I’m not going to read it, you read it!
Well someone has to read it.

When was the last time you read your own contract?

By: Mike Lipshultz
Executive Editor


Some basic information on the how’s and why’s of contracts from a practical point of view.

The following information is not being presented from a legal standpoint, but from the practical standpoint of having worked with contracts day in and day out for over ten years.

This article is not for when things go right, but for when they go wrong.

Think about it. If you do a job and everything turns out right, everyone is happy, who cares about what the contract said. Now if things go wrong, that’s when you need a contract. Contracts are there only if things go wrong - if one party or both are unhappy with the other one. What was really promised about the work to be done? What was the agreement about payments? If you sue in court, chances are the judge will go by the written contract, not what the parties say they agreed to. Yes you can make and be held to a verbal contract, but how can you prove who said what? In the law, for an agreement to be binding there must be a "meeting of the minds". What this means is that everyone understood and agreed to the agreement. In a verbal contract, maybe they did, maybe they did not. In a written contract, tough luck, you signed it, you agreed to it. Even if the parties to a contract never read it, if they signed it, the court will uphold it (unless it can be shown they can’t read). So does that mean a written contract always "binds" all parties to it? The answer is most of the time. Remember no one but the judge knows what he will decide, but with a written contract, and proof you did your part, you can expect to win the fight.

Now, go get a copy of your contract and look it over as you read this article. You may discover that you need to talk to your attorney about re-writing it. If you’re not using a contract, take some notes, call your attorney, and start using a contract.

The focus of this information will be on the how’s and why’s of having certain things in your contract. The intent of having these items is to help stack the deck in your favor should there be a disagreement. Most items covered should be in every contract.

The first thing to talk about is what can you put in a contract? If you can write it, and they will sign it, you can put it in a contract. If you want the court to enforce it, it must be legal. For example, most states have laws against prostitution, so no mater how well written, and even if signed, the court will not enforce any contract calling for the exchange of sex. In deciding what to put in your contract think about this. If your contract is flaky, the court will see you as flaky. Do yourself a favor, if it’s not going to fly in court, do not put it in your contract. Other then that, you can put anything you want in. Yes, it is true that the other party may not like what the are reading, and not sign the contract. Now think about the last time you had a customer read your contract. The fact is, most consumers never read the contracts they sign. Again don’t go nuts thinking this person is never going to read it. In protecting yourself, there are lots of time-tested items to put in your contract to help keep the fight in your favor, provided you did your part. No contract will completely protect you from your not doing your job (talk to your attorney and insurance agent about that).

I would also like to talk about why contracts seem to get so long-winded, just going on and on. The reason is this: the law states that if a contract can be interpreted in more than one way, it must be interpreted against the party that wrote the contract. The reason is that the law assumes that the writer of the contract had the opportunity to cover all the bases. So, to cover all the bases, contracts tend to go on, and on. I have never seen a short contract that was worth the paper it was printed on. So, it’s O. K. to go over your own contract and to even write up a draft of it; but do yourself a favor, let an attorney finish it for you. Yes it cost money, but so does losing in court.

So, let’s start with the law. Laws vary from state to state – so, what laws do you want to go by? If you’re in California, in most cases you will want your contract governed by the laws of the State of California. Now you can chose any state you want. Make sure of two things. That the laws in that state favor you, and that if it hits the fan, you’re going to sue in that state. Think about it. Lets say you sign a contract in California that states the laws of Arizona are to govern the contract. If this goes to litigation no California court is going to touch it. Why? Because California courts know and enforce California law, not Arizona law. Pick the state that is best for you. Both in law and location.

The next concern after the state law that is going to govern the contract, is what is called the "Venue". Venue is the locale jurisdiction in the state you have chosen. If you do business in different counties or cities, pick the Venue that is best for you. Generally speaking, you want the closest and most convenient court to you. Just because you do business all over the state or even state to state, does not mean you need to go all over the place to enforce your contract. One word of caution: if you are in a business that sells or assigns your contracts, be careful about what the contracts say about Venue. If you sell your contract to a company in New York, are they going to be happy with being locked into a Venue in another state? If this is a concern, talk your attorney. You can call for multiple or changeable Venue’s.

