience in your business. A lawyer who has experience with your type of business will understand the protections that need to be included in your contracts.
Terms to Look Out For
The parties. It is important when looking at a contract to ensure that the parties named as the contracting parties are as they should be. For instance, if you are contracting as a business you should ensure that your business name is one of the contracting parties, rather than your personal name. This is important because if you have gone through the trouble of registering a business entity to protect your personal assets and you then contract in your personal name, you defeat the whole purpose of registering a business entity. So it is important that you ensure that the correct name of the entities or parties entering into a contract agreement are reflected on the contract.
The scope of work or obligations. In a service contract, the scope of work describes the expected deliverables or obligations of both parties. It is important that the descriptions of what each party is expected to do are accurate and complete. The descriptions should also be written in sufficient detail to avoid ambiguity. In some contract arrangements it may be difficult to anticipate every possible issue that may arise, affecting the parties’ obligations. It is important to pay close attention to the obligations in the beginning stages of the contract implementation so that additional items can be agreed upon and addressed through written amendments or addendums to the existing contract.
Fees. What is the contract amount? How will it be paid? When is it due? And, are there penalties for late payments?
Termination. The termination of a contract is also very important. How does the contract end? Does it end automatically after the performance of the obligations by both parties? Do the parties have rights of termination if certain provisions in the contract are breached? Do both parties have the right to terminate or only one party can terminate? Is there a notice period before termination and what form must the termination take, e.g. written notice?
Remedies for breach. What happens if one party is in breach of the contract? Non-performance, poor performance, and missed payments can give rise to a breach. The consequences of a breach of the contract will often determine how detailed this provision will be. The higher the stakes the more protection the parties will want in the remedies provision. For some contracts a refund of fees paid may be sufficient remedy for a breach of the contract. Other contracts may require more to cover damages suffered by the injured party. What is a sufficient remedy may depend on the type of contract, industry standards, and the negotiating power of the parties.
Intellectual property protections. In today’s world where the value of most small businesses lies in their intellectual property, it is important to have intellectual property protections in contracts. For instance ownership of intellectual property. If you’re hiring the services of a contractor or third party, for instance, you may want to ensure that all intellectual property in the work product is assigned to your business. If you are going into a partnership arrangement to create a new service or product, you may also want to cover ownership of intellectual property created by the partnership.
Dispute resolution. We all enter into contract agreements with the best of intentions. However, it is the nature of business and human relations that disputes will arise. Because of this it is important to provide for how those disputes will be resolved. Will the parties resolve disputes through arbitration or through litigation? Which laws will be used to interpret the terms of the contract? Ideally, you want a dispute resolution provision that reduces the cost of resolving any disputes that arise. Litigation will always be more costly than alternative dispute resolution methods like negotiation and arbitration. If you are contracting with businesses that are outside of your state or country you will want to pick an applicable law and a venue that is the most favorable to your business.
This is by no means an exhaustive list of what to look out for in a contract. However, it is a starting point. The important thing to keep in mind is that you should not ignore any terms in your contract. It is also important when reading your contract to anticipate what could go wrong with the contract relationship and ensure that your interests are protected should something go wrong.
This article is NOT a substitute for advice from your legal counsel in your specific situation.
