Introduction

At some point in everyone’s life they enter into a legally binding agreement, whether it is to buy a car, rent an apartment, or to buy an extended warranty for an appliance. While most people will enter into dozens of these contracts during their lifetime, few people know the basics of contracts such as what laws govern contracts, when is a written contract needed, what should be included, and what happens when a contract is breached. This article will go over the basics of contracts, how to successfully negotiate your position, and how to write a good contract.

Who Can Enter into a Contract Agreement?

In the simplest terms, a contract is a legally binding agreement between two or more people of legal age. In order for a contract to be legally enforceable all parties involved have to be over 18 years of age and capable of making informed decisions.

For example, if a minor enters into a lease agreement, even if they lie and say they are 18, the landlord will not be able to take legal actions to force the minor to pay for back rent owed or even for damage sustained to the property while the minor was occupying the apartment. If however, the minor turns 18 during the lease and continues to rent the dwelling after their 18th birthday the contract becomes legally binding as the person has "renewed" the contract as an adult, and thereby indicating that they agree to abide by the terms set out in the agreement. They will then not be able to breach the agreement and they will be liable for rent payments and any damages to the property that incurs during their residency.

In addition to age restrictions on who is eligible to enter into a contract agreement, mental ability is also taken into consideration. In order for a contract to be legally binding all parties involved have to have the mental ability to enter into the contract as fully informed parties. This mean that if one or more of the parties were drunk or impaired at the time when the contract was struck then the document is not legally binding. People with mental illnesses or disorders also may not be able to legally enter into a contract without counsel or accommodations.

When Should a Contract Be Written?

While many states accept and enforce a verbal agreement, it is very difficult to "prove" that such agreements exist and the terms that were agreed upon, especially when there is a dispute between the parties. In order to protect yourself in cases of dispute or breach of contract it is best to get it in writing, and in some cases it is required by law. For example all real estate transactions have to be in writing, and so do the sales of items that are valued over $500, and any contract that expands over more than one year.

What Laws are Applicable to Contracts?

Contracts are governed by two sets of laws. The first is Common Law, and the second is the Uniform Commercial Code. What you need to know about Common Law when drafting your contract is that if a dispute arises, or if the contract is breached and goes to court, a judge will pass judgement about the contract based on past rulings in similar cases. They will also interpret the contract’s wording how an average person reading the contract would interpret it. This makes clear and concise wording of your contract vitally important to the contract’s legal enforcement. Try to avoid confusing wording such as bi-monthly payments, as this can be interpreted as either one payment every other month, or two payments each month.

The Uniform Commercial Code is another body of laws that influence how contracts are drafted and enforced. The most important aspect of the UCC that the average person needs to understand is the good faith clause. This clause requires both parties to enter into the agreement in good faith. This means that the contract is drafted with both parties intending to be fair, honest, and intending to meet the agreed upon terms. The other terms set out in the UCC act as guidelines for commercial trade, and if you are not sure if these terms will impact your contract, then you should download a copy of this code or talk with your legal advisor.

What Happens When a Contract is Breached?

If you have entered into a contract in good faith and find that the other party has not lived up to their part of the deal then the contract is breached. Once a breach has occurred the other party is no longer liable for upholding their part of the agreement. If the injured party has already completed part or their entire portion of the agreement, then they can take actions to get restitution for damages they sustained.

One option is to talk with the breaching party and come to an agreement for a settlement out of court. You may accept a partial payment, or recovery of expenses you incurred due to the loss of business, materials, or labor. If you are not able to talk civilly with the breaching party, you may want to bring in a mediator to help negotiate a settlement offer that both parties will agree to. However, if a settlement is not possible and the amount of damages is greater then $3,000 - $7,000 (depending on the state requirements), then you can take the breaching party to small claims court.

Writing the Contract

The process of writing a contract involves a number of steps: making an offer, negotiation (a.k.a.), and acceptance. These steps may be quick and easy, or they may involve months of negotiation and redrafting.

Step One: Making the Initial Offer

Your initial offer should present what exactly you will bring to the table in exchange for exactly what you expect in return. Terms set out should be precise, clear, and unmistakable. The items in question, be they labor or property, should be described in their legal terms and broken down to specifics.

