It's a common misconception that contracts have to be wordy, complicated and full of "legalese" to be valid and enforceable. In reality, legal gibberish is neither essential nor helpful; the parties are more likely to know where they stand when the contract uses simple, everyday language. A simple contract is one that follows certain rules for creating a contract. As long as you follow these rules, you can write the contract any way you choose – or not write it at all.
What Is a Simple Contract?
A simple contract is any contract that is not signed as a deed. Contracts that are signed as a deed carry the signature of the parties and the signature of one or more witnesses. Generally, you'll take the contract to a notary public, produce some identification and sign the deed in the notary's presence. The idea is to create a series of legal checks that you are who you say you are. That way, everyone can be sure that the document was signed, witnessed and acknowledged in the manner required by state law.
A simple contract does not follow these formalities. To create a simple contract, the parties only have to sign on the dotted line. There's no special form of language, no requirement for a witness signature and no notarizing. In fact, the rules are so relaxed that you don't even have to write anything down at all. An oral contract or "handshake agreement" is perfectly valid most of the time.
Why Businesses Need Simple Contracts
Businesses use simple contracts because the business world moves quickly. Imagine if you and your customers had to visit a notary every time you needed to sign an agreement – nothing would ever get done. When you consider all the sale contracts, purchase orders, employment agreements, independent contractor agreements, stock purchase agreements, termination agreements, franchise agreements, equipment hire contracts and partnership agreements that a company might enter into in any given month, it's easy to see why simple contracts are essential in the business world.
Requirements for Simple Contracts
Because they're so easy to make, simple contracts are often entered into without much thought or deliberation. To protect the parties, the law requires that the following conditions are met before the contract can be enforced:
Offer and acceptance. One party must make an offer and the other party must accept it. For example, Company A can agree to sell 10,000 wood screws to Company B at the cost of $300. The contract is made when Company B accepts the offer by telling Company A to go ahead with the order. Company A now becomes liable to sell the screws, and Company B becomes liable to pay $300.
If this sounds obvious, there are plenty of scenarios that blur the lines between making a valid contract and holding a preliminary discussion. If Company B says, "we'll take the screws but for $275," or, "the price sounds great, but we need the screws in two different sizes," then no contract is made. The parties are still haggling over the terms.
Valuable consideration. Consideration is the legal word for a "thing of value" such as cash, labor or a promise to do something in the future. For a simple contract to be valid, both parties must exchange something of value; otherwise, it's just one person making a one-sided promise. Returning to the example of the wood screws, it is clear that both parties are giving consideration: Company B is promising to pay the money if Company A promises to supply the product. Another example is a job contract where you promise to provide your time and labor in return for a monthly salary.
Intention to create legal relations: Anyone can make an agreement with somebody but what converts that agreement into a contract is the intention to create legal relations. When you write and sign a contract, your intention to create a binding agreement will be clear. Oral contracts, by contrast, might need some additional evidence that you intended to make a legal arrangement such as an exchange of emails discussing the contract terms.
Simple Contract Outline
There are no hard-and-fast rules for laying out a business contract. You can cover all the bases by including the following terms:
Date and parties. Begin your contract by writing a space for the date – you can leave this blank until the contract is signed. Then, list the full legal names and addresses of the parties involved in the contract so it's clear who is responsible for performing the contract terms. Where a party is a business entity, write the name of the organization with the correct "LLC" or "Inc." suffix.
Words of agreement: Now, let everyone know that the specific contract terms will follow.
This agreement is made on the day of 2018 between: 1. ABC Inc., a company registered under the laws of the state of Delaware whose principal place of business is at 1 Town Street, Townsville, Delaware 12345 ("the Company") 2. John James Doe of Street Lane, Streetsville, Delaware 23456 ("the Consultant") The parties agree as follows:
Contract terms: The body of the contract should spell out the rights and responsibilities of each party in detail. Use numbered paragraphs to organize the information and include a short heading to describe what each paragraph is about. For example, you might include the headings "Payment Terms" or "Dispute Resolution." That way, the reader can easily find what he is looking for.
Be sure to include all the terms you negotiated in the body of the agreement. If you disagree over the terms of the contract and end up in court, a judge will only give weight to the words that are written on the page. What you said to each other during negotiations is irrelevant.
Payment obligations: When the parties to an agreement disagree about something, it's usually over the payment terms. So, you need to be very clear and detailed in this clause. Think about:
- Who is paying whom?
- How much is being paid?
- When the payment must be made; list the times and dates of installment payments.
- The conditions for making payments, for example, payment on delivery or payment within 15 days of receiving an invoice.
