Sunday, April 4, 2010

What goes in a business contract?

A contract is something everybody needs, especially business. But there are legal aspects of a contract you must be aware of to make the whole thing enforceable. Keep in mind that individual jurisdictions may have additional legal requirements that supersedes some of the following aspects of the contract. Also, as I am not a lawyer, I can only write in very generic terms. You should consult a legal self-help book, such as those published by Nolo Press, for the exact verbiage, or check an existing contract used by your competitor(s).

A contract is composed of these major components:

* Names Clause
* Signature Clause
* Standard Clauses
* Dispute Resolution Clauses
* Attachments (if any)
* Amendments (if any)


Names Clause

Identifying the entities involved in the contract can be tricky. As individuals, just full name would be enough. However, a business entity cannot sign for itself. Only its officers can sign, thus, the entity and its representative must identified properly. If the business entity is accredited by the state (Corp, LLC, or LP), then you also need to identify the state it was organized in. Finally, if the business has a fictitious business name (i.e. "dba" -- doing business as) you would need to identify that as well.

Example: XYZ Inc., a California Corporation, doing business as AlphaBeta (seller) and Jane Smith (buyer) enters into the following contract...


Signature Clause

A contract is only valid if signed by people who actually have the authority to "bind" the contract (i.e. the person has the LEGAL authority to enter into such contract). The signature block should usually consist of six parts:

Full name or DBA (entity name entering into contract)
Type of Business, even if it's just sole proprietorship
Signature line
Full name of the person signing contract
Title/Position of the person signing contract
Full address

Example:

XYZ Inc. (dba as AlphaBeta)
A California Corporation
___________________
John Johnson
Vice President
123 Main Street, New York, NY 12345

Personal and other guarantee clauses, plus witness and notary clauses, may also be part of this section.

If you are signing a generic contract, and you are signing for a business, make sure you sign, then next to it put ", ". If you don't, the contract can be construed as between the seller and you as an individual, not your company!


Standard Clauses

Contracts can contain a variety of clauses depending upon the circumstances. Some of which you may want to include:

* Actual Agreement (in entirety)
* Successors and Assignees (how will the contract survive management / ownership changes?)
* Notices (how you keep each other informed? Include address, fax, and so on)
* Governing Laws (which state or jurisdiction has authority over this contract?)
* Counterpart (all pages are treated as original, if contract is signed in different locations / times)
* Modification (contract can only be "amended" by stuff in writing, signed by both parties)
* Waiver (if you don't do something doesn't necessarily you can't do it in the future i.e. waive the rights)
* Severability (if ONE portion of the contract is not enforceable, it doesn't void the whole contract)


Dispute Resolution Clauses

We all do not like disputes when it comes to contracts, which is why you should have a contract written up in plain language and understandable to all parties. However, if there are still problems, you should explore alternative dispute resolution methods, such as negotiation, mediation, and arbitration, before you go to actual litigation, in terms of increasing costs. Thus, it makes sense to specify in the contract that should disputes arise, one must first attempt negotiation. If that didn't work, you have two choices: mediation then litigation, or mediation then arbitration. In general, both sides split the costs of the mediator, and the person can be picked ahead of time or as "mutually accepted choice". Arbitration results can be entered into court's jurisdiction and has the same legal weight.


Attachments

Attachments are additions to the contract that doesn't quite fit in the contract, but are needed. If there are more than one, it should be numbered, and all must be presented to both parties BEFORE anything are signed. If they appear AFTER things are signed, they become AMENDMENTS.

If you are purchasing real estate, for example, a full description of the property would be an attachment, as the actual description doesn't really fit in the contract.

Attachment should have the same names as appeared in the main contract, in the same order. It should also have refer to the main contract by name, date, and short description. You then include the content you wish to "attach".

Attachment should be signed and dated, just like the main contract, by all parties.


Amendments

Once contract has been signed, it can still be changed, but all parties must sign a written amendment, if you included the "amendment clause" as mentioned above.

If the changes are minor and small, such as changing an amount or two, or a date, you can simply cross out some words with a pen and write in some more, and then all parties must initial the change to confirm they have looked at it and accepted it, either next to the word(s) or in the margin. No separate document is needed for something that trivial.

If there are extensive changes, it is probably better to rewrite the contract altogether, as it can be VERY confusing to refer to an amendment that changes the contract in a dozen different places.

An amendment would contain the names, the contract title, date, and short description, and finally, the actual content. If you are deleting a paragraph or provision in the original contract, specify the page number and paragraph number. If you are amending some figures, specify both the before and after, and the page number and paragraph number.

You will also want to throw in the following legalese: "In all other respects, the terms of the original contract and any earlier amendments will remain in effect. If
there is conflict between this amendment and the original contract or any earlier amendment, the terms of this amendment will prevail." This basically says should anything else in the contract conflict with the amendment, the amendment is the one that counts, else the contract

Then you make room for all parties to sign and date the amendment.


Contracts are a necessary part of business life, and writing the wrong contract can hurt you. Thus, it is better to do it right from the start. Not only will your contract look more professional, it will protect you in the long run.

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