The Legal Zone (S1:E1): Contracts 101

Transcript

Introduction

Hi, good morning. I'm Regina Campbell, and I'm proud to bring The Legal Zone to you from The Campbell Law Group. This is Season 1, Episode 1, and we're going to be talking about Contracts 101. So this should be really exciting, guys. I'm just going to give you a brief primer on contracts, and something that every business owner and person should know about contracts.

Put it in writing

Number one, contracts should always be in writing. I know that may seem obvious, but you'll be surprised how often contracts are not in writing, or they're pieced together with texts. He said this, and so-and-so said this, and if you put it all together, this is our contract. That doesn't mean it's actually a less effective contract or not a legally binding contract. In most states, all contracts are honored and recognized, except when it deals with land, or lending money, or something related to estates, which has to have certain formalities of execution. But for the most part, contracts are basically an offer and acceptance of certain terms.

Essential terms

So aside from number one, the contract should be in writing, number two, the terms need to be very, very clear. If you're talking to a party or another business, and you've agreed to certain terms, "Okay, I'll sell you 100 widgets for $10 a widget," those are some of the essential terms that need to be in the contract. And that brings us to number two, which is essential terms. That might not just include a price and an understanding of how many products or services you're purchasing.

It should also include information such as when the delivery is going to be, and who takes responsibility for delivery upon arrival. Is it at a location, at a dock, in which case the liability shifts to the other person to pick it up in time? What are the terms as far as who pays for delivery? What happens in the event of refunds? These are some examples, depending on the type of contract you have, of what may be essential terms.

So step number one, of course, is getting it in writing. That's very important, and we just discussed that. Step number two is getting the essential terms in place. Most people think of the essential terms as what you might have agreed to as far as the price of the goods and how many goods you want. Those are normally considered essential terms, but there may be other essential terms depending on the type of contract you have.

So for instance, you might indicate that you want to buy 100 widgets at $10 a widget, but some of the other essential terms may be when the payment is due. Is payment due 50-50, 50% now and 50% upon delivery? Is it due net 30 days? Also, with a goods contract, some of the essential terms might be who's going to deliver the goods, and when they're expected to be delivered. These are some examples of additional terms that may be necessary, that are actually part of the essential terms that should be included in a contract.

Contracts are basically bred from a necessity of what's going on in the deals. As we indicated in the first step, number one, a contract should be in writing. Number two, you should ensure that you include the essential terms of the contract in writing. Some examples of essential terms might be what you're purchasing, 100 widgets, and at what price you're purchasing the widgets.

But let's give an example of what might be other essential terms that you need to know. In a goods contract, for instance, it might be when you expect payment. Is it 50% now and 50% upon delivery? Is it net 30 days? Then you're going to be running on credit, which is something to consider when you're making the arrangement, to make sure you understand that you're waiting for payment. And particularly with a goods contract, you may want to make sure you're talking about when delivery is expected. When are the products supposed to be delivered?

It may seem basic, but you'll be surprised how many times contracts, particularly goods contracts, do not include these essential terms. Now, not including certain essential terms may not necessarily be fatal to enforcement of a contract, but it's not recommended. Let's put it that way. If a court can tell more or less what you intended in the basics, the offer and price, so to speak, or the terms as far as the wages and the price, sometimes the courts can fill in the gaps. But it's an extremely expensive process. So it's recommended that it's done in the contract, so it's clear what the parties intended.

When you're dealing with service contracts, for instance, we have other examples of essential terms. What services are included? What services are not included? Once again, when is payment expected? What is the expectation of the parties? And if there's anything specifically material, anything the parties are relying on, that should become an essential term that's clearly defined in the contract.

Governing law and jurisdiction

Number three, you may also want to consider what state law applies as far as governing the contract. That depends on whether you're dealing across state lines, and a lot of us are doing business on the internet. It's better to put a venue clause, and potentially a personal jurisdiction clause, in these contracts. From a personal and a commercial point of view, you'll often see "Florida law applies," and "The parties agree to jurisdiction within the state of Florida in the event of a dispute."

These are things that may be important, depending on the type of contract you're entering into. Some of these contracts, for instance the purchase of a real estate property, are a lot of times going to be governed by the state where the property is located, or specifically the county where it's located. So for some of those, this doesn't have such importance, but in other types of contracts, these can be important elements.

Planning for a breach

One of the other things to consider: we don't always want to get into a contract thinking, "Well, what happens if it goes wrong?" Obviously, we're all hoping when we get into a contract that it's going to go right. But unfortunately, there is that side of the equation. It's a possibility, and it should be covered in the contract. What happens in the event that someone does not comply? What are the remedies for a breach of the contract?