- The method of payment such as a check, cashier's check or bank transfer.
The Company shall pay to the Consultant the sum of $5,000 per month on the last business day of each calendar month. The first payment shall be made on January 31, 2018, and the final payment shall be made on December 31, 2018. The Company shall make the payments electronically directly to the Consultant's bank account at Acme Bank, routing number 123456789, account number 9876543210.
Termination clause: Few contracts go on forever, so be sure to include an end date for your agreement. It's also a good idea to include the circumstances under which the parties can terminate the contract. For example, each party should have the right to end the agreement if the other party fails to pay or misses too many important deadlines.
This contract shall be for a period of 12 months starting on January 1, 2018, and expiring December 31, 2018. Either party may terminate this contract by written notice to the other at any time if that other party commits a breach of this contract and, where the breach is capable of remedy, he fails to remedy the breach within 10 days of being required to do so in writing.
Jurisdiction: If you and the other party are located in different states, you'll need to choose which state's laws will apply if you end up in dispute. This can save a lot of problems later. You can also decide upfront what will happen if something goes wrong. For example, you might agree to resolve a dispute through mediation or arbitration instead of going to court, which usually works out much cheaper.
Who Writes Simple Contracts for a Business?
Most businesses will draft their own simple contracts. There are lots of online resources that can help you put together a solid contract for every business situation without reinventing the wheel. The legal website Nolo, for example, offers a starter pack of legal contracts for running a small business, and websites such as Law Depot offer a wide range of attorney-drafted, fill-in-the-blanks contracts for a fee.
Where you find yourself using the same type of contract over and again, it's sensible to hire an attorney to draft the "master" contract and include the relevant language. You can then tweak the master document to fit each business scenario. For example, a company that sells replacement windows might ask an attorney to prepare a model sales contract containing all the important commercial terms and conditions. The sales team can then fill in the blanks every time they make a sale by writing in the customer's name, details of the order and the sale price.
Downfalls of Bad Contracts
So many things can make a contract "bad" that it is almost impossible to list them all. Generally, a business contract is bad if it:
- Is not in writing. Oral contracts are much riskier than written agreements because there's no proof of the terms you agreed to.
- Does not set out the rights and responsibilities of the parties properly so no one really knows what he's agreed to do.
- Contradicts itself or contains ambiguities. This will create unnecessary hurdles to enforcing the contract if problems arise.
- Doesn't contain an end date or a termination clause.
The problem with bad contracts is that they push the parties in one direction – towards misunderstanding and dispute. You might lose an important customer, fail to receive a payment or be forced to shut down your manufacturing operation if you wind up ordering the wrong raw materials. If you cannot resolve the problem commercially, there's a strong chance that you will end up in costly litigation. Bad contracts mean more work for lawyers and more expenses for your business.
How to Break Contracts
A contract – even a simple one – is a serious promise. There can be serious consequences if you break the contract when you don't have a valid reason to do so. The first step, then, is to review the contract and look at the language. Is there a termination clause? Termination clauses are your get-out-of-jail-free card. As long as you perform the conditions of the cancellation, there should be no problems with breaking the contract.
If there's no right of cancellation, you may be able to break the contract if any of the following apply:
The agreement is "unconscionable." This means that it's grossly unfair and heavily favors one party over the other. For example, your security alarm provider may be acting unconscionably if it suddenly hits you with additional charges midway through your contract and threatens to cut off your remote monitoring service until you pay up.
The other person gives up first. If the other party backs out of the contract or stops upholding his end of the bargain, you're usually free to rip up the contract. For example, if the freelance consultant you've hired stops showing up for work, you may be able to cancel the project and stop paying her fee.
The other party breaches the contract. This happens when the other party does something to void the contract. An example would be if you ordered a custom sculpture for your lobby but the artist sold it to someone else.
The contract is fraudulent. Fraud happens when one party deliberately misrepresents the facts surrounding the contract. For example, you bought a "nearly-new" vehicle which you were told had only one previous owner, when in fact it had 10 previous owners and was unsafe to drive.
Breaking contacts is a tricky area of law. A small business attorney can help you to avoid costly mistakes.
- Law Dictionary: What is a Simple Contract?
- Nolo: Contracts – The Basics
- Nolo: Contracts 101: Make a Legally Valid Contract
- Nolo: Ten Tips for Making Solid Business Agreements and Contracts
- Nolo: Legal Forms for Starting and Running a Small Business
- Law Depot: Legal Forms and Legal Documents
- Rocket Lawyer: How to Break a Contract