5 Characteristics of a Great Contract

 

Media gives contracts a bad rap for binding people to things they do not want to do. Everyone has heard jokes about being stuck in a contract or “not reading the fine print” — I remember cartoons from when I was growing up of a character pulling out a magnifying glass to read the literal fine print. However, contracts, when done properly, should simply define the relationship between a business and anyone they work with. A contract documents the expectations each party has of the other, and how each party sees the transaction playing out. It does protect the business but also protects the party they are contracting with. What follows are five primary objectives for every good contract.

1)    Clarity: The saying goes that “good fences make good neighbors”. Robert Frost used this saying to represent unnatural separation, in his poem Mending Wall, but separation and clarity of the parties in contracts are good. The parties need to recognize that they are separate entities and have their own motivations, considerations, and gains in the contract. By ensuring the clarity of the parties and their wants, there can be no confusion as to who is to do what in the contract.

2)    Certainty: In contracts, all parties should be certain of the outcome no matter what direction the parties take. Should everything go smoothly and both parties perform, both parties should know exactly what they are getting. If there is an issue with one party’s performance, then the other party should know exactly the steps to either fix the issue, return the product, or how the parties should resolve the dispute.

3)    Completeness: Building on certainty, a contract should answer all questions about the transaction and stand by itself (meaning there needs to be no clarification). Without getting into too much legal-speak, the “four corners” rule (parol evidence rule) will generally only allow what is written in the contract as evidence of the parties’ agreement. Therefore, if there is a dispute, the court will only consider what the contract says, not what the parties verbally understood or agreed to outside of the written contract.

4)    Easily Understood: One of the most prominent reasons contracts get a bad rap is the legal jargon used and the extensive use of a thesaurus. A contract should be drafted in a way that laypeople — not just the parties — can clearly understand the expectations and will not lead to confusion. Remember, if there is a dispute, a court or arbitrator with no technical background and no knowledge of the transaction is deciding the fate of the parties. To make matters worse, the parties who originally negotiated the contract may not be available to translate!

5)    Trust: Like any relationship, the drafting and negotiation of contracts open the parties up to risk. But also like any relationship, a party can gain nothing if they are too afraid of the risk of getting hurt. Contracts can attempt to reduce this risk, but a party that contracts only to reduce their own risk is not one that inspires confidence. Instead, draft contracts to foster a trusting relationship. Be open about intentions, clear on requests or needs, and do not assume the other party will do or understand something. Do not be afraid to question things if you do not understand. By fostering trust, a contract is nothing to fear.

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