Do you want to call something a material breach right off the bat? For instance, let's say the goods are not delivered by the 30th day. Maybe you have to turn around and sell them to somebody else, and it's an important element that you have them. Time may be of the essence to you. So you may want to say that the contract is potentially canceled, or considered terminated, if it's not delivered on the 30th day, to give you an example from the original widgets essential terms.

So I think you can probably see that building a contract is like building a foundation. It describes what each one of you thought goes into this house, or into this project. So whether it's a personal contract, for consumer goods, or for commercial reasons, you can see how these different elements are very important.

Attorney fees

Also very important may be the expectation of attorney fees. Once again, I know we don't always try to think about things in terms of them not going well, but it is a reality. For instance, in the state of Florida, if someone breaches the contract, you're not entitled to attorney fees unless it's permitted by statute or it's in the contract.

So someone can breach a contract that might have a value of, let's say, $30,000, and you have to take them to court to enforce the contract. Unfortunately, if there's no attorney fees provision, you might spend $10,000 or $15,000 enforcing the contract to be able to get your 30 back. And again, that's assuming you win and you can actually execute on your judgment and get the funds back. So I find it's one of the most important elements to have: an attorney fees provision that requires that, in the event the contract has to be enforced, or there are issues with interpretation or anything of that nature, the prevailing party be entitled to attorney fees.

And again, we can go further into depth with each one of these elements, but I'm just giving you an overview of the type of provisions that should be in a contract, and why, and the basic elements at a minimum.

Authority to sign and international deals

Of course, we also want to talk about who's signing this contract: making sure that the party signing it actually has authority to bind that company, or has authority to act on behalf of the person that's entering into a legally binding contract, whether it's for services or goods.

You also want to take into consideration if you're doing any international transactions. That can be rather tricky. You may want to use letters of credit, or other types of forms, to ensure payment, in addition to enforceability. What type of law do you choose? Is it that country's law, for instance, depending on where the goods are coming from or where the services are occurring? Is that country going to honor the contract, or these rules? These are different types of things you want to think about.

Family contracts and the four corners of the agreement

This actually also applies in a family setting, even if some of us don't think about it in that manner. Family contracts, such as prenups, postnups and marital settlement agreements, are all subject to contract law. Just to understand a little bit: most courts are required to enforce a contract based on what they call the four corners of the agreement. So unless the agreement, or one of its provisions, is ambiguous in some manner, the court is not allowed to go outside the contract to look and see what the parties may or may not have agreed to. If it's unambiguous, they're required to stay within the four corners. So once again, this is another example of why you need to make sure the essential elements and terms are in your contract, and that they're spelled out clearly.

Keep it clear and concise

I guess one of the other terms I would say, for number four, would be: make sure your contract is as clear and concise as it can be. Of course, hindsight is 20/20. You see things more clearly in hindsight than you do a lot of times when you're doing the contract at the moment. But it's very important to make sure you understand what you're writing and that it's clear.

Often in contracts I will use examples. For instance, if we're doing an equation to figure out a termination provision, or a pricing that might be a little bit more complicated than just a per-unit price, I might give an example: "In the event this occurs, this is how the parties intend for this to be interpreted," and I give an example. These are little tips to help you avoid what you agreed to not being enacted or enforced in the way that you bargained.

And it's very important, because if it's not clear, or the contract doesn't have everything you need, a lot of times you're going to end up with a circumstance you did not count on, or unfortunately, in some cases, people can take advantage of it. In the example I was giving you about an ambiguous term: if there's an ambiguous term, the courts can potentially go outside the four corners and use what they call parol evidence, to review maybe the parties' emails that contain additional terms or context that isn't contained in the agreement. But this is not permitted in the event that you have an unambiguous term, even if you didn't mean to leave that provision unclarified or unfixed in the agreement. Most of the time, the agreement is going to be upheld in the way that it's written, "expressly written," as the courts would say.

Closing

So here are a couple of tips for when you're thinking of contracts, whether you're writing them or reading them. I know we're all in both positions, so to speak. Hopefully this is helpful, and maybe in a subsequent series we'll drill down a little bit more into, for instance, merger clauses, other terms that go with manufacturing or distribution agreements, and the essential terms that exist in those contracts and other types of contracts. But this is a little primer. Hopefully it's helpful.

We want to thank everyone for joining us on our first Season 1, Episode 1 of The Legal Zone with Regina Campbell, brought to you by The Campbell Law Group. We hope you enjoyed this, and we hope to bring you better content, well, not better, but more content in the future that might be helpful for you. Thank you for joining us for our first podcast, Season 1, Episode 1, Contracts 101. We hope you enjoyed it. We would like you to subscribe to YouTube and follow us on all our social media accounts, and we look forward to seeing you on our next podcast. Thank you so much.