I’ve wanted to be a lawyer since fifth grade. And when I was younger, I thought that all contracts were like that famous scene from A Night At The Opera by the Marx Brothers. Trying to comprehend a contract, Groucho says: “Now pay particular attention to this first clause because it's most important. It says the, uh, ‘The party of the first part shall be known in this contract as the party of the first part.’ How do you like that? That's pretty neat, eh?”
Too many people think that contracts need to be nearly unintelligible in order to be enforceable. In fact, it is exactly the opposite. If there was one piece of advice that I would give to every person entering into an agreement: make sure it plainly says what you’re agreeing to.
Contracts are made up of three basic parts – an offer, an acceptance and consideration.
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The offer and acceptance are what the purpose of the agreement is between the parties. A public relations firm offers to provide its services to a potential client. An electrician offers to wire a new home. A photographer agrees to photograph a wedding.
But offers are never really that simple, are they? What exactly will the public relations do for the client? Press releases? Media contacts? Editorial services? Event planning? Will it be exclusive? Can the public relations firm offer its services to businesses in the same industry? How long is the engagement for? Just an event? Or for a longer period of time? How much will be paid? How often?
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Naturally, you’d expect that the owner of the public relations firm and the potential client discussed these items. But if the outcome of those discussions aren’t memorialized, aren’t written down in the contract, no one else will ever know. And if later the client isn’t happy with how services are going, how does the firm show it fulfilled its bargain?
This scenario happens more frequently than anyone cares to admit. The only winner in those instances are the attorneys who are hired to sort it all out. That sorting – through a series of nasty letters back and forth, arbitration, mediation, litigation – costs an extraordinary amount of time and money, not to mention stress. Most of those consequences could have been avoided simply by writing a clear contract.
If you expect someone to do something – put it in writing. Don’t worry about offending the other side. If they promised something, write it down. If you expect a certain level of services, spell it out.
Some people don’t want to do that because they are afraid the other side will walk away from the deal due to the specificity. My reply has always been the same: if they won’t put it in writing, they didn’t intend to do it at all. Better to find out before things go south in those instances.
Consideration is a legal way of saying “something of value.” For a contract to be enforceable each party has to bring something of value to the table. In most commercial transactions the consideration is the service and/or product (on one side) and cash (on the other). You pay a certain amount of monthly retainer for the services of a public relations firm, you write a check to the electrician for wiring your home, you provide your credit card information to the photographer who takes event photographs.
When it’s time to write a contract, the first thing you should do is be sure you can clearly lay out what the bargain is – who will do what, when, where, how often and for how much. If there are any special promises or guarantees, what are they? If something goes wrong, what do you intend to do about it? Make sure that you and the other side are both clear on each other’s rights and responsibilities.
In addition, business owners should have solid form agreements in their possession that address these main issues for routine transactions (drafted by an attorney for their use and not just downloaded from an Internet site*). And certainly for large transactions, an attorney should be consulted prior to signing any agreement.
Review of contracts is typically not expensive, especially by an attorney that has experience in commercial transactions. The small amount spent upfront can potentially save thousands of dollars, not to mention avoidance of a large amount of unnecessary stress later.
* Please see my prior blog entry “Say It Isn’t True” for my cautions on online legal resources.
Of course, all contracts should be in the name of your entity. Having a business entity is just as important as having strong contracts. Both protect you from potential liability and preserve your assets. If you don't have an entity yet, we can help you form one.
If you liked this article, check these out as well:
Contracts 101: Part 1
Contracts 101: Part 2
Top 8 Things to Negotiate in any Contract
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
