Everyone knows that the best practice in business is to put agreements in writing. But many small business owners don’t. In my experience, a combination of factors contribute to this error. Business people often don’t want to add a layer of expense to the business deal by involving “the lawyers.” Additionally, business deals are often time sensitive, and as a result, people often believe they don’t have time to consult an attorney. Here are ten elements of any good contract. Follow these steps and you can do it yourself.
1. Put it in writing
Oral agreements are often legal and binding; however, they are usually more expensive and more difficult to enforce in court (in some situations, they are not enforceable at all). Most agreements must be in writing. And this is where the problem starts. I have had clients use contracts from a trade agreement in a second different situation with disastrous results. A written agreement is less risky than an oral agreement, but only if you have a document that clearly spells out the rights and obligations of each party in the event of a disagreement. Using form association agreements or online vendor contracts can be just as bad as reusing old agreements without carefully reviewing them. In one case I represented a partner in a partnership dispute. The parties had purchased a partnership agreement online and the agreement specifically allowed individual partners to compete with the partnership. While that clause is counterintuitive, neither side read the agreement and got it. Therefore, it was due to the great shock of one of the partners.
2. Keep your deal in order.
Contrary to what many lawyers think, it doesn’t take a lot of legal mumbo jumbo to make a contract enforceable. Instead, what is required are short, clear sentences with a simple and logical heading system that provides a road map for the reader as to what is in the paragraph. And yes, you can write your own contract if you put in the effort.. Just like you might change the oil in a modern car or work on your bathroom tile. You have to weigh the cost over time against the benefit of using an attorney. An experienced attorney should be able to quote you a flat fee, upfront and with no obligation, so it’s worth asking.
3. Deal with the person you can hire on behalf of the company.
Don’t waste time negotiating a business deal with a junior who has to sign off on everything with someone above him (or her) in the business. If you’re not sure who has the authority to bind a company, ask.
4. Describe the parts accurately.
Include the correct legal names of the parties to the contract. Make it clear who is responsible for doing what.
5. Include the details in the written agreement.
The agreement must establish the rights and obligations of each party. Most attorneys include language in a contract that states that the written agreement is the entire agreement between the parties.
6. Specify payment obligations.
Obviously, most contracts arise from deals in which one party provides goods or services and the other pays for them. Specify when payments are due and the conditions for making payments. If you will be paying in installments or only when the work is completed to your satisfaction, say so and list the dates, times and requirements. Consider also including the method of payment: check, cashier’s check, or credit card.
7. Agree on the circumstances that terminate the contract.
It makes sense to establish the circumstances under which the parties can terminate the contract. For example, if one party misses too many important deadlines, the other party should have the right to terminate the contract without being legally embarrassed for breaching (violating) the agreement.
8. Specify how disputes will be resolved and whether the prevailing party will receive attorneys’ fees and costs.
Write in your agreement what you and the other party will do if something goes wrong. I’m not a fan of arbitration. Particularly in California it is a very expensive proposition with retired judges acting as arbitrators and demanding stupendous fees. Many judges openly admit that they retired from the bench to earn more money as referees. You’ll also want to carefully consider whether the prevailing party in a legal dispute will be awarded attorneys’ fees and costs of the lawsuit, such as filing fees, deposition fees, and the like. This can be a good idea if you have to fight for a modest amount like $100,000.00 (I know, I know… Right now you’re thinking that I have an unusual idea of modesty!) The reality is that without the attorneys’ fees clause, you could have a nominal victory just because arbitrations and lawsuits are expensive. On the other hand, if you are more likely to breach the contract than the other side, you may not want an attorneys’ fees/costs clause.
9. Choose a state law to govern the contract.
If you and the other party are in different states, you should choose only one of your state laws to apply to the contract to avoid difficult legal disputes later, and I can think of no reason why you would agree to litigate under laws. from a state other than California as I write this. In addition, you want to specify where you will mediate, arbitrate, or take legal action under the contract. This is an important thing to consider when you are presented with a contract by another party. For example, if you want to become a franchisee and end up having a legal dispute, you may have to pursue it thousands of miles away under state law, which differs greatly from California law.
10. Keep it confidential.
Often when one company contracts with another to perform a service, the other company goes private for sensitive business information. Your agreement must contain mutual promises that each party will keep any business information of which it becomes aware confidential while performing the contract. This clause is very different from a non-compete clause. California laws regarding non-compete clauses are unique and the subject of another post.