There’s a lot more to contracts than just the words on the page. I take special care with every contract I write. However, I realize I don’t have a lot of articles explaining much of my process. Therefore, I’m starting a deeper dive into contracts series of articles where we explore how I develop my contracts as well as a lot of information about many of the clauses you find in them.
- Parties
- Contract Starting Terms
- What Laws Apply?
- A Different Contract for Every Situation
- Reusable Contracts are Iterative
- Boilerplate
- Dispute Resolution
This article will be evolving in nature as I add more content to this series. However, in this article I’ll start with some of the basics. Let’s get started.
Parties
Generally, contracts have 2 parties. However, there’s no legal limit to the number of parties. To be a party to the contract, you need to adequately identify the party and they have to legally be allowed to be a party. The most important part is that the party agree to be bound. You obviously cannot list someone who does not agree. For example, people have tried to list the US government as a party and tried to bind it to obligations they otherwise would not have agreed to. It obviously didn’t work.
Parties can be individuals or entities. However, entities need an individual with authority to sign on its behalf because entities have no body and cannot act on their own. The person with authority is called “agency” and that’s a whole other area of law. Basically, a person has to have authority to bind a company and the person dealing with the company has to have a reasonable belief that the person has the authority to bind the company.
Basic Starting Terms
No matter the type of contract, they all start with the same basic terms. You need a party, what you give, what your client gives, when the contract happens, and signature or assent in some way. They can be written, oral, or implied, but written is the most enforceable. In most cases, an oral contract is enforceable. However, our nation has decided that some things are so serious that they must be written down. For example, all real estate contracts have to be in writing to be enforceable. This is the Statute of Frauds.
Consideration
What you give into a contract is “consideration”. It’s one of the few requirements in a legally binding agreement. You need an offer, acceptance, and consideration. However, the bar for what constitutes consideration is very low. For example, I could agree to not visit Mars (a thing I was never going to do) in exchange for a million dollars from you. Although it’s imbalanced, it’s still enforceable. Sometimes, a court will reject the enforceability of an agreement because of impossibility, but my hypothetical wouldn’t fit into that exception because although insanely unlikely, it is not impossible.
An impossible contract would be more along the lines of “I agree that I will not swim to Mars for a million dollars”. Since it is a physical impossibility to swim to another planet, that one is impossible. Like I said, the bar for consideration is extremely low.
You see failure of consideration more often in things like giving up something you do not actually own or cannot own by the time of performance. For example, I cannot sell you the Statue of Liberty. I don’t own that and the US Government is not selling it. Additionally, I cannot sell you something illegal or sell you on me not doing something illegal. For example, I cannot agree to murder someone or even sell me not murdering someone in exchange for anything. I already legally cannot murder people, so that would fail as consideration.
Signatures, Assent, or Some Form of Agreement
Before a contract is valid, the parties to be bound have to agree to it. Agreement isn’t necessarily a signature or a handshake. Any action that signifies an intent counts. For example, if you send your service contract to a client and they pay you but forget to sign the contract, that’s usually agreement.
However, you can change the terms of your contract to specify what constitutes agreement. For example, all over my website I have the phrase “no attorney-client relationship until an engagement letter is signed by both you and an attorney at Law++”. If my contract also says “no attorney-client relationship until this agreement is signed by both parties,” that would be pretty telling of that specific contract. However, that doesn’t mean no contract exists between you. If I have the above example, and you forget to sign it but still pay me, there is a contract between us, just not the one I sent. We have to be careful there!
What Laws Apply?
Contract law draws its authority from a huge variety of places. It all starts, as many things do, with the US Constitution. Article I, Section 10 states that no state shall pass any law impairing the obligation of contracts.
Beyond that, contracts derive most of their authority through common law. We brought much of their law over from England and simply modified it over the centuries to meet our own brand of law through the courts and through some statutes.
That brings us to the next area: statutes. Congress and state legislatures have passed many laws regulating what may be in a contract, how to enforce them, and what limitations must exist. For example, North Carolina enacted a “right to cancel” law regarding gym memberships. This specifies that, in order to be valid, a gym membership must notify the customer of their right to cancel within 3 days of signing up. All other regular contract terms apply.
A Different Contract for Every Situation
No one contract fits every scenario. In fact, boilerplate contracts often cause more harm than good. In my experience, it’s the terms you don’t understand or are unnecessary for your business that end up haunting you. I look at contracts like when you’re buying a suit for your wedding. It’s helpful to at least know your size, but a nice tailored contract (suit) will serve you much better.
For example, if you’re a web designer and you’re shopping for a service contract, a generic service contract will likely be terrible. A generic service contract for web designers is better, but a custom contract specifically written for your business and your practices is best.
Because of the vast differences between types of contracts, some of the provisions in this article won’t apply sometimes. I’ll try to point that out in that specific context as best I can.
Reusable Contracts are Iterative
If you reuse a contract in your business, it’s likely a contract that needs to be reviewed from time to time. I call these contracts iterative because the process of using, making changes, and reusing the contracts is ongoing throughout its life.
Making periodic changes to your contracts helps keep them best suited for the situations your company might face.
Boilerplate
Every contract has it: boilerplate. Generally, this language is most the same from contract to contract. However, I don’t believe all “boilerplate” is standard language. For example, the venue clause in a contract can specify what county a case has to be tried in. For my clients, I generally specify the county they are in so they don’t have to travel far. If they have many locations, I choose the county I am in: Durham County.
Here are some of the more common boilerplate clauses:
- Merger or Integration Clause. This provision keeps all terms of the contract within the contract itself. No outside promises can be relied upon during its enforcement.
- Jurisdiction, Venue, and Choice of Law. These provisions decide where a lawsuit can happen and what laws apply.
- Severability or Savings Clause. This clause tells the court that if one provision is found to be invalid, the rest of the contract remains enforceable instead of throwing the whole thing out.
- Assignment. Here you can specify who, if anyone, the parties can assign their rights and responsibilities under the contract to.
- Force Majeure. Basically, this states that one or more parties cannot be held liable if their breach is caused by something significantly out of their control like a natural disaster.
- References, Headings, Tenses, Genders. Basically this just says things that are there to help organize the document don’t change the meaning behind the other words.
- Third Party Rights. You’re explicitly stating that no third parties get any rights to sue under this contract.
- Counterparts. This clause allows the contract to be signed separately by each party with each one constituting an original for enforcement purposes.
- Electronic Signature. Just stating electronic signature is equally as valid as ink.
Dispute Resolution
If you have a dispute arising out of your contract, generally, this falls under state law. That means, unless the contract says otherwise, the dispute needs to be filed in state courts in the correct state. In most cases, you can put the state and county disputes have to be heard in right there in the contract. If you don’t, the jurisdiction and venue are chosen through the choice of law statutes in each state. The most important part of this analysis is whether the state has personal jurisdiction over the defendants.
Your contract can also specify whether the parties have to submit to arbitration or mediation or any other types of dispute resolution. Arbitration is similar to litigation except the rules of evidence are relaxed and the process is intended to be quicker. There’s no option for a jury in arbitration and the presiding arbiter is usually a lawyer who had previous experience in the industry or the type of suit she is presiding over. This is helpful for complex or highly technical issues.
Mediation is an informal process where a mediator tries to help the parties come to a solution outside of court. A resolution in mediation usually involves a settlement agreement. Mediation is typically a 1-2 day process, and it doesn’t usually include witnesses or the presentation of evidence. More than anything, parties will show what evidence they plan to submit should the dispute go to court.