Contracts 101: The Basics You Need To Know

I’ll be posting answers to frequently asked questions about Contracts. Let’s start with the two of the most basic questions of all.

What is a contract?
A contract is a legally binding agreement between parties that creates an obligation to do something, or, in some cases, not to do something.

Why should I use a written contract?
At any one time, more than 90% of all corporations are involved in some kind of business litigation, both as a Plaintiff and as a Defendant. It would appear that corporations often use litigation as an effective dispute resolution tool. Other than intellectual property disputes, disputes over contracts and employment are most frequent.

Why are contract disputes so common? Because most businesses don’t realize the importance of a good, solid contract, not only as protection but also to use as a roadmap for the working relationship between the parties. A good contract decreases misunderstandings, gives methods for working out problems, defines the exact relationship between parties to minimize damage if and when things go awry. Some agreements must be in writing. Generally, contracts over one year in length, contracts for the purchase of goods over $500, some leases, and real estate purchases must be in writing. Whether a particular contract should be in writing depends on the facts and circumstances and should be reviewed by an attorney. Writing the contract down avoids people later changing their story about what was agreed to, and helps the parties focus on the important points.

What law governs contracts?
Contracts are generally governed by the law of the state where they were written. However, through a choice of law provision, this can be modified and the laws of another jurisdiction can apply.

What are the purposes of a contract?
The 3 main purposes of a contract: detail what both sides have to do, detail how both sides will get paid, and give both sides a way out of the deal. If all 3 purposes are not in the contract, it is not a complete contract. The contract should also clearly indicate when the performance will be considered complete.

What does “breach” mean?
A party breaches a contract when that party breaks its end of the deal or fails to fulfill its
obligations under the contract.

What can I do if someone breaches a contract?
Most contracts are enforced in court. If the other party breaches the contract, you can go to court to try to collect damages or obtain “specific performance.” However, some contracts have an arbitration clause, which requires any disputes to be arbitrated by a neutral party.

What is “specific performance”?
Specific performance is a remedy that courts may use when money damages will not remedy a breach. Specific performance is generally used when the item in the contract is unique, such as with land or custom goods.

What should I do when signing a contract?
1. Be sure you have read and understood all of the contract. If you do not understand it, don’t sign it until you do understand it
2. Be sure everyone signs & dates the final page
3. Be sure everyone initials & dates each page of the contract
4. Contract pages should have numbering “1 of xx pages”
5. Be sure all warranties, etc. that are incorporated by reference are attached to basic contract
6. If the contract is a form contract, *all* entries must be filled out. (If the space does not apply, use “NA,” etc.)

What should a business contract contain?
1. Reasonable attorney’s fees & costs in collection
2. A provision for interest finance charges
3. A statement of which state law controls
4. A statement of where disputes must be resolved
5. The consequences of not paying, e.g., contract and warranty are void
6. A section that defines terms carefully
7. A statement that only the written contract controls and that verbal statements do not make part of the contract
8. A definition of what comprises the written contract, with its additions, etc., so that warranties, exceptions, etc. are incorporated by reference
9. A statement that all changes to the contract must be in writing
10. Fixed dates for completion if appropriate
11. A clause that makes clear that the parties cannot be liable for things out of their control (terror, weather problems, etc.)
12. Compliance with appropriate consumer protection laws (if applicable)

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