Corporate Law: Seek professional advice on corporate contracts

Corporations and other business entities enter into contractual agreements every day. Some of these agreements are written and some are verbal. Contracts for the sale of goods for more than $500, contracts relating to transfer of interests in real property, and promises that cannot be performed within one year are among those that must be in writing.

The overwhelming majority of all contracts, however, do not by law have to be in writing to be enforceable. While oral contracts are often legal, it is usually best to memorialize in writing any promises that are either long-term or substantial in nature.

The following elements are found in most commercial contracts and agreements:

The parties

An agreement should clearly state who the parties are to the contract. Each side promises to do something in exchange for the promise of the other party. If a corporation is making the promise, an officer will usually sign the agreement.

There may be a corporate resolution of the board of directors authorizing an officer, such as the president, to enter into the agreement. One or more members, depending on the provisions in the operating agreement of the entity, must sign the promise of a limited liability company.

Consideration

Each party to a contract makes a promise to the other. The parties may negotiate the terms of the agreement in full before drawing up a contract of their understanding.

Sometimes, however, one or more offers and counter-offers may be presented in writing. If a party receives an offer, contract formation takes place only if it is accepted without change.

Once a contract becomes binding, the agreement may only (usually) be amended by a written instrument signed by all parties. Thus, the more specific and less ambiguous the agreement, the greater the enforceability of the contract.

Courts generally will not listen to oral testimony of the parties if the contract clearly covers the issue in question. Only if an issue is not addressed or is addressed in an ambiguous manner will the court consider evidence beyond the four corners of the document.

Remedies for breach

If a party does not fulfill its obligations, that party is said to be in breach of the agreement. Contracts often state which remedies are available to a non-breaching party.

A contract may require a party in breach to pay a certain sum of money to the other party. Or the agreement may simply state that each party may pursue any remedy available in law or in equity, including the remedy of specific performance.

Representations and warranties

A business contract often contains representations and warranties of the parties. For example, on the sale of a business, the seller may represent that all the information provided to the buyer is true and accurate and that the seller has the right to enter into the agreement. A buyer also may warrant certain things to the seller.

Before signing an important agreement, and before making an offer to another party, it is best to consult with professional advisers. You should be confident that legal and tax issues have been resolved and that the instrument contains promises that you are capable of performing fully.

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law and taxation, and estate planning.)