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Minimize and Manage Your Risk with Written Contracts

Michael Gove

Michael Gove

Written contracts. Too often, they are an overly formal, wordy, inconvenient intrusion into the tenuous relationship between a business and its customer, and they can be seen as making it more difficult for a business to function. But, much like how paying years of homeowners’ insurance makes sense if you have a house fire, using written contracts makes sense if you have a dispute.
A written contract is simply a documented agreement between two or more parties for the performance or lack of performance of some action. Written contracts will also usually include promises (covenants), representations, and warranties. Contracts can capture the details of all types of business transactions, from simple consumer purchases to billion-dollar corporate transactions. In transactions like real-estate or automotive purchases, parties can use written agreements to make, accept, or decline offers.
Written contracts can appear in many forms, from 100-page formal documents to the front and back of an invoice, or an acknowledgment of a proposal. When a contract is well-drafted, it will spell out the entire arrangement between the parties, keeping each party informed and tied to the terms of the agreement. For convenience, many businesses have standard contracts used with all their customers and clients. These are then tailored to specific jobs by filling in blank spaces or providing attachments. Some common elements of written contracts include the following:
• Scope of Work to be Performed. The most common aspect of a written contract is a description of the services or work that will be provided or performed. This will often include language regarding the duration of the contract, the materials or methods to be used, and the autonomy granted to those completing the work.
• Payment for the Work Performed. The other most common element of a written contract is a clause calling for some form of payment or benefit to the person or business providing the service. While often described in terms of money, payment can be made in many ways, including by providing services in return, undertaking other obligations, or making promises to take some future act. In fact, if an agreement does not have some benefit to both parties, it lacks ‘consideration’ and will be unenforceable.
• Warranties. These constitute a way for a party  to  guarantee its product or services and limit its liability. By drafting warranties so that they are specifically and narrowly tailored, or so that express exceptions to warranties are clearly and conspicuously stated, a business can effectively put its customers on notice as to their rights if the product or service is unsatisfactory.
• Remedies. Written contracts can be very helpful when the other party breaches its obligations.  Oftentimes there is language regarding remedies which the non-breaching party will be entitled to if there is a breach. While common and statutory law may contain remedies for specific situations, a written contract can spell out or include other remedies, including the forfeiture of deposits made, the applicability of legal proceedings, or alternative ways in which the breaching party can meet its obligations.
• Costs and Termination. By shifting the burden to customers, language regarding the ability of the business to charge interest on unpaid bills, or to include costs and fees related to the collection of past-due accounts, can help keep billing delinquencies in check. Written contracts will also contain provisions by which the parties can terminate the contract, though not always without penalty.
When developing a written contract, you should use clear language and define any terms which may be vague or subject to dispute. While it may lead to longer documents, you should also try to cover as many situations as are likely to arise.
Statutes and regulations specific to an industry may require additional terms or provisions in your written contract. For instance, contracts for home-improvement services must contain language regarding a homeowner’s right to cancel the contract within a certain period of time.  Because of this, you should always have an attorney draft or review any written contract you intend to use in your business. Additionally, when presented with a contract to sign, you should consider having an attorney review it to ensure it is legally binding, that the terms do not violate any statutes, and that the individuals signing for the other party are authorized to do so.
The thought of using or executing a written contract can be intimidating, but their ability to define the terms of an agreement allows a party to undertake their obligations with confidence that the other party will fulfill theirs.

Michael Gove is an associate with Cooley, Shrair P.C. focusing his practice on assisting clients in the areas of corporate/business, banking, and bankruptcy law; (413) 735-8037; [email protected]
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