Contracts can be fantastically complicated, or absolutely simple. But without the essential elements being present, they aren’t binding or enforceable. It might be 100 pages long and have cost you $5,000 to have drawn up, but without the essentials you have no deal.
On Monday, I started a series of blog entries on the 10 essential elements that must go into a contract to make it legal. Today we’re looking at the last three #8, #9 and #10: Clarity, Completeness and Jurisdiction.
Essential Element #8 – Clarity Counts!
When it comes to enforcing a contract, clarity counts. The cloudier it is, the less likely it is to be enforceable. If you’re the one who wrote it, you’re the one who suffers. The court will typically rule against the person who wrote the contract when there is uncertainty to the language.
Essential Element #9 – Be Complete
This element goes hand-in-hand with clarity. What is your deal? How are you going to be paid? If you are doing an installment deal, are the payments monthly, quarterly, yearly, etc.? What about interest? When are payments due? And what happens if someone doesn’t pay? Do you want to have a liquidated damages clause (which is a clause that says, you broke this deal, I figure it cost me $XXX in lost revenues or opportunities; therefore you owe me $XXX for breaking the contract)? How about if you need to a settle a dispute? Do you want to limit arguments to being solved by arbitration or by litigation? Both are expensive – an arbitration can set you back $50,000. But a lawsuit can set you back by millions …
Essential Element #10 – Know Your Jurisdiction
In order to be enforceable, you need to know what jurisdiction your contract is in. Sometimes that’s not as easy as it sounds. For example, when Diane and I contract for work to be done for TaxLoopholes, we have a choice. TaxLoopholes is a company that is based in Arizona, but my company is based in Nevada.
When a court looks at jurisdiction, they look more or less at where the work is being done. So, if a court was to look at our deal, the first impression would be the contract should be enforced under Nevada law. That’s where I am, and I am the one doing the work to fulfill the contract. But as far as Diane is concerned, as TaxLoopholes is based in Arizona and she’s footing the bill, any disputes between us should be mediated or litigated in Arizona. So one of the terms we need to agree to is where our contract will be based.
Now practically speaking, he or she who draws up the contract sets that rule – but if you are on the other side, you can certainly put that up as a negotiation point. Why does it matter? Because there are times when it will benefit you (or another party) to have a contract be in a certain jurisdiction. It may be that collection proceedings are better, or the remedies for breach of contract are higher.
Quickly recapping, the 10 essential elements of a contract are: – Offer – Acceptance – Consideration – Date – Fully-Signed – Parties are properly named – Parties are authorized to sign – Clarity – Completeness – Jurisdiction
In all honesty, there are lots of other things to think about as well. For simple contracts, there are off-the-shelf products that can do the job, but if you’re looking at a bigger deal, or something that is a little complicated, you are always going to be best off getting professional advice from your attorney or legal advisor.