Most people enter into a contract on a daily basis without even consciously knowing that they are doing so. Contracts are legally binding agreements between two or more parties and are the basic mechanism for conducting the majority of transactions in almost every aspect of our personal and business lives. Managers and business owners contend with contracts all the time for their dealings with various entities such as partners, suppliers, employees, landlords, financial institutions, service providers, insurance companies, contractors, vendors, customers, and clients. Even in personal life, we deal with contracts all the time, e.g. a person buying a product or service is entering into a contract where the other party is providing the product or service in exchange for the payment by the person.
The contract derives its importance and power, especially in business transactions, from the fact that it is binding on the parties and that there is a legal remedy available against a party in default for breach of the contract.
Requirements Of A Contract
An enforceable contract (whether written or oral) must have the following elements:
- Offer and Acceptance. There must be a clear or definite offer to enter into the contract by one party followed by an unqualified acceptance by the other party.
- Consideration. Each party must give the other party something of value or take on some obligation that is legally enforceable.
- Meeting of the Minds. There must be mutual assent between the parties as to the essential terms of the contract and all parties must intend to be bound by those terms.
Certain contracts are not enforceable based on the capacity of the parties involved or the purpose for which the contract was formed. If the purpose of a contract is to accomplish something illegal then the contract is not valid, e.g. an agreement to rob a bank. Contracts with people who lack mental capacity and minors are generally not enforceable as there is a presumption that minors and people who lack mental capacity do not understand what they are doing and thus lack the capacity to enter into contracts.
In some situations, public policy may dictate the imposition of additional requirements such as:
- Certain consumer contracts must have specific disclaimers listed or provide a certain level of warranties.
- Contracts that require more than 1 year or involve a value greater than $5000 must be in writing.
Elements Of A Contract
Though there can be valid oral contracts, the term “contract” often refers to a written agreement. A typical contract may include some or all of the following elements:
- Recitals or introductory material
- Definitions of key terms
- Purpose of the agreement
- Promise or obligations for each party and any triggering conditions
- Warranties, representations, or covenants
- Boilerplate provisions
- Arbitration clause
- Merger clause
- Liquidated damages clause
- Jurisdiction and venue choices
- Available remedies
- Signature blocks
- Exhibits, annexures, and attachments
Many of these clauses and the language of the terms can look innocuous until something goes wrong and they prove to be very costly. We can help in utilizing the right language and negotiating terms that are most favorable and that protect your interests. Agreeing to enter a contract with unfavorable terms can be acceptable by a business, if done with knowledge of the consequences and proper weighing of the risks-rewards involved but entering a contract with hidden time-bombs can be a costly mistake if done without proper understanding and analysis.
Contract Formation
Entering a contract typically involves three phases:
- Evaluating the deal. Each party analyzes the prospective arrangement and its pros and cons. They try to analyze the risks and rewards and what obligations and liabilities may arise depending upon any changes in circumstances in the future.
- Reaching an agreement. The parties negotiate for favorable terms, mitigation of risk for them, etc. and come to an agreement on the terms. This is usually followed by a formalized written contract or some other documented evidence of the arrangement. In a simple transaction, the written record may be as simple as an IOU, receipt, or purchase order.
- Performance and enforcement. Once the contract is in place, the parties have undertaken a legal obligation to fulfill their mutual obligations. If a party fails to perform, the other can sue to enforce the deal or get other remedies if the other parties cannot or will not perform as agreed.
Negotiating a Contract
Contract negotiations involve efforts by each party to finalize the contract terms so as to maximize its rewards and reduce its risks. Negotiation of contract terms can easily be broken into two distinct parts – the business terms and the legal terms. In general, it is advisable to agree upon the business terms before hammering out the legal terms as negotiating everything together often results in failure.
Often the business owners and managers lament that they had a good business deal hammered out with another party, but as soon as the lawyers from the two sides got involved, the deal fell apart. The main reason for this is the different perspectives that a businessman and a lawyer bring to the negotiating table. A business person negotiating a deal is generally optimistic and is often more focused on the rewards from the contract as that is generally the driving force to enter into the contract. The lawyer, on the other hand, is trying to envision the worst-case scenarios and is trying to protect the client from any mishap in the future that may impose liabilities. Lawyers are focused on risks because by nature their expertise comes into play when the deal falls apart and the parties are disputing what their obligations are. Lawyers are also concerned about malpractice claims in case they fail to recognize a risk scenario and it materializes in the future.
Negotiating a good deal requires the negotiator to understand the other party, their goals, their alternatives, their positions, and their options so that he/she can find the optimal agreement point that is most favorable to his/her client but still acceptable to the other party.
In completing a negotiation successfully, understanding the other person’s style of negotiation plays a big part. A person’s style of negotiation can be categorized as one of the following – accommodating, compromising, cooperative, avoiding, or competitive. A good negotiator understands the other negotiator’s style and employs the necessary strategies to negotiate the best deal for his/her client.
Contact Our Experienced Austin Attorneys
Attorney Kumar has been in your shoes and in that role has negotiated multimillion-dollar deals with geographically diverse companies like Apple, Samsung, Sony, Philips, Microsoft, etc. He understands both the legal and the business factors at play. These experiences enable him to look out for your interests and help negotiate a contract that is advantageous to you, provides the optimal risk-reward balance, and protects your interests by mitigating risks. If you need help in negotiating a contract, please call our law firm and put us on your side of the table as a trusted partner looking after your best interests.