One of the first thing the other party will try to do when it comes time to enforce your contract is to claim that you did not do what you said you would do. So, put everything in your contract everything you are to do and everything they are to do. Now is the time to get it clearly and cleanly in writing. If it is in your contract, do it and document it. If it is not in your contract, then you never promised to do it. Make sure your contract states that this is the complete agreement, that there are no verbal representation or promises made. That all terms and conditions, promises, etc., must be in writing, signed by both parties, and attached to this agreement. If you are in a type of business where a lot of things beyond your control can effect the performance of your work, make sure you state them and state that you are not responsible for the failure to perform. Only that you will do "your best". This could include such things as weather, criminal acts, or equipment owned or maintained by third parties. Make sure to talk to your attorney on this point.

The next thing a person is likely to use to fight you, is to claim you damaged them. They may be able to prove it, they may not. The easiest thing to do is to limit damages in your contract. Talk to your attorney about this one. Try to limit your damages to no more than, say $250.00. Depending on the dollar value of the contract you may wish to raise or lower this amount. Generally speaking you want to keep it as low as you can. This is known as "set" or liquidated damages". Again let your attorney come up with the exact wording. Now if they say " his failure caused me to lose ten thousand dollars", you can say, under the contract if the other party was damaged, my liability is limited to $250.00. It kind of takes the "bite" out of their claim.

Damages. This is the section of your contract that helps you get the money you’re entitled to. In addition to calling for all lost profits (the profit you would have made under the contract), you will want to recover all of your cost. If your profits are hard to calculate or prove you may wish to go with a set amount or a set formula. An example of a set amount is : Damages are to be set at $500.00. (This can be any amount you wish, but do not go nuts. If common sense tells a person that damages would be in the hundreds of dollars, and you put down $20,000.00, the court is not going to like it.) . If you do not want to take "small balances" to court, now is your chance to go after a minimum amount... "it is agreed as the cost of damages, and the cost of recovery is hard to calculate, minimum cost and damages are to be set at a combined figure of $500.00. Again, this can be any amount, but don’t go nuts. An example of a set formula is: damages are to be equal to the monthly payment amount , times 12. Your attorney can help you come up with just the right amount and wording.

Another item to consider is your cost of recovery. Most contracts call for you to recover all attorney’s fees and court cost. What about if you hire a collection agency? What about your lost time fighting this. Now is the time to cover these items. Think about wording along the lines of "will be entitled to all cost of recovery, including but not limited to all collections cost, attorney’s fees, court costs, in addition to a minimum collection/recover fee of $200.00. Now, when the other party defaults, you can add another $200.00 onto the balance due. If nothing else it gives you more to bargain with. You can tell the other side " just pay the original amount and I will waive the collection fee.

Talking about waiving things, one of the most important thing to have in your contract is a part dealing with waivers. In general you want to have a section that states: any and all waivers are to be in writing, that no actions constitute any waiver, and that any waiver of any section is not to constitute an ongoing waiver, or waiver of any other section of the contract. You should also have a similar section dealing with: if any section is void or invalid under the law. The reason for this is to keep your contract intact. Without it, it is easier for someone to break or invalidate your entire contract just because one part was invalid or "waived" by something you did.

Guaranties. If you are doing business with a corporation or a limited liability partnership, or corporation, think about a personal guaranty. If the business goes under who are you going to go after for your money? In the event of the above, without a personal guaranty you’re pretty much out of luck. So think about something like " the undersigned, by signing this document, acknowledges that in the event that the party(ies) they are signing on behalf of, is an entity other than a real person, that they (the undersigned) are representing that they are authorized to sign on behalf of all such entities, and are further authorized on behalf of all officers, principle owners, and partners of such entity, to enter said officers, principle owners, and partners into personally guaranteeing this agreement on behalf of said entity, in exchange for services being rendered to such entity".

In closing, just a few more thoughts to keep in mind. Your Customers:

If you do business with customers that are likely to read your contract, make sure it is written in a way that not only protects you but does not make you look like a flake to your customers. A good contract is there to protect you. Not to let you get away with being a bad business person.

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Last modified: November 08, 2002