Contracts rule everything around me…..dolla dolla bills y’all!!! Wait, maybe that’s not how the song goes….but you feel me, right? Contracts govern a huge portion of our everyday lives from lease and loan agreements to employment contracts and website terms/conditions. Because of this, whether you’re an entrepreneur starting a business or a college student signing your first lease, everyone should know some contract basics. This article will outline the five basic things that every GOOD contract should have. Notice how I emphasized the word “good”? That means if your contract is missing one, some or all of these provisions…RUN! Ok, maybe you don’t have to run but you should definitely reconsider signing the agreement and/or consult an attorney for more advice.
#1. Parties. A party to a contract is the person(s) or entity (company) meant to be bound by its terms. A good contract should clearly define who the parties are. Contracts generally do this by providing several identifying factors for each party including but not limited to: full name (applies to both individuals and businesses) including a DBA (doing business as) name, entity type (this can be a person, corporation, limited liability company, nonprofit corporation…etc.), state of residence, address and/or telephone number. The purpose of clearly defining the parties is to make it clear who is being bound. For example, if your name is John Smith, there are probably millions of John Smiths. The party identifiers should make it clear that the contract is referencing you vs. one of the million other John Smiths roaming the world.
#2. Term. The term is the length of time that the contract is active or valid. The contract term should have a clear beginning and a clear end. The beginning is usually the date the contract is signed, but it may be another date if the contract states otherwise. The end date can also be given as a precise date but that may not always be the case. It may be stated as follows: “thirty days from the effective date.” This means the contract will be active or valid for the 30 days immediately following the beginning date.
When the end date is not stated as a specific day/time, make sure you are clear whether the contract will end “on” a certain date, “by” a certain date or “after” a certain date. Contract end dates that aren’t specific can sometimes be tricky, but you can always include a specific end day/time to alleviate the possibility of any confusion. Regardless of the contract wording, it is important to make sure everyone is clear about when a contract begins and ends. No one wants to be bound forever!
#3. Payment. Every contract MUST include a payment provision. For a contract to be valid there must be consideration exchanged between the parties. This means that each party must receive something of value in exchange for what he/she is giving up. The “thing of value” does not have to be money. It can be some other form of property (tangible or otherwise) services, rights…etc. that the parties deem to be of some value. Regardless of value, each party must give and receive something.
The contract should also include terms governing the nature of the payments such as: amount of payment(s), frequency of payment(s) (one time, weekly, monthly…etc.), date of payment(s), forms of acceptable payment, places (bank account numbers, addresses, wiring instructions…etc.) where payments can be delivered, continued obligations to pay in the event of termination or expiration and penalties for late or missed payments.
#4. Termination. Contract termination is ending a contract prior to the date of expiration (the last day of the contract term). There are many reasons why you may need to end a contract early. Maybe you are no longer happy with your service(s)/good(s) or maybe you can no longer afford your service(s)/good(s). Make sure your contract states if and when you can terminate your contract as well as what steps you need to take to terminate the contract without breaching it. Many contracts require a penalty for terminating a contract early like a “termination” or “cancellation” fee. Whatever the penalties and/or steps are for termination (if any), make sure you are aware of them and make sure they are clearly stated.
#5. Signature. For a contract to be valid, all parties must agree to its terms. The way that we show agreement is through signature. Make sure that all parties sign to ensure a contract’s validity. Also note that: (i) if one of the parties is a minor, a parent or guardian may need to sign the contract as well (not all states require parental signature for all persons under the age of 18) and (ii) if one or both parties are businesses, make sure that the person signing on behalf of the business has the authority to bind it.
Please note: this is not an exhaustive list of important contract terms/provisions and all contracts should be reviewed on an individual basis. However, generally speaking, most good contracts will have the previous provisions included somewhere in them. If your contract is missing any of these provisions or if you are unsure about other terms of an agreement, be sure to consult an attorney for advice.