Contracts

Contracts make the world go round, so regardless of your track record in doing business, it’s never too late (or too early, for that matter) to learn something new.

Businesses should be aware of how contracts can help them protect their interests. Only a couple of things can make a huge difference in the outcome.

While they require a lot of attention, contracts are not as complex as you might have been led to believe.

Continue reading to learn the basics of contracts, from what makes an agreement legally binding to how certain clauses can help you if things ever turn out sour.

1.  Basics: is it legally binding?

For a document to be legally binding, it needs these five elements:

  • Offer: One of the parties makes a promise to complete an action in the future.
  • Acceptance: A contract is not binding until the other party accepts the offer. The acceptance needs to be mirroring the terms of the offer.
  • Consideration: Something of value needs to be exchanged between the two parties.
  • Mutuality: Both parties need to understand and agree to the terms of the contract, and intend for it to be legally binding.
  • Contractual capacity: Contract is valid only if parties can understand they are entering a legally binding agreement. For example, a contract is invalid if one of the parties is a minor or under the influence of substances.

2.  How detailed is too detailed?

A contract is only as good as its details. This is a part that should never be overlooked as the specific details defined in the agreement ensure that a contract is less likely to be breached, especially if you are the person tasked with making the draft yourself.

Specific terms will prove to be hard to keep track of, though. A good bet is using document review software to ensure you don’t miss any of the important terms or spend any unnecessary amount of time going back and forth while double-checking details.

The first step is identifying the parties correctly. You should use the correct legal names of the people signing the agreement. For example, if you are signing a contract with an individual representing a corporation, make sure you are using the legal name of the business, rather than specifying the representative personally.

If you are exchanging money for services, specify the terms and the requirements of the payments. This applies to the details such as the amount, who is paying who, as well as the conditions of the payments themselves.

However, the most important thing you need to pay attention to is the specifics that address the rights and obligations of each party in detail. Never skimp on adding clauses that address negative scenarios that might occur.
Let’s use an example of a business hiring a photographer to do photos of their latest product. A contract should outline in clear language the details of this transaction, a clause that states the time frame in which the photos should be delivered, and what happens if the deadlines are breached.

3.  What about termination?

Writing with the worst in mind is one of the crucial principles of writing contracts. Having the termination clauses is the best way to avoid any trouble from happening if you get stuck in an agreement that doesn’t deliver on its promises.

We previously mentioned the need to address potential breaches of contract, but things can be taken further to protect yourself from a costly litigation process.

You can achieve that by using provisions that allow you to terminate a contract if a particular trigger occurs, such as:

  • A force majeure: This clause allows for one party to terminate the contract if an unforeseeable circumstance is preventing the completion of any duties defined by the contract.
  • Insolvency: If one of the parties becomes insolvent, this clause allows for the other party to terminate the contract if they wish to do so.

We also recommend adding in boilerplate provisions (provisions at the end of the contract) that can lessen the blow by addressing the worst-case scenario:

  • Arbitration: The parties won’t enter a lawsuit, rather, they will solve disputes through arbitration.
  • Assignment: Allows the parties to transfer their rights in the contract to another party.
  • Limitation on damages: If the dispute goes to court, there is a set limit on damages that can be awarded to one of the parties.

4.  Strength lies in simplicity

Most people imagine contracts as unreasonably complicated texts that normally are difficult to read, and too complicated to write. However, the most effective ones are actually written in simple, easy-to-understand English.

Your contract doesn’t need to contain a lot of flowery words like henceforth, heretofore, or any kind of unnecessary legalese. The draft you make only needs to define the terms and conditions clearly. This means you should focus on using short and direct sentences that won’t confuse the reader.

Ultimately, the simpler the language in your contract, the less chance of any misunderstandings happening.

Keeping your interests safe

The basic information on contracts should come in handy whether you are drafting a contract for the first time, unsure of what makes a contract legally binding, or you are already about to sign.

You don’t need to be a lawyer to draft or understand a contract. It all depends on the business deal brought to the table. With all the contract review software and the free legal information floating around, writing the draft yourself shouldn’t be a problem.

However, even if you are bringing a lawyer into the picture, you should know what you need to look out for. This will allow you to negotiate better terms or simply communicate your needs on a more competent level.

Whatever it may be, your interests should come first. Hopefully, this bit of information helps you protect them.