Businesspeople need to make certain that their contracts are clear and meet the minimum objectives of enforceability. The only reason to enter into a written contract is to make it enforceable in court. Usually lawyers provide the client with this service. And the advice of a lawyer is essential in most situations. Here is a simple checklist to make certain that a contract contains the minimum of critical clauses:
1. Party Names. Make certain that the person or entity is clearly identified with an official address. If it is a corporation or another type of entity, check out the State of Incorporation and the official address. Identify the role of the Party ( “Seller” or ” Buyer”). Precision in this step is essential.
2. Consideration. All contracts must exchange consideration. Usually, the exchanged considerations are the respective terms and conditions. But the Agreement must clearly state what the mutual promises of each party are.
3. Terms and conditions. To be enforceable, the agreement must clearly define what each Party will do in the transaction and what the rules set by the parties are:
a. Exchange. If the agreement is to exchange goods or services, the Agreement must say so clearly and specifically.
b. Payment. If the agreement requires payment terms, those terms must be outlined specifically and clearly.
c. Duration. Specify how long the agreement will last.
d. Termination: Specify how the agreement can be terminated, by whom and for what clear and specific reasons.
e. Writing. Specify that the Agreement is the only agreement between the parties on the subject and that it may not be amended orally, but only in writing, signed by both parties. Make certain that both parties agree that there are no oral agreements.
f. Governing law. Clearly indicate which law will govern the Agreement and where the contract will be enforced.
d. Dispute Resolution. Clearly indicate how the parties will determine disputes. Will the parties use arbitration or refer the matter to the courts? Will the parties waive jury trial and try the case just to the court? Will the prevailing party have to pay the costs and attorneys fees of the other side? Will the parties waive punitive damages?
e. Limitation of Liability. Make certain that the parties decide what their limits of liability will be if something goes wrong in the transaction.
f. Warranties, Insurance and Indemnification. It is critical that the Agreement clearly specify any warranty, any insurance and any agreement by one party to indemnify the other. If not in writing, no “oral understanding” will be enforceable.
g. Non-Circumvention. Sometimes, the parties will want to be protected that the other party does not go around it and take the opportunity for itself. It must be specified.
h. Confidentiality. The parties may be exchanging confidential or business proprietary information. The terms of confidentiality must be clearly specified.
i. Other terms. There may be many other terms and conditions necessary, depending on the nature of the agreement. For example, an agreement may be necessary for the other party to agree not to compete. Each State has laws with respect to non-compete clauses and usually limit them in time, geographical area and business category scope. They are disfavored. The agreement may be in a highly regulated area, such as alcohol distribution. Competent counsel must be engaged to assist.
4. Signatures, Dates, Witnesses.
a. Clearly indicate who is signing on behalf of which Party and the title of the person signing, if an officer.
b. The date of the agreement must be specified.
c. Some types of agreements must be witnessed-with the witnesses clearly specified. You must check the law of your State. Most agreements need not be witnessed, however.
d. Counterparts. If your agreement is to be signed by parties in different cities, you can specify that each party can sign, making the whole contract consist of the two signed counterparts. You can specify that the agreement will be considered original if sent by fax or email. But you must specify those conditions.
e. Page numbers. Specify clearly the number of pages in the agreement and each page number. Sometimes parties want to initial each page. In this hi-tech age, pages can be modified and copied. Sign original agreements in blue ink if the type is in black.