This article goes over the basics of contracts. It provides tips on how to successfully negotiate a contract, and how to draft a contract. After reading this article you will know what steps to take to orchestrate your own contract agreement.
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 you should include, and what happens when someone breaches a contract. This article will go over the basics of contracts, how to successfully negotiate your position, and how to write a reasonable 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. 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 juvenile 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 contract 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 a consideration. For a contract to be legally binding all parties involved have to have the psychological capacity to enter into the contract as fully informed parties. It means that if one or more of the parties were drunk or impaired at the time signing the contract, then the document is not legally binding. People with mental illnesses or disorders also may not be able to agree without counsel or accommodations legally.
When Should a Contract Be Written?
While many states accept and enforce a verbal agreement, it is tough to “prove” that such agreements exist and the terms that were agreed upon, especially when there is a dispute between the parties. To protect yourself in cases of litigation or breach of contract it is best to get it in writing, and in some cases, the law requires it. For example, all real estate transactions have to be in writing, and so make the sales of items that are valued over $500, and any contract that expands over more than one year.
What Laws apply to Contracts?
Two sets of laws govern contracts. The first is Common Law, and the second is the Uniform Commercial Code. What you need to know about Common Law when drafting your agreement 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 understand it. It makes the clear and concise text of your contract vitally crucial 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 we draft and enforce the contracts. The most important aspect of the UCC that the average person needs to understand is the proper faith clause. This clause requires both parties to agree in good faith. It means that you draft the contract with both parties intending to be fair, honest, and planning 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 Someone Breach a Contract?
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 section or their entire portion of the deal, then they can take actions to get restitution for the damages.
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 labour. 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. However, if a settlement is not possible and the amount of damages is more significant 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 some steps: making an offer, negotiation (a.k.a.), and acceptance. These steps may be quick and easy, or they may require months of bargaining 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, bright, and unmistakable. The items in question, be they labour 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 you will render, then the terms that you will need to draw out include. Who will do the work, which the work is to be done for when you should do the job, where you will make the action, how you will charge the fees, what is the cost of taxes, when payment is due, and how you will deliver the cash.
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 related companies. Many standard contract agreement templates you can purchase and downloaded online for a small fee. You can either use a template, or you can draft a contract from scratch to enter the specific terms you want,.
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 explain what you are willing to offer in exchange. Again be as accurate as possible. You will also want to keep the sentences short and to the point. It will help to eliminate confusion, and it will make the contract more natural to read.
Also, make sure that you use headings that are logical and that you order it logically. It will help the reader to navigate through the contract, and it will help you identify essential terms and items during the negotiation process. Make sure that names, address, etc. are all spelt correctly and labelled appropriately.
When you start writing the body of the contract make sure that you define terms that could be confusing. For example, explain 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 you are discussing.
Another consideration that you should make while drafting your contract is to identify situations that “could” happen down the road. It includes litigation of the contract. To provide for this situation, you should include how you will handle this situation. 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.
- Names of all parties involved spelt correctly, and with proper titles.
- Date the contract was drafted.
- Your terms.
- What you want in return.
- Procedures for litigation and legal breaching of the contract
- The place for signatures.
- 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 typical for warranties offered and most leases. However, if you are entering into a contract that you negotiate, 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. The second list will contain the things that you are willing to negotiate such as payment options, the 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 understand what laws apply to your situation; what federal, state, and local zoning restrictions apply; and any other elements that may influence that how you will handle the contract. 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 on 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. It will only hinder your attempts to forge a reasonable contract. Listen to what the other hand wants and needs from the agreement, 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 middle ground that benefits both sides, an acceptance of the contract by both sides can begin. The acceptance process will involve finalising 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 on the type of contract you are dealing with, and how much security you desire. For example, the sale of the property will need to be notarised.