Let's talk about preparing contracts. As you know, a contract is a voluntary agreement between two or more parties that's legally enforceable. Now, in the process of conducting your business, you're going to have several contracts that you're going to be entering into. In this lesson, we're going to talk about the process for entering into contracts. We're going to talk about different forms that contracts can take, and then we're going to go through a litany of key terms that you want to keep in mind for any agreement that you are negotiating or entering into with a third party. Then finally, we'll say a few words about how bankruptcy can impact your contracts. Now, contracts are just a voluntary agreement between two parties. It can be oral, written, or implied. Even if the contract is written, it can take several forms. You can have a long form agreement which essentially lays out all aspects of the parties, negotiations, and agreement in excruciating detail. You can have standard contracts which are familiar with leases, like loan agreements. You also can have a short form contract, which can be as simple as a paragraph that just outlines the key elements of the parties agreement, the essential terms of the agreement. In addition, you may have additional materials that are part of the contract, for example, attachments. The subject matter of those attachments become part of the larger body of the contract. The same with addenda, anything that's added to the contract ultimately becomes part of the contract. Now, let's go through several key terms that you want to consider as you're entering into any agreement. Now, all these terms may not be relevant to any one particular agreement, but each of these is something that you want to keep in mind as you're negotiating whatever contract with a third party. The first is the parties. Seems simple enough, but you want to make sure it's clear in the agreement, who is contracting with who. That way, you can enforce the agreement if something goes wrong. That way, you know who is responsible for what. Secondly, signatures. Because you're going to be entering into these contracts on behalf of your business, you want to make sure you have a corporate signature. Not you as an individual or an employee of yours as an individual. It must be a corporate signature. Now, a corporate signature requires an individual signature plus their title and the name of the corporation, so that it's clear that this person is acting on behalf of the corporation and not in their individual capacity. Now, if you're living in a distributed world, you may have people who are not geographically close. In order to get signatures on a contract, you may have counterparts. One person may sign one part of the document and someone else signs a different part of the document. If that is the case, you want to make sure that the agreement itself makes a provision for the ability of counterparts. You should have language in the contract that says counterparts are part of the overall agreement. Sometimes you may want to consider having some language on the contract that just shows that the parties intend to enter into agreement. As you know, one of the requirements of a contract is that it's a voluntary agreement. That both sides are intending to enter into a contract with each other, that there's a meeting of the minds. You can establish that by having words in your contract that essentially say the parties in this agreement, they intend to enter into the agreement under the terms that are outlined below. That's an easy way to accomplish this aspect of the contract analysis. Then you're going to have the date. Dates are very important. Dates around the date the contract is signed, the date a performance is to be conducted under the contract. You want to make sure that dates that are key to the agreement are clearly outlined in the contract. Representations and warranties. If there are any statements that each party needs to make to make sure that it's clear where they're coming from or their warranties or guarantees that a party wants to include in the agreement, those terms should be written in the contract. Similarly, any conditions, pricing and payment terms, not only how much is going to be paid, but how that payment is to be made, the timing and date of performance, as we said, to the extent there is a breach of the contract, what damages may be available to the non-breaching party. To the extent, you can include that in the contract, it will make it much easier for you on the back end if there's any dispute about what damages should be available. You should also have terms around how long the contract should be ineffective and to the extent a party has the ability to renew the contract, or how and when can a party terminate the contract. Also, if there's ever a dispute about the contract, you should have terms around dispute resolution. Where will a dispute be adjudicated? What country, what state, what type of court, is it arbitration? All of those issues are issues that you want to make sure that you take into account as you're entering into an agreement. Other considerations that you want to have in mind as you're negotiating or if you're entering into a contract. First, is the subject matter of this contract legal, or is in other words, void? As you know, if it's an illegal purpose for a contract, then the contractor is invalid. Is it voluntary? Are both parties coming to the table on their own accord? Are the terms of the contract fair? This is important because even if you sign a contract, there is an area of law that would allow a court later on to disregard the contract if it's so unfair to one of the parties. We use the word unconscionable, if the terms relative bargaining power of the parties are so out of work, and the terms are so unfair, although you think you may have an agreement, that agreement can be disregarded later. Keep that in mind. Are any terms in the contract that are ambiguous, that are unclear inside the agreement? Ambiguous terms can cause problems for you later when parties are disputing exactly what the contract means. Make sure that there are no mistakes, no mistakes of fact, no mistakes of judgment so that both parties absolutely understand all the relevant facts coming into signing the agreement. Then how are you going to allocate the risk? The idea of a contract is it brings some predictability and some clarity to the arrangement with this third party. Who takes on what risk? Those types of things you want to keep in mind as you're thinking about the terms of your contract. Now let's talk about bankruptcy. This is an area of law that you want to make sure you have a good understanding of, because sometimes it can be frustrating if a vendor or supplier that you're dealing with ultimately files for bankruptcy. But also as an entrepreneur, you may be in a position where you need to file for bankruptcy and you should understand what rights and obligations you may have if you're on that end of the equation. First of all, if a party files for bankruptcy, they are automatically afforded a stay, so everything stops when bankruptcy is filed. As a creditor or someone who is owed something from the party that filed bankruptcy, you have to go to court and get permission before you can do anything. You can't foreclose on a loan or a property. You can't stop performing a contract that you have with this party, apps at getting court permission. Any termination clauses tied to bankruptcy are unenforceable. Because of this bankruptcy law, you can't agree with someone that, hey look, if you file for bankruptcy, the contract is terminated. The law doesn't allow you to do that. Also if someone files for bankruptcy, that party can decide in bankruptcy which contracts they want to maintain. If you're on the other side of that equation and a vendor or supplier that you're dealing with files for bankruptcy, they may decide that they're not going to maintain the contract with you, and the law allows them to do that under the umbrella of bankruptcy. As you're entering into agreements, you want to keep in mind the relative strength of the businesses you're doing business with, because bankruptcy can have some serious implications on the contracts that you're entering into. Just as a matter of summary, contracts are designed to bring predictability, clarity, and accountability to your agreements with other parties. There's no one size fit all form for a contract. They could be a long form agreements standard contracts, short forms. There's a myriad of ways that you can structure a contract and there are key terms that you want to keep in mind for any contract that you are entering into. Then remember, bankruptcy law oftentimes trump contracts. You want to have that in mind as you're entering into an agreement with a third party, keep in mind that bankruptcy can sometimes impair the obligations under that contract.
