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"Contracts for Beginners"

Contracts for BeginnersWhether you’re buying a car, renovating your home, or leasing property for your small business, you can be sure you’ll need a contract. Contracts are essential in all of these situations and more for two very good reasons. First, you need to set out the details of the agreement you’ve reached with the other party. A contract tells everyone what the agreement is―and that includes you, the person you’re making the contract with, and third parties, including lawyers and courts. Second, you need a contract to state what happens when things go wrong, or if circumstances change. Ultimately―and this is the way lawyers approach contracts―if you wind up in court, the contract tells the court what you and the other party agreed to, and the court will hold you to that agreement.

What Goes in a Contract?

Contracts can be very long, dense documents. They look like this for a reason: contracts should capture every piece of relevant information about the transaction.

For example, imagine a contract dealing with home renovation. The contract would obviously specify the work to be done (for example, turn that little bathroom next to the hall closet into a big bathroom with new plumbing.) It would also specify the amount to be paid, and the completion date. But in addition, a good contract would deal with warranties―that is, guarantees that the work will be done in a workmanlike manner. It might deal with change orders―that is, what happens if you make changes during the construction process. It should deal with insurance, and certify that your contractor has workers’ compensation insurance. It should allocate responsibility for arranging permits and inspections. And it should include language about who is to pay attorneys’ fees and litigation costs in the event of a dispute. With all these clauses (and many others), a contract for a fairly simple home renovation project might run to ten pages or more.

Remember that the purpose of the contract is to define exactly what the agreement is, and to protect yourself if things go sour. The more vagueness there is in the contract, the less understanding there is between you and the other party, and the greater the likelihood that the agreement will fall apart. The best contracts are concise, precise, and cover every eventuality.

Negotiating a Contract

There is no such thing as a “standard contract.” Every contract is subject to negotiation, and any contract can be changed, annotated, or rewritten. If a person flat out refuses to negotiate on a contract, you may want to seriously consider walking away from the deal.

Bear in mind that if the other party has drafted the contract, or uses a pre-printed form that is “standard” in this kind of transaction, the contract he or she slides across the table has not been written with your best interests in mind. There’s nothing dishonest or even shady about that. Contracts are about protection and leverage, and the person who writes the contract is going to give himself all the protection the law allows. Work with your lawyer to go through the contract and identify the terms you will agree to, and the terms that you want to negotiate.

When you are changing a contract as a result of negotiation, you can simply cross out language that you don’t agree on, and annotate terms that you wish to change. You can add a rider of additional terms. Make sure both parties initial and date any changes.

Oral Contracts

An oral contract is any contract that is not in writing. For example, if a person sells you a second hand car, you agree on a cost, and you shake on it, you have created an oral contract.

An oral contract is a bad idea, period. Don’t do it. Get the contract in writing. And if you have a written contract, don’t make any additional agreements orally.

Here’s why. First of all, there’s the law. Some states still rigidly enforce the Statute of Frauds, an old common law rule that any agreement having anything to do with real property (land) must be in writing. If it’s not in writing, the courts will not even bother to decide who’s right; there simply is no valid contract.

The second legal issue involves the parol evidence rule, which says (roughly) that the written agreement signed by the parties is the entire agreement. If you have a written contract, but you agree to a change orally and problems arise, you run into the parol evidence rule. Any oral agreements you and the other party have reached will not be considered as part of the contract. If you agree on anything that’s not covered in the contract, add it to the written contract.

The third issue is a matter of evidence. With a written contract, the proof of the terms of the agreement is right there, on paper. With an oral contract, the proof is what you remember about the agreement versus what the other party remembers about the agreement. Even honest people can have different ideas of what terms were agreed to.

The fourth issue is a practical one. Think about how many issues are covered in a contract for the simple home renovation used as an example above. It is very unlikely that someone making an oral contract will be able to cover all of these issues in sufficient detail.

Signing the Contract

What should you do when the negotiations are over, a written contract is drawn up, and the person you’re negotiating with asks you to sign on the dotted line? First, you should read the contract. Make sure that everything you agreed to orally is included in the contract. Query anything you don’t understand. And, if a substantial amount of money is involved, it’s a good idea to run the contract past your lawyer.

(Fall 2005)