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Contracts 101: What Are The Key Parts Of Any Good Contract?

contraccct.PNGA contract is often referred to as the only forum where people come together to essentially "make their own law." For the most part this is true, since you are able to make an agreement with any number of parties to achieve a certain result; whether it is a contract for the sale of goods, services, or a promise to do or refrain from doing something. But contract law is not as simple and easy as many might assume, as shown by the great number of contract-based lawsuits that clog up the courts. What then are some key parts of a good contract that might help you avoid future litigation?

 

1. Definite Terms

Two of more sides to a contract will often end up in court because they simply failed to use definite terms when making the contract. A good contract will clearly and meticulously spell out every single term or obligation of each party, and attach a specific date of completion for each. It is more common than not that a contract contains a "glossary" of terms, where people have the power to give their very own meaning to a word outside of the Webster Dictionary definition.

 

It's a reality that when you write or review a contract, you have to be cynical in asking yourself: Are any of the terms in this document ambiguous enough so that I could delay/avoid doing something that I know I'm supposed to do by the terms of the obligation? If there's ambiguity, you have a poorly formed contract. A very good contract will go so far as to contemplate potential unforeseen ambiguity, by inserting language to the effect of "If there is ambiguity later found, the clause must be interpreted in x or y way." This prevents either party from attempting to point to outside-of-the-contract evidence, such as conversations or meetings. Simply put, your contract should spell out what you and every other party must do/refrain from doing and when exactly that should be done by.

 

2. Choice Of Law

Many states give parties to a contract the liberty to choose which state's law they wish to control it (It is key you speak with an experienced attorney prior, as such an obligation may be precluded by state law). For example, many companies strongly prefer to incorporate a Choice Of Law provision that utilizes New York or Delaware law, because the law of those states are favorable to them and yield consistent results in contractual disputes. Companies and individuals do this for much the same reason that they choose to incorporate in certain states. Taking the time to figure out if negotiating a choice of law provision is useful forces the parties to think about the effects it would have on their obligations and more importantly, on their rights should litigation arise.

3. Arbitration/Resolution Procedure Clauses

Arbitration clauses have become widely popular in recent decades for a number of reasons. Parties to a contract see the mutual benefit of eliminating the judicial process with its uncertainty and heavy litigation fees, in favor of arbitration proceedings, where the costs can be far less and results are much more consistent (as no juries are involved). In addition, many contracts have taken this a step further to incorporate dispute resolution procedures that parties must go through before initiating arbitration, like mediation.

 

You might want to consider including arbitration/resolution procedures in your contract, as they could save you substantial time and fees in the future. It is absolutely key that an experienced attorney advises you, as there are federal and state laws that specifically govern arbitration and dispute resolution.

 

4. Termination/Discharge Clauses

It can sometimes be shocking to attorneys when they are confronted by an irate individual seeking legal counsel because a contract he or she independently made gives them no way out! An attorney's first thought might be "Well, why didn't you build yourself a way out before you dug the tunnel?"

 

It is absolutely crucial that a contract contemplates unforeseen circumstances that might make the contract a ball and chain around the neck of a given party. For example, a contract for the construction of a house might have as a party a wood supplier, whose obligation is to deliver a rare and exotic type of wood for building by a certain date. Unknown to her at the time, a powerful tree fungus had sprung up on the day of the contract that specifically attacked the species she was sourcing the wood from. As a result, that wood increased 800% in price. By performing her obligation on the contract, she would be forced to take a tremendous economic loss for something outside of her control. This is known in legalese as "impossibility/impracticability of performance."

 

A good contract provides for circumstances that allow a party to get out of an obligation. Typically, such a clause will indicate that if a party is at fault for being unable to perform, then he or she might have to pay a percentage fee to be relieved of their obligation. It is impossible to know the future, but it is possible to include terms in an agreement, that foresee circumstances that render it impossible/difficult for you to complete your end of the bargain.

 

5. Get Everything In Writing

Many lawyers like to insist and impress on their clients that all contract discussions/negotiations be placed in writing. This is to protect everyone involved, as humans are fallible and sometimes have selective memories. While it has become something of a cliché, insisting that key parts of your contract negotiation are placed in writing (even if they're not part of the contract) might help refresh everyone's memory when the word "lawsuit" is thrown around later on. Evan Xavier Bakhet is a J.D. Candidate at Rutgers School of Law-Newark with a scheduled graduation date in 2017. He collaborated with me on this blog.

 

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