For example, if you are selling a piece of property, the properties legal description such as lot size, structures included, and exact location need to be drawn out so that both parties are thinking about the same piece of property. If the contract is describing services that will be rendered, the terms that will need to be drawn out include: who will do the work, who the work is to be done for, when the work is to be done, where the work is to be done, how fees will be charged, what fees will be charged, when payment is due, and how payment is to be delivered.

Before you present your initial offer to the other party you will need to draft a copy of the contract. To do this you may want to look at a sample of a similar contract. Sample contracts can be found online, in books, and from similar companies. Many typical contract agreement templates can be purchased and downloaded online for a small fee. You can either use a template and enter the specific terms you want, or you can draft a contract from scratch.

Whatever choice you select you will probably want to outline the terms of the contract that you desire before drafting your contract. For example you will want to describe what you want, being as specific as possible, and you will want to describe what you are willing to offer in exchange. Again be as specific as possible. You will also want to keep the sentences short and too the point. This will help to eliminate confusion and it will make the contract easier to read.

Also make sure that you use headings that are logical and that are ordered in a logical manner. This will help the reader to navigate through the contract, and it will help you identify important terms and items during the negotiation process. Make sure that names, address, etc. are all spelled correctly and labeled appropriately.

When you start writing the body of the contract make sure that you define terms that could be confusing. For example define things like professional terminology that a layperson probably won’t understand, and define abbreviations and shorthand notations so that anyone reading the contract will be able to follow what is being discussed.

Another consideration that you should make while drafting your contract, is to identify situations that "could" happen down the road. This includes litigation of the contract. To provide for this situation you should include how this situation will be handled. For example, describe who will be responsible for attorney’s fees, court costs, etc. and what remedies will be available in case one of the parties breaches the contract. You may want to provide an "out clause" that allows the other party to breach the contract legally for a fee paid to you.

On the last page of the contract you will need to provide a space for the involved parties to sign and date the contract. You may need to provide extra signing space if more than one person from each side needs to sign the document before it is accepted.

Before bringing your draft to the negotiation table it is important to proofread your document for grammar, spelling, and punctuation. Go over your outline to make sure that you covered all of the areas that you needed to, and that everything that needs to be in the contract is.

Checklist:

1. Names of all parties involved, spelled correctly, and with proper titles.
2. Date the contract was drafted.
3. Your terms.
4. What you want in return.
5. Procedures for litigation and legal breaching of the contract.
6. Place for signatures.
7. Legally required statements or terms. (If this is a contract with a governmental agency you may have to include a statement of non-discrimination. Check the UCC and government websites for specific wording requirements.)

Step Two: The Negotiation

The negotiation process is perhaps the most complicated step of the contract process. In some situations the negotiation process isn’t necessary as the terms in the contract are non-negotiable and are standard to everyone who enters into it. This situation is common for warranties offered and most leases. However, if you are entering into a contract that will be negotiated you will need to prepare your case before coming to the negotiating table.

First make out two lists. One list will be of items that you are not willing to negotiate, such as the price you are willing to pay and the amount of time that you have for the project to be completed in. The second list will contain the things that you are willing to negotiate such as payment options, location of work, and subcontractor options.

In addition to knowing what points that you are and are not willing to negotiate on, you should also have done a bit of research to know what laws are applicable to your situation; what federal, state, and local zoning restrictions apply; and any other elements that may influence how the contract is handled. Knowing this information will help you draft a contract that will be legally enforceable and that will comply with zoning and legal restrictions.

When you start to negotiate you will want to keep the discussions focussed to the issues at hand. Have goals of what items of the contract that will be accepted by the end of the day, the hour, etc…You will also want to try and keep the tone of the negotiation positive. Do not enter the negotiation wanting to cheat the other side out of a fair deal. This will only hinder your attempts to forge a good contract. Listen to what the other side wants and needs from the deal, and then present what you want and need from the deal. Try to find a median point that benefits both sides of the agreement. Use a checklist to help keep the topics focused and on course throughout the negotiation process.

Step Three: Acceptance

After both sides have found the median ground that benefits both sides, an acceptance of the contract by both sides can begin. The acceptance process will involve finalizing the contract by all of the involved parties signing the contract. A third party witness or notarization of the document may also be required to make the document binding. However, this greatly depends of the type of contract you are dealing with, and how much security you desire. For example the sale of property will need to be notarized.