Kathleen M. Stotish, Esq. focuses her legal practice on business transactions and commercial litigation. Ms. Stotish gets great satisfaction out of assisting small business owners with the often complicated process of establishing and maintaining their business entities. She has drafted, negotiated, and reviewed a wide variety of partnership and joint venture agreements, management and operating agreements, asset purchase agreements, and many other contracts. Ms. Stotish’s articles can be found on LinkedIn and on the firm website of the Law Offices of Jonathan Gelber, PLLC.
Anyone can scribble on a napkin the words “I, Joe, will pay Sally $15 tomorrow” and assert that the napkin constitutes a valid contract. However, it should go without saying that a “good” and valid contract must include certain specific elements in order to be enforceable. What are those elements, though? Is it enough to include just those initial elements in your contract? And, if the answer is no, how can one be sure that they have drafted a truly strong contract that will best protect them and their rights?
In order to pass the old fashioned “sniff test” a basic contract must:
- Identify the parties involved. Who is agreeing to the contract? Are there any beneficiaries, or guarantors involved? Are the parties individuals, businesses, or a combination thereof?
- Identify and clearly explain the agreement that gives rise to the contract. What are the parties exchanging? And, perhaps most importantly, what consideration is being offered for that exchange?
- Identify all key terms and conditions. Without such detailed information, a court may not be able to determine what is and isn’t enforceable when a dispute arises, much less whether the contract itself is enforceable.
- Be signed and dated by all of the parties.
While including the above elements in a contract should result in a fairly clear and likely enforceable document, it is often wise not to stop there. In addition to those basic elements, one should also consider some other provisions, the inclusion of which will only serve to strengthen the contract and provide more protection for the parties involved. There are, of course, an abundance of provisions and clauses that may be found in a contract, but the following are some of the provisions that one ought to strongly consider adding to the basic elements discussed above:
- Dispute Provisions
- “Integration Clause”
- Severability Clause
- First, what is the goal of the contract; what are you, as a party to the contract, trying to accomplish? Why are you exchanging or doing X, and what must X look like in order to meet your goals?
- Second, how could the contract, or the relationship between the parties, turn sour?
- Finally, what do you, as a party to the contract, want to see happen in the event that something goes wrong?
a. In addition to the key terms and conditions, it is important to specify what, exactly, will constitute a breach of the contract and, in the event of a breach, what remedies are available to the parties, and how the outcome of the dispute will be determined.
b. In addition to the dispute resolution clause discussed above, it is also important to include language indicating which state’s or jurisdiction’s laws will determine the outcome of a dispute. And, if the contract provides that a dispute may go to litigation, it should also provide details regarding what courts will have jurisdiction over any dispute.
Relatively straightforward, an integration clause provides that the contract is the full and final agreement between the parties on the given topic, and that there no other “side” or unexpected agreements. This is particularly important in the event that one party asserts the existence of some prior agreement, oral or written, that conflicts with the contract at hand.
Finally, if there is a dispute and you end up before a court, there may be the possibility that the court will find that one particular part of the contract is illegal, ineffective, or otherwise unenforceable. As such, in order to ensure that the rest of the contract remains valid and enforceable, one should include a severability clause, which states something along the lines of “The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.”
It may seem daunting to come up with the language and information needed to complete the crucial contract elements discussed above; it is, however, imperative to do so in order to ensure that you have a strong, clear, and valid contract. As such, and in order to facilitate the drafting process, you should take the time to thoughtfully and thoroughly determine a number of things.
You should be able to describe, in detail, the things that the parties will do or exchange, including the consideration that one party will provide to the other and the value of that consideration.
a. Depending upon the exchange and/or contract, you may need to envision and specify quality and/or quantity of goods, delivery dates, start and completion dates of work, etc., that must be met in order to accomplish the goal discussed above.
b. What rights, obligations, and duties will each party have in order to meet the goals of the contract?
c. Will either of the parties make any representations or warranties with regards to their negotiation or performance of the contract?
a. If something does go wrong, how do you want that dispute dealt with? Would you prefer to mediate the dispute, go through binding arbitration, or let a judge or jury in a court decide the outcome? And, regardless of which dispute resolution method you chose, which state’s laws would you like to govern the contract?
b. Would you like to require that the party at fault be required to pay the attorney’s fees of the other party?
c. Finally, if you decide that any dispute will be dealt with through litigation, you should also think about what courts the parties would like to be heard in.
While one may believe that the subject matter of their contract is simple and straightforward, the above information should make clear that, regardless of that belief, a good deal of forethought and preparation is required in order to draft a strong, clear, and valid contract which not only meets the parties’ basic goals, but also protects the parties in the event that any type of dispute arises from that contract.