5 Things to Consider When Signing a Contract
In the course of our business and personal life, we are confronted with dozens — if not hundreds — of contracts per year
In the course of our business and personal life, we are confronted with dozens — if not hundreds — of contracts per year. You may not even realize it through the course of your busy day. However, every time you make a purchase with a credit card, download a new App to your phone, or order a service or product for your business, you are entering into a contract.
The question is: what do those contracts look like?
According to the oft-referenced Black’s Law Dictionary, a “contract or agreement is either where a promise is made on one side and assented to on the other; or where two or more persons enter into engagement with each other by a promise on either side.”
In short, a contract is an exchange of one or more promises or obligations between two or more parties. The elements of a contract (as any law student will begrudgingly tell you) are: (1) offer; (2) acceptance; (3) consideration; and (in certain Florida District Courts of Appeal) (4) sufficient specification of essential terms.
To make things more complicated, contracts can be either verbal or written, and either express or implied. An implied contract can be created by virtue of the parties mere conduct, or even by legal construction of a judge (this is called a contract “implied in law”).
Contracts Of Adhesion
For the purposes of this article, we’re going to focus solely on written, express contracts — the kind printed on your credit card receipt, and included in the end-user license agreement you have to click through in order to use software.
Oftentimes we are confronted with what are called ‘contracts of adhesion’ — these are ‘take it or leave it’ scenarios where you either accept the terms, or you don’t use the product or service — there is no room for bargaining. This is what we are agreeing to when we sign up for and use a credit card. We don’t have a sit-down negotiation with American Express; we just use their card, or we don’t. It’s that simple. And, thanks to that pesky ‘Duty to Read’ rule, as soon as we accept those terms and conditions (whether by clicking a box on a webpage, or beginning to use the card), we are considered to have agreed to all of the fine print we likely never even bothered to read.
This is often unavoidable for consumers. However, when you are negotiating a contract with a local vendor, business owner (a ‘b2b’ transaction), partner, or client, it is crucial that both parties understand and specify exactly what they are agreeing to.
Without further ado, here are 5 things you should seriously consider when signing or drafting a contract:
1. Are The Parties Clearly Identified?
This seems so simple that you may be wondering why we’ve included it. However, we have seen more instances than we care to count of business owners who overlook one simple fact when signing a contract: If you don’t clearly enter into the contract in the name of your business, you may be actually signing a contract in your personal capacity. This means that the “corporate shield” liability protection that you count on to separate you from your business may be completely thrown out the window. Therefore, when drafting or signing a contract, take a moment to make sure that the parties are clearly identified. For the avoidance of doubt, it’s always a good idea to print your title next to your signature. For instance: “/s/ John Doe, as President of John Doe, Inc.”
2. What Happens If One (Or All) Of The Parties Don’t Perform?
It happens all the time: the parties to a contract know each other; they’ve gotten along for years (perhaps even decades), and they feel almost embarrassed to have to sign a written contract between each other. They figure, ‘what’s the point of making things complicated? We both know we’ll just work it out if something bad happens.’ Sadly, our court systems are full of protracted, messy, and expensive litigation that all began with this flawed reasoning.
The truth is, if you are close with the other party with whom you are contracting, you owe it to yourselves — and your relationship — to clearly identify what you expect from one another. That means laying out the parties’ obligations with specificity, but also outlining remedies and dispute resolution procedures. For instance — what happens if a breach or threatened breach of a provision would result in the wrongful disclosure of trade secrets? Injunctive relief may be appropriate to “stop the bleeding,” and entitlement to it should be agreed upon in the contract. Further, if the parties cannot informally resolve their differences, will they resort to litigation? In an effort to save time and money, why not include a mandatory pre-suit mediation provision? Or, if you want to stay out of the public eye, perhaps mandatory arbitration may be more appropriate.
3. What Makes Up Your Contract?
There are two concepts that are helpful when drafting a contract: integration and incorporation.
