With the money that is at stake with every job you sell, you can't risk conducting business the way your father or grandfather did. Namely, you need to replace the old-fashioned handshake with a written contract.
A written contract leaves less possibility for misunderstandings—resulting in fewer disputes. And if the other contracting party breaches the terms and conditions of the contract, a written contract gives you a better chance of covering your losses. Although many oral agreements are enforceable, they may come into question in court.
Elements of a Contract
There are three key parts of a contract: offer, consideration and acceptance. An offer is a proposal to make a deal, while consideration is what both sides stand to gain from the deal. For instance, the homeowner will have a newly installed floor while your consideration is the payment you receive for installing the floor. Accepance occurs when both parties agree.
When the party responding to an offer rejects or amends the offer, it becomes a counteroffer. This starts a process of negotiation where each party submits counteroffers to one another until they reach an agreement. Once an offer has been accepted in an agreement, then both parties have made a formal contract. The process of negotiating a contract provides each party with the opportunity to:
• Set the terms of a sale
• Describe all the obligations accepted by each party of the contract
• Establish payment terms
• Set parameters such as a timeframe
• Clearly establish all risks and responsibilities
• Limit any liabilities.
Additional terms can include conditions on how parties can negotiate the contract, what counts as acceptance, how disputes arising under the contract are resolved (such as by arbitration or mediation), a provision awarding attorney's fees to the prevailing party if one party breaches the contract, provisions for sending notices under the contract (such as an address or fax number) and a statement as to which state's law applies if questions about the contract occur.
Some vital things to remember about acceptance includes:
Execution. Make sure both parties sign the contract and, if one of the parties of the contract is a company, make sure the person signing on behalf of the company has the authority to sign.
Delivery. Make sure each party to the contract receives a copy of the final signed agreement.
Date. The contract should state the date on which the contract becomes effective, usually the date when the contract is signed.
While the task of drafting a contract may seem daunting, remember that you almost always want to produce the contract's first draft. This gives you a greater advantage because you can structure the transaction in a way favorable to your business.
Reviewing a Contract
In situations where you are asked to sign a contract, these steps can minimize the risk of a bad deal. First, read the contract carefully. In most states, the fact that you did not read a contract before you signed it is not a valid excuse. When reading the contract, highlight anything that is ambiguous or vaguely worded for possible deletion or clarification. List any additional provisions you feel are necessary, and identify provisions you think should be deleted. Discuss all of your proposed changes and questions about the contract with the other party and make sure requested changes were made prior to signing. It may be difficult to enforce oral agreements not included in writing once the contract has been signed. Consider consulting an attorney, especially if the agreement is complicated. Finally, keep a signed copy of every contract you sign.
Standardized Contracts
If you repeatedly enter into agreements with your customers and the basic terms of the agreements rarely change, you should consider using standardized terms and conditions. Rather than having every contract spell out all of the terms and conditions of contracting with your company, your individual contracts with customers can be short and could incorporate a reference to your general terms and conditions (a uniform sheet that accompanies every contract). The terms and conditions could contain all the terms of the business relationship that rarely change. These include:
• The general nature of your goods and services.
• The representations and warranties you do or do not provide for the quality of your product or services.
• When you expect payment
• Any elements of the pricing of your goods and services that never change
• The "boiler plate" or miscellaneous clauses (standard clauses usually found at the end of the contract). These typically include an arbitration clause, notice clause, force-majeure clause (a clause in contracts that excuses parties from not performing their obligations due to unforeseen events beyond their control), and entire agreement clauses, also known as merger clauses (clauses declaring that the contract represents the complete and final agreement between the parties; usually this eliminates any ability to rely on oral agreements that preceded the written contract). An attorneys' fees clause can be tremendously useful; it says that the legal fees and costs of the prevailing party will be paid by the nonprevailing party. This can amount to a lot of money.
By using general terms and conditions, you standardize a large part of every customer relationship. Individual contracts become much shorter and easier to draft and execute. However, you need to ensure every contract specifically incorporates the general terms and conditions. Include in your written (and signed) contract language stating that "Terms and Conditions dated ___ are incorporated into this agreement by reference and are part of this agreement as if fully stated herein;" make sure you fill in the blank with the date of your terms. You may also want each customer to acknowledge receipt of your general terms and conditions, eliminating any doubt or uncertainty as to the terms of the business relationship.
Although a written contract may seem more impersonal than a handshake, it may help to preserve relationships and prevent a messy legal battle.
