Everybody knows that the best practice in business is to put agreements in writing. But many small business owners do not do it. In my experience a combination of factors contribute to this error. Business people often do not want to add a layer of expense to business deal by involving “the lawyers.” Further, business deals are often time sensitive, and as a result people often believe they do not have time to consult a lawyer. Here are ten elements of any good contract. Follow these steps and you can do it yourself.
1. Put it in writing
Many times oral agreements are legal and binding; however, they are usually more expensive and more difficult to enforce in court ( in some situations, they aren’t enforceable at all). Most agreements should be in writing. And here is where the trouble starts. I have had clients use contracts from one business 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 each party’s rights and obligations in case of disagreement. Using form partnership agreements or contracts from online vendors can be as bad as reusing old agreements without carefully reviewing them. In one case I represented a partner in a partnership dispute. The parties had bought a partnership agreement online and the agreement specifically allowed the individual partners to compete with the partnership. While that clause is contrary to common sense, neither party read the agreement and caught it. Therefore it was enforceable to the great shock of one of the partners.
2. Keep your deal straight.
Contrary to what many lawyers think, you don’t need a lot of legal “mumbo-jumbo” to make a contract enforceable. Instead, short, clear sentences with a simple, logical headings system which provides a roadmap to the reader to what’s in the paragraph is what is required. And yes, you can write your own contract if you put some effort into it. Just like you could change the oil on a modern car, or work on your bathroom tile. You have to weigh the cost in time to the benefit of using a lawyer. An experienced lawyer should be able to quote you a flat fee, upfront without obligation, so it doesn’t hurt to ask.
3. Deal with the person who can contract on behalf of the business.
Don’t waste time negotiating a business agreement with a junior person who has to okay everything with someone above him (or her) in the business. If you’re not sure who has the authority to bind a business, ask.
4. Describe the parties with precision.
Include the correct legal names of the parties to the contract. Make clear who is responsible for doing what.
5. Include the details in the written agreement.
The agreement should state the rights and obligations of each party. Most lawyers include language in a contract that states the written agreement is the complete 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 the payments must be made, and the conditions for making payments. If you’re going to pay in installments or only when work is completed to your satisfaction, say so and list dates, times, and requirements. Consider including the method of payment as well–check, a cashier’s check or credit card.
7. Agree on circumstances that terminate the contract.
It makes sense to set out the circumstances under which the parties can terminate the contract. For instance, if one party misses too many important deadlines, the other party should have the right to terminate the contract without being on the hook legally for breaching (violating) the agreement.
8. Specify how disputes will be resolved and if the prevailing party will be awarded attorneys fees and costs.
Write into your agreement what you and the other party will do if something goes wrong. I am not a fan of arbitration. Particularly in California it is a very expensive proposition with the retired judges who act as arbitrators commanding stupendous fees. Many judges openly admit that they retired from the bench to make more money as arbitrators. You also want to give careful consideration to whether the prevailing party in a legal dispute shall be awarded attorneys fees and the costs of the suit such as filing fees, deposition fees and the like. This can be a good idea if you might have to fight over a modest amount like $100,000.00 (I know, I know… Right now you’re thinking I have an unusual idea of modest!) The reality is that without an attorneys fees clause you could have a victory in name only as arbitrations and lawsuits are expensive. On the flip side if you’re more likely to breach the contract than the other side you may not want an attorneys fees/costs clause.
9. Pick a state law to govern the contract.
If you and the other party are located in different states, you should choose only one of your state’s laws to apply to the contract to avoid sticky legal wrangling later, and I cannot think of any reason that you’d agree to litigate under the laws of a state other than California as I write this. In addition, you want to specify where you will mediate, arbitrate, or bring legal actions under the contract. This is an important thing to consider when presented with a contract by another party. For example if you desire to become a franchisee and you end up having a legal dispute you may have to pursue it thousands of miles away under state laws which differ greatly from California laws.
10. Keep it confidential.
Often, when one business hires another to perform a service, the other business will become privy to sensitive business information. Your agreement should contain mutual promises that each party will keep confidential any business information it learns of while performing the contract. This clause is very different from a non-competition clause. California laws on non-competition clauses are unique and the subject of another post.