By Jonathan Schmidt / Guest Column
Contracts are an essential part of doing business in the United States. A contract is a formalized agreement between two parties in which each agrees to certain obligations in exchange for certain rewards or benefits. It is a form of communication that all sides understand what they are required to do and what they can expect to receive in return. They define relationships and allocate risks and benefits, which can then be enforced by a court.
Here are four things you should know about business contracts as we head into the new year:
1. You may have made a contract today already – and not even realized it.
The traditional elements of a contract are an offer, acceptance of that offer and consideration, or the receipt of something in exchange for doing something else. While some contracts must be in writing to be valid, not all have to be.
Most people make dozens of contracts a day. When you swipe your credit card at the gas pump, for example, you’re entering into a contract, signaling that you accept the deal to buy gasoline at the price shown on the sign (the offer). When you pump the gas in exchange for the money charged to your card, you’re operating under a contract.
Most of the contracts people make don’t need to be examined by a lawyer, written down or enforced in court. Some do, however.
2. “Boilerplate” is real (and enforceable).
It’s easy to think of “boilerplate” or fine print as something that adds weight (and length) to a contract, but isn’t particularly important. Very few people take the time to read all of the boilerplate language on contracts or forms they sign every day, such as the repair bill at an auto shop or the print on the back of a movie or bus ticket.
When you’re making a business contract, however, it’s important to understand every word, because every word has a certain legal effect – and if you don’t know what the “boilerplate” language says, you could be agreeing to a deal you never wanted to make.
3. Contracts can reduce bad behavior, but they can’t always prevent it.
Contracts are an excellent way to clarify expectations, make sure every party knows exactly what is expected of them and compartmentalize problems into specific issues so that you can focus on the rest of the business while a dispute is pending. This is why they are such commonly used business tools.
A contract cannot solve everything, unfortunately. If you know that the supplier you’re contracting with has a habit of late deliveries, partial payments or terrible customer service, a contract alone will not magically reform their behavior. It’s important to understand what contracts can and cannot do – and to think carefully about whether the other party is someone you want to contract with.
4. If the contract isn’t clear to others reading it, it isn’t going to be very helpful to you.
When you enter into a contract, there may be a time in the future when others are called upon to read and interpret it. The reader could be a mediator, lawyer or judge. The intent of the parties must be clear in order for others to advise you as to your options or predict the outcome of a dispute.
When writing a contract, ask the obvious question, “Does this make sense to me and my client?” But don’t stop there. You need to go further and ask yourself if someone else who potentially knows nothing about the way you conduct your business will be able to understand the transaction you are trying to describe. Standard, industry-specific terms are OK because their meaning can be easily ascertained. However, if others can’t figure out what the goals are, you may be left without recourse.
A serious “gotcha” related to this is that if a contract is vague, ambiguous or able to be interpreted multiple ways, a court will interpret it against the party who drafted it.
In sum, if the value of the contract is more than you can stand to lose, it will behoove you to seek the advice of a qualified attorney to prepare and/or review your business contracts before you sign.
Jonathan Schmidt is an attorney and partner with Nazette, Marner, Nathanson & Shea LLP. He practices areas of business and litigation. He can be contacted at firstname.lastname@example.org or www.jschmidtlaw.com.