On the Law: Clear communication crucial to good contracts

Most contracts made by businesspeople are oral rather than written. Today, business moves quickly enough that it is impractical to draft a document for each transaction or business relationship.

Some contracts, however, must by law be in writing to be enforceable, and others should be in writing to clarify the intention of the parties entering into the agreement.

More effective business contracts can be created by keeping the following points in mind:

Signees

First, consider who the parties to the agreement should be. If the business is incorporated, a corporate officer should sign the document. If the company is a limited liability company, the members, or the managing member, should sign.

A businessperson would not under normal circumstances want to enter into an agreement in his or her individual capacity, unless of course, the business were a sole proprietorship.

If the owner signs an agreement individually, he himself will be responsible for the promises made in the agreement, rather than the business entity.

Promises

Second, the promises made or received from the other party should be drafted in a clear and precise manner in the document. Many disagreements occur because the obligations of each party were not carefully drafted, and the performance required was ambiguous.

No special language or magic words are usually required to make the promises enforceable, but the promises do have to be understandable. Unadorned, everyday language is often the best way to describe the obligations of the parties.

If each party has to perform some specific action in the agreement, they may wish to state a date or timeframe within which such actions must be done. If no time or date for performance is stated, a court may allow a "reasonable amount of time." But the objective is to stay out of court by drafting the document precisely.

The parties involved in the contract should take care to cover all the bases. Once drafted, a contract controls all the interactions for the subject matter between the parties. Do not assume that because a point was discussed and agreed upon that the agreement does not need to reflect the understanding. If the parties agreed orally on several points, all of those points should be written into the agreement.

Each party may also want to consider what will happen if the other party fails to perform obligations under the agreement. If the other party does not perform, the businessperson may suffer economic damages, especially if he had to spend money in reliance on that party's performing.

At a minimum, the business-person may want to be able to cancel the contract if the obligations are not performed by a reasonable date.

While these contact provisions may help in the event of a default, the parties should not be overly rigid in enforcing them. Events may occur outside of the control of one or another party. If so, either party may be able to allow some reasonable amount of additional time to perform.

Professionals

Finally, important agreements should be drafted by, or at least reviewed by, professional advisers. While an attorney may draft the document, it may be desired to have other professionals work with the attorney.

A businessperson's accountant probably is more familiar with the day-to-day operations of the business than anyone other than the owner and should be involved in the negotiations from the outset.

Some agreements may also have substantial tax consequences or may affect other aspects of business that owners should be aware of. With careful planning, a well-drafted contract may make a business agreement work effectively for all parties.

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