Ideally, every person should understand the fundamentals of contracts, because they determine so much of how we interact with others. A contract is actually a mutual promise to exchange benefits, or refrain from certain acts, in the future. Depending upon the law in your state, certain contracts or even individual contract sentences are written in a particular manner to be enforceable. A contract may also be oral or written, but some contracts must be written to be enforceable, such as those for certain real estate transactions.
Example, Company B promises to send Company A one hundred widgets within thirty days. However, Company A need not ever pay for these widgets. This is an agreement but not a contract. Why? Because the promises should be mutual, but Company A has no obligations whatsoever.
The initial section of a contract generally comprises the parties’ names, addresses and their expectations, as well as how each party will provide a benefit to the other. For example, in return for one thousand dollars from retailer Company A, Company B provides widgets, because company B has expertise in producing widgets. Definitions of at least some contract terms is usually necessary. For example, in a non-disclosure contract which subject matter is considered confidential. As another example, does the term ‘widgets’ include accessories that reversibly attach to widgets?
One section of a contract designates obligations and performances of each party to the contract. For example, in return for payment of $1,000.00 from company A, Company B must send 100 widgets to Company A (i) within thirty days from Company A’s request therefore, and (ii) in no more than two identical deliveries of the widget request. Not surprisingly there is a complementary section which memorializes consequences of failure to meet performance obligations. In this section the parties will agree upon which failures comprise ‘deal breakers’ for disengaging from the entire contract.
If there is a deal breaker, then the parties agree upon a section in which the remedies for what is known as a ‘major breach’ are designated. Examples include (i) money damages or (ii) a court ordering a party to perform a specific act or refrain from doing an act. However, there should also be a procedure in the provisions which allows parties to leave a contract even if no deal breaker occurs. For example, a residential lease may require sixty-day notice to the landlord, while other contracts, such as advertising may automatically expire, or automatically renew after one year.
It is very important to obtain the dated signatures of the persons with authority to sign the contract. For example, in business each party should be sure that the person signing the contract has the authority to hold a company legally responsible for contract performance. It is also important to be aware of potential landmines. For example, there should be a contract provision stating that one excused obligation or performance does not excuse future similar failures to perform. There should also be a statement designating the state law governing the contract, as well as the geographic location in which a lawsuit should commence. However, these are just a few provisions which should appear in contracts.
Please keep in mind that although the parties should understand the contract, only an experienced attorney should draft the actual document.
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