In plain English, integration (also referred to as a ‘merger’ clause, or simply an ‘entire agreement’ provision) is a contractual provision basically saying: “This document represents the entire form of our agreement on this subject; there are no other agreements about this subject, either verbal or written, and all other conversations or agreements we’ve had on this subject are superseded.” An integration clause may also state that neither party has relied upon any representations outside of the four corners of the document in executing the contract. The purpose of an integration clause is to make clear that the only agreement between the parties is the current document being signed — not the conversation that took place prior, or the exchange of emails that took place a month ago.
When drafting a contract, sometimes there have been other agreements between the parties that you do want carried forward into this one. Or, there may be a voluminous document, exhibit, or other contract that you want restated in the current contract, without actually having to re-type it into the new contract. This is where the idea of incorporation comes into play. A document can ‘incorporate’ (either by reference or by attachment) an existing document, exhibit, or other contract into the current document simply by stating so. Here’s a basic example of what this looks like in a contract: “This Employment Agreement hereby incorporates by reference the Confidentiality Agreement executed between John Doe and Sally Sue on October 4, 2019 in its entirety.”
The use of incorporation saves time, but it can also cause a lot of problems if used incorrectly. For instance, a previous contract may contain an unfavorable or unworkable provision. If you incorporate the entire previous contract into a new one, you’ve now carried forward that problematic provision into the new contract. To avoid this, carefully consider whether you should incorporate only a portion of an existing document into a new contract.
4. If One Of The Parties Misbehave, Who Has To Pay?
There are two very simple things that can be added to almost every contract in order to address this question: (1) indemnification, and (2) a ‘prevailing party’ provision.
In its most basic form, indemnification is an obligation of Party A to make good (or to cover) the losses incurred by Party B as a result Party A’s actions (or negligence). This can be expanded out to include the actions (or negligence) of Party A’s employees, contractors, suppliers, agents, officers, subcontractors, vendors…the list goes on.
Why would you want to use indemnification in your contract? Because you may get sued (or incur damages) due to the fault of the other party. In order to protect yourself, you can obligate the other party to “take the heat” for you if you get sued (or incur damages) for something that they do.
In the United States, we have a doctrine concerning legal fees called the ‘American Rule.’ In short, the American Rule states that each party is responsible for paying its own attorney’s fees and costs when they pursue (or defend) litigation. In Florida, there are a few general exceptions to the American Rule: (1) when a statute or administrative rule provides that a party can recover their fees and costs from the other party (such as through Sections 57.105 or 713.29, Florida Statutes); (2) through operation of a Proposal for Settlement under Florida Rules of Civil Procedure; (3) at the discretion of a judge or arbitrator; or (4) by agreeing to it in a contract.
In a contract, you can specifically state that if a party must file suit against the other party(ies), and they prevail, they can then recover their attorney’s fees and costs from the non-prevailing party(ies). Aside from the extraordinary monetary implications that come with using this type of provision, it also often prompts settlement of disputes in which one party has a questionable claim or defense. The parties know that, should they lose, not only with they be liable for the damages (or other form of relief) requested by the other side, but they will also have to fork over money to pay for the other side’s attorney’s fees and court costs.
5. Is Your Contract Enforceable?
At the beginning of this article we discussed the basic elements of a contract. Remember that, in order to have an enforceable contract, you must establish all of these elements. If you miss one of them, you risk not being able to actually enforce the contract should you need to. In addition, you cannot violate law or public policy in a private contract. That means that there are just some things that you can’t agree to (such as performing something that would be unlawful). Be careful to make sure that your contract is enforceable before you sign it. By way of example, due to the operation of section 489.128, Florida Statutes, a contract entered into by an unlicensed contractor for the performance of work that requires a license, is unenforceable by the contractor.
Contracts can be complex. Navigating them doesn’t have to be. If our firm can be of assistance to you or your business, please give us a call today. We’re here to help.