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Monday, September 03, 2001
Contract Review: Checking For Key Contract Elements
by Russell O. Wheeler Esq.
Contracts are the glue which bind businesses selling goods and services to the customers who buy them. Small businesses relying on this glue often use the same form contract for years and never review its language with a critical eye until a dispute arises. By that time, it’s too late and dealing with the consequences is at a very expensive stage. A few minutes invested now to do a quick review of your basic business contract could save a great deal of time, aggravation and money, in the future.
The Basic Elements
Start evaluating your contract by doing a quick check of the critical basic elements. In most states, for a written contract to be enforceable, it must at a minimum:
- Identify the Parties. Many form contracts used by small businesses include spaces for the names of the contracting parties, but in a harried workplace, these blocks don’t always get filled in. Avoiding a loss in a contract dispute because the parties to the contract have not been identified should be a "no brainer." Simply make sure that you and your employees ALWAYS (legibly, if done by hand) insert the names of the parties in the appropriate spaces on the contract.
- Describe the Subject Matter. A contract must adequately describe the subject matter of the agreement. In a contract for services, for in stance, the contract should state that the contract is for the performance of services and those services should be clearly described. How ever, if the contract is for the sale of goods, it should clearly indicate that the parties have agreed to a sale of goods. Making it clear that the parties understood and agreed in advance that the contract was for the sale of goods, not services, or vice versa, will make sure that the correct body of law is applied in the event of a dispute. For example, the Uniform Commercial Code (adopted in some form by all states and known as the UCC) applies only to the sale of goods. All other types of contracts are generally governed by the more imprecise and varied statutory and common law of each state. In some cases, it is not always clear whether the contract is for the sale of goods or services. If there is any doubt, you should consult an attorney to determine how to characterize the description of the subject matter of your contract.
- State the Material Terms. Every contract must state the material terms and conditions of the contract. Under the Uniform Commercial Code the only material term necessary for an enforceable contract is a term stating the quantity of goods to be sold. In the event of a dispute, the Uniform Commercial Code permits a court to fill in the unstated or missing terms with what the court deems to be a reasonable price, quality, color, delivery date, interest rate, etc.
- Include a Signature. Every written contract must be signed by the party to be charged in the event of a breach. What this means is that if the seller eventually requires enforcement of a contract against a buyer, the contract must have been signed by the buyer. Conversely, if the buyer wants to force a seller to comply with the terms of a contract, the contract must bear the seller’s signature. A signature by the buyer of goods or services is critical evidence that he or she agreed to the terms of the contract and intended to be bound by them. Most pre-printed form contracts provide the necessary spaces for signatures.
Fine Tuning
After checking your contract for the basic elements, consider some of the following more advanced touches to tweak your contract into better form:
- Integration or Merger Clause. Does the contract contain some language to the effect that the terms contained in the written contract are the only terms agreed to between the parties? Including such language can preclude a party, in the event of a dispute, from arguing that additional terms were agreed to orally, or by some other means, at the time the contract was formed. The language could be as simple as stating “This Agreement constitutes the sole agreement of the parties.”
- Choice of Law Clause. Specifying in advance, within the body of the agreement itself, which state’s law will be used in the event of a dispute is a prudent move, for businesses with customers in more than one state. Litigating the same contract in different states under each state’s unique body of contract law can produce widely differing results. By insuring that only a single state’s law is applied, the drafting party can know in advance with some degree of confidence how certain disputes may be resolved. A typical choice of law clause might say: “This Agreement shall be construed and interpreted in accordance with the laws of the State of Oklahoma.”
- Arbitration Clause. It is possible to keep contract disputes from going to court at all by including language in the contract requiring the parties to submit any disputes to arbitration. Arbitration is usually much less expensive and faster than traditional litigation. An arbitration clause in a contract might say: “Any controversy or claim arising out of or relating to this Agreement shall be settled by arbitration in Oklahoma City, Oklahoma, by and in accordance with the Rules of the American Arbitration Association.”
Form contracts are critical tools for any business which buys or sells goods or services. They should be reviewed periodically to make sure they comply with the law and provide the drafter with the terms it needs to do business. Consult with an attorney before adding or changing any language in your existing contracts./
Mr. Wheeler is an attorney in private practice in Oklahoma City and is an award winning legal author. He has a Juris Doctor degree from the University of Oklahoma College of Law, and a Master of Arts in Management from Webster University.
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