Protect Yourself: Know Your Contract Basics
You’re not in business very long before you’re signing contracts. Agreements with landlords, vendors, freelancers, employees, even simple sales – whether you realize it or not, you’re constantly making contracts. Remarkably, some people are willing to sign their name without knowing exactly what is written in the agreement.
We’ve seen careless contract blunders like:
- Misspelled names
- Incorrect addresses
- Missing or incorrect start and termination dates
- Unclear terms
Since the whole point of a contract is to be legally binding, those are pretty dangerous gambles.
There are many different types of contracts. In this article we’ll take a look at sales and service contracts. In future posts, we’ll explore other types of contracts, including contracts in corporate governance.
First, you have every right to rewrite or rephrase a contract. You should feel free to alter a realtor’s or product supplier’s standard template. Set – or at least propose – your own terms for the particular situation. These agreements are there to benefit and protect you.
And they need to be enforceable. That’s where contract law comes in, says Ann F. Thomas, director of’s Graduate Tax Program.
When a dispute arises – for example, if one party disregards part of the contract – the aggrieved party can invoke contract law to right the perceived wrong. To do this, though, you need to have a binding contract to begin with, Thomas advises.
- It should be in writing
- The parties involved should be clear
- The terms should be clear: What’s expected (money, goods, services); if applicable, when it begins and ends
- Both parties need to agree
- Both parties keep a copy
“The [contract] does not have to be a formal document or even on paper. An exchange of emails is generally sufficient. But whatever the form it takes, [it] must be signed by the party against whom you want to enforce it,” says Thomas. “If you don’t understand something, ask about it.”
Every sale or order for a sale is a contract of sorts. If an order is placed by telephone, a written acknowledgment of some kind is usually considered sufficient to be enforceable as a contract. If the contract concerns the purchase or sale of goods worth $500 or more, the Uniform Commercial Code generally requires that it be in writing to be enforceable, Thomas says.
When things go wrong
If all goes well, the contract can pretty much be put out of mind. Both sides are satisfied, so there’s no need to revisit it. But, as we all know, things don’t always go well. This is when the language in your contract is vital.
“Even with the clearest and most straightforward contracts, things can go wrong,” Thomas says. Your supplier may run out of the fabric you ordered or deliver the wrong color, or decide to sell it to someone else at a higher price.
“Trying to work things out with your supplier should be the first approach. But buyers of goods also have the right to replace undelivered or unacceptable goods and then seek the additional cost as damages from the first supplier. This self-help remedy is authorized by the, adopted in all 50 states. It applies to all transactions in goods, at whatever value.”
The UCC contains a great deal of material that is important to businesses in addition to contract guidelines. Although, it is valid throughout the United States and applies to interstate commerce as well as transactions within the same state.
When to call a lawyer
The crucial time to get contract law advice is at the outset, when you are setting up your business. “It is much more cost effective to start with order forms, receipts, and website text that will protect your interests than having to learn from expensive mistakes,” Thomas says.
Here are some examples Thomas gives:
- Order forms and receipts: These documents present the opportunity to set the terms of the contract with your buyers. You may want to exclude some of the warranties that would otherwise be included as a matter of law under the UCC. You may want to limit the time for exchange or refund. You may want to establish payment terms, such as payable in 30 days with interest accruing after that.
- Collecting sales tax: With a sales tax, the business typically adds the tax amount on the receipt and charges the customer the total of the price and the tax. If you don’t collect the tax from the customer, you will have to pay it yourself.
- Website: Generally, listing prices and items on a public website or in a catalog is not considered an offer by you to sell at the listed price. This means that you have not committed yourself to deliver those goods or services at the listed price to anyone who orders them at any time in the future. When a customer places an order, the seller has the opportunity to accept it or reject it. But an explicit listing along the lines of “first customer gets two tickets for the price of one” may well be considered an offer and could become binding on you as the seller when the first customer makes the purchase.
There could be, however, other language on your website that holds you to a listed price, Thomas warns. Another sticking point could be warranties about the quality of the product and how returns are handled.
Thomas has taught at New York Law School since 1995. In 1999, she organized a symposium for the New York Law School Journal of Human Rights on the subject of “Women, Equity, and Federal Tax Policy: Open Questions“.
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By Mat Probasco