This article. written by Austin K. Sweet, Esq. appeared in Northern Nevada Business Weekly on September 15, 2014.
One of the advantages of conducting business in Northern Nevada is that our relatively close community necessitates a certain level of accountability. Establishing a reputation for following through on your word can take you a long way in Northern Nevada, while proving otherwise can ruin a business or career. Because of this mentality, many Nevada business-owners resist written contracts and prefer to rely on the “handshake deal.” However, reducing your agreements to writing is always a wise decision for a number of reasons.
Miscommunications Happen and Memories Aren’t Perfect.
Subject to a few major exceptions, which will be discussed below, oral agreements are legally enforceable contracts. In practice, however, oral contracts can be very difficult to enforce because they necessarily lack physical evidence of the agreed upon terms. In other words, it’s much easier to prove the terms of a contract if you can print the contract out and show it to someone. Without tangible evidence to show a judge or jury, any dispute will boil down to your word against theirs. This can become exponentially problematic when both parties honestly believe they are telling the truth, either because the parties misunderstood the agreement from the outset or because one of the parties misremembered the deal.
Regardless of how strongly you trust the person you are dealing with, creating a written record of your agreement prevents miscommunication and protects against the dangers of human memories. Even good relationships between honest people can go awry when the two sides honestly remember the agreement differently. This situation can easily be avoided by simply writing down the terms of the agreement and giving both parties a copy. As the saying goes: “Trust, but verify.”
Not All Oral Contracts Are Enforceable.
The general rule that oral contracts are legally enforceable is subject to a few major exceptions, primarily encompassed under the Statute of Frauds. Contracts which fall under the Statute of Frauds are generally unenforceable unless they are written. The main types of contracts subject to the Statute of Frauds are contracts relating to real property, contracts for the sale of goods worth more than $500, and contracts which cannot, by their very terms, be performed within one year. You should always put these types of contracts in writing or you may not be able to enforce them.
The Statute of Frauds contains a number of exceptions and nuances. Rather than attempt to determine whether your particular agreement needs to be in writing, it is good practice to simply put all agreements in writing and avoid a problem with the Statute of Frauds.
A Written Contract Is Only Beneficial If It Is Accurate.
A contract is like an insurance policy – (1) you hope you never need to use it, but if you do, it had better cover what you need covered, and (2) it is worthless unless you put it in place before trouble arises. Simply having a contract is not good enough; it must be clear, accurately reflect the agreement, and include all necessary terms. Drafting a good contract while all parties are cooperating is much easier than attempting to interpret a vague, inaccurate, or incomplete contract after a dispute arises.
Contracts need not be long, complex documents full of legal jargon. A multi-million dollar contract can be hand-written on a single sheet of paper, so long as the correct terms are included. Written contracts need to include all essential terms of the deal (price, terms, dates, deadlines, etc.) and everyone’s signature. Be sure that any critical element of the agreement is included in the contract – do not rely upon any promises from the other party that are not included in your contract.
All good written contracts should also include provisions concerning how disputes under the contract will be resolved, such as whether you agree to arbitration, which state’s laws apply, and in which court any disputes should be decided. It is also important to include an attorneys’ fees provision, allowing the prevailing party in any dispute to recover its attorneys’ fees and costs if a dispute arises.
Understand What Your Contract Requires.
It is absolutely vital that you understand everything in your contract. It may be tempting to download a template off the internet, change parts of it to apply to your situation, and leave the several remaining pages of legal mumbo-jumbo because it “sounds good.”
I have seen contracts between local businesses that require them to file suit in places like Florida. I have seen contracts that include superfluous provisions that have absolutely no applicability to the actual agreement at hand. I have seen contracts that include applicable, important requirements that neither party was enforcing because neither party understood their obligations. In some such cases, the parties would have been better off with no contract whatsoever than to have used a contract that included language that the parties did not understand.
Having a contract with provisions you do not understand can actually impede your ability to enforce your agreement. For example, you may be in breach of the contract without even realizing it, opening yourself up to liability or providing the other party with defenses they might not otherwise have. If you are not sure what a provision in your contract means or requires of you, consult with an attorney before signing.
Understand What A Contract Can and Cannot Do.
You can’t make good deals with bad people. No matter how iron-clad your contract is, it will not protect you from the improper dealings of dishonest people. What a good contract can do, however, is deter the other party from manufacturing a dispute they are unlikely to win. A good contract can also maximize your ability to resolve any dispute as quickly and inexpensively as possible.
A “loophole” in a contract may be enough for a defaulting party to drag a dispute through the legal process for several years at great expense to everyone involved, while a well-litigated dispute over an iron-clad contract can be resolved much more efficiently. While a good contract may not prevent a lawsuit, it can minimize the time and cost of a lawsuit.
Consult With a Lawyer.
In order to ensure that you have an accurate, complete contract that you fully understand, it is wise to meet with a lawyer before signing the agreement. Your lawyer can help you verify that your contract includes all necessary terms and appropriately applies to your situation, as well as explain to you all your rights and responsibilities.
If you are concerned with the cost, considering drafting the contract yourself, then sitting down with your lawyer to discuss any revisions that need to be made. The Gunderson Law Firm, for example, will review any unsigned contract and offer our comments, concerns, and advice free of charge for our existing clients. If your attorney offers a similar service, do not hesitate to utilize it and protect yourself and your business to the best of your ability.
Austin Sweet is an attorney at Gunderson Law Firm, practicing business law directed at helping business owners stay protected and prosper. He can be contacted at (775) 829-1222 or firstname.lastname@example.org.