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Mar
08

Contract Basics – A Common Sense Guide for Business Owners

Contracts

Having a basic understanding of contracts law will help you to negotiate your contract more effectively, whether you’re signing a contract for janitorial services for your company or agreeing to use a third party vendor to sell your services.  For transactions of even moderate complexity, it is highly recommended that you consult with a legal professional, since a good negotiator can likely help you to obtain favorable terms which can translate into big bucks for your company.

Here are a few suggestions, in a step-by-step guide, to help you to understand contracting so that you may use that information to your advantage.

1. Objectives.  Does the contract clearly explain the objective of the contract, what you are trying to achieve, the requirements of each party, and clearly state your goal for having a signed agreement.  If you can’t tell, put it down and read it again later for a fresh perspective.

2.
Clearly define all terms.  This sounds simple, but when you read the contract, from a common-sense perspective, make sure all key terms used in the contract are defined, so that there is no question later as to the scope of what is covered.

3.
Dates.  Pay attention to all dates written in the contract.  This includes effective date, termination date, delivery date, even contract date.

4.
Dollars.  Make sure any amounts are clearly stated so as to leave no question on the issue of compensation.  It should be clear what the amounts are and how that ties to the service being paid for.

5.
Anticipate a law suit.  Read the contract with an eye for which clauses could be invoked in case something goes wrong.  Assume the worst.  Here are some clauses that become relevant in case of a dispute:

a. Indemnification clause – this means that one party holds harmless the other; they cannot sue the other party if something goes wrong. (See earlier post on indemnification clauses for a detailed explanation).

b. Confidentiality clause – if the other party will be exposed to information about your company that is confidential, make sure you have this clause that requires that they not share this information, with a punitive measure in case of disclosure.

c. Attorneys Fees – pay attention to which party pays attorneys fees in case of litigation or any dispute.  Ideally, it would be the other party.  Sometimes it’s the party that initiates the suit.  And sometimes it’s just everybody pays their own fees.  Assess your business and consider which structure is best for you.

d. Choice of Venue – read this to find out where you and your attorney would have to go to court in case of a law suit.  For example, if you live in Virginia and the janitorial service that you selected is based in California, it would be to your advantage to have the venue be Virginia.

e.  Arbitration - this requires parties to go to arbitration instead of a court in case of a dispute.  Some arbitration clauses are more detailed than others, and can include which arbitration organization will be used, where arbitration is to occur, and other relevant details.  Consider your business and whether this type of forum works for you.

6. Don’t try to sound like a lawyer.  The best contracts are those written in plain English and understood by both parties. 

7. Number the pages.  Seriously. Make sure it doesn’t look like pages were added on or taken out.  You don’t want a dispute later on about which pages were even part of the contract.

8.
Make sure it’s signed by both parties.  A contract isn’t valid and enforceable without the signature of both parties.

This is just a start.  If any of this is confusing or if during the course of the negotiating process you have questions, contact a professional.  It will be worth it in the end.

Image by Flickr user NobMouse (Creative Commons)

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