Before You Start Up: What You Need To Know About Contracts

The following is a guest post by Tiffany Rowe. Tiffany is a Marketing Administrator at Seek Visibility, where she assists clients in contributing resourceful content throughout the web.

A contract is a legally enforceable agreement between two or more parties. It can be as simple as a few words jotted on a cocktail napkin or as complicated as a densely written many-page document. It can even be a spoken conversation sealed with a handshake. But before you engage in one that can have long-lasting effects on your business, you need to understand what you’re getting into.

First, let’s start with the notion of what is or isn’t legally enforceable. You can make any agreement you like, of course, but if the premise is not legal, the contract isn’t either. Hiring someone to burn down your building for the insurance money, for example, might sound good if you’re strapped for cash, but if you pay your arsonist and he doesn’t get the job done, you’ve got no grounds to take him to court contract or not.

Assuming, then, that the premise is something legal, an enforceable contract consists of four major elements:

  1. Offer – An offer by one of the parties to do (or not do) some specified activity.
  2. Consideration – Something of value promised in exchange for that activity. It may be money, a promise to perform a service in return, or something else of value that distinguishes a contract from an outright gift. (If you’ve ever watched People’s Court you know how many times that issue arises.)
  3. Acceptance – Proof that the offer was accepted unambiguously.
  4. Mutuality – The parties understand and agree to the substance and terms of the contract. Mutuality includes the premise that both parties are of legal age and competent to understand and carry out the terms of the contract.

Here are the major contract points you should be familiar with:

How Contracts Are Written

The language of contracts is specific and every word needs to mean precisely what it is meant to. If there’s a later dispute over the terms of a contract, the court or other arbiter will look very carefully at what the intent was, so every phrase, every sentence must be clear from the outset. Contracts are no place for casual slang or, on the other hand, overly complicated language that obfuscates its meaning.

How Contracts Are Organized

Contracts generally begin with an opening that identifies the parties to the agreement and its effective date. The opening may also include such other relevant details as a summary of facts or background information.

Next are the operative clauses that explain what the parties are agreeing to. These clauses are introduced with terms that are defined as to their meaning within the contract. Operative clauses may include a statement that indicates the priority of the elements, which is useful if there’s a later conflict among them. These clauses are usually categorized as:

  • Rights – These allow either party to do or not do certain things. There may also be a waiver of rights, which means that a party agrees to not do something even though there is the right to do it.
  • Obligations – These describe what each party must or must not do. There would typically be defined time frames or deadlines for these obligations.
  • Representations – These explain relevant legal facts or information.

Finally, there are execution clauses which include signature blocks where the agreeing parties sign to indicate their acceptance of the contract’s terms and conditions.

There may also be additional schedules, exhibits, or other supplemental attachments. These would be referred to in the contract, but included separately so they don’t interfere with the main flow of the contract.

How Contracts Are Changed

There may be a time in the term of the contract when conditions have changed and the agreement needs to be altered. This can be done in one of two ways:

  • A simple amendment, which would typically be a short document describing just the terms that the parties agree to change.
  • An amended contract, which consolidates both the original and the amended terms in a new document that supersedes the original contract.

How Contracts Are Renewed or Terminated

The terms of some contracts are finite, with conclusion determined by a certain date or by completion of the agreed-upon services, and some are open-ended with no fixed expiration date. An example of the former might be a sales contract, and an example of the latter might be an employment contract. In either case, the terms of renewal and/or termination should be outlined in the contract itself.

Even what you think of as a simple contract can turn complicated if it’s not drafted correctly at the outset. That’s why you’d do well to look to professionals for your contract management. It will give you peace of mind and leave you to focus on what you do best.

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