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The Process of Writing and Negotiating a Contract
 
 

The Process of Writing and Negotiating a Contract


Capacity to Contract
According to contract law, not all entities are eligible to enter into a contract. Laws that address the capacity to contract have been established to protect individuals from being exploited when agreeing to perform. Contracts are only legally enforceable if executed by a sane, sober adult. Contracts assented to that are not legally binding include those "signed" by:

1. Minors (under age 18).

2. Individuals under impairment or suffering disability from

a. Alcohol or drugs.

b. Mental incapacity.

Those that lack the capacity to contract can rescind the contract, rendering it unenforceable. This defense cannot take back a portion of the contract; the entire contract must be dismissed. There are cases where a party who lacked the capacity to contract can later ratify or approve the agreement upon achieving the recognized ability to enter into the agreement.
Minors
Want to learn more? Take an online course in Contract Law - An Introduction.

Minors must show the lack of capacity prior to reaching the age of majority. Though there have been differing court opinions, generally speaking, if a minor misrepresents their age in order to obtain the contract the other party may invalidate the agreement due to fraud. If a parent or guardian executes a contract on behalf of the child, the parent may be held liable for any negligence, and cannot charge that the contract is voidable on the minor's behalf due to a negligent act committed by the child. Children who are emancipated (given freedom) from adult guardians may be able to gain capacity to contract.

Impairment by mental incapacity
Impairment covers a variety of mental conditions that can lead to incapacity to contract. Organic brain disease or brain injuries, mental retardation, depression, psychoses, and insanity can all be grounds for terminating a contract. There are two tests typically used to determine a party's mental lack of capacity:

1. Cognitive capacity. Did the party have the ability to understand the consequences, responsibilities, and nature of the agreement?

2. Volitional capacity. Did the party have the ability to control their actions and act in a reasonable manner towards the completion of the contract? (Important in some cases is whether the other party was aware of the disability.)

If an impaired party gains a benefit despite having the impairment, he may have to make restitution to the offended party. Certain impaired parties (such as an alcoholic) are typically held to a higher standard of legal competency than minors, and may be deemed responsible for their actions; however, if an addiction can be linked to a diagnosis or the other party was aware of the impairment at the time of agreement, then the contract may be voidable.

Negotiation

When contracts are more complex or of high value, there is usually some negotiation between the parties. Both parties enter into an agreement with the intention to bargain for what each will promise and receive. On each side there will be the expectation to give and gain. Nearly every business contract has this premise at its core. Parties may negotiate for themselves or have a representative perform that duty. It is important to note that, if a third-party negotiates on your behalf, he must be deemed a legally intended representative who will likely be required to testify in dispute resolution.

If you negotiate on your own behalf, make sure you have the personality and conviction to handle opposing viewpoints. Good negotiation can require strength, patience, compassion, and capitulation. To reach a contract that best suits your objectives, there are steps you should take prior to formally discussing an agreement.

  • Have clear objectives. Know exactly the primary outcome and the secondary benefits you wish to obtain. Define what you need, what you would like, and what you can do without. By prioritizing your objectives, you can calmly approach negotiations.
  • Research your objectives. Clearly understand the relevant facts, figures, specifications, laws, and requirements of both your performance and the contract's outcome. Make sure it resembles similar contracts in the subject matter to be agreed upon.
  • Research your options. Know what alternatives there are available for completing the contract. Learn what the costs, implications and benefits are of other choices.
  • Know your competition. Find out who else can perform your side of the contract, and determine how you measure up against the competition. If payment is involved, compare your pricing to others.
When you enter negotiations, remember that all parties are participating because they would like agreement. Some see negotiation as adversarial; however, contracting parties would not be negotiating if there wasn't an interest in coming to an agreement. As you begin discussions, keep these points in mind:
  • Build trust. Act and speak in a manner that instills trust from other parties. Negotiations go south very quickly if trust is broken, often leading to contentious behavior which may damage your negotiating ability.
  • Communicate clearly. Make sure in both written and oral communications, your message is sent in plain language, leaving no room for misinterpretation. With international negotiations, it may be important to learn how the other party communicates and what phrases, mannerisms, and gestures to avoid.
  • Maintain order. To the best of your ability, make sure discussions or communications operate in a professional, orderly manner. Making a topic checklist would help in keeping to your agenda. If discussions move away from the central topics, use your checklist to restore order.
  • Listen, pay attention, and understand. You must listen not only to what the other parties are saying, but how they are communicating their requests and intentions. Are they open to discussing an issue or firm in their statement? Do they have a request or a demand? Focused listening will allow you to address important concerns, learn about what may not be important, and manage your negotiating responses to your advantage or towards agreement.
  • Give and take. Understand that negotiation may be a series of compromises for all parties. By holding on to what is important for you and giving in on less important issues, you will have an easier time coming to an agreement. Approach negotiations with a win/win attitude and you'll succeed in negotiations more often than not.

Writing the Contract

While laws don't prevent parties from constructing unique agreements (except government contracts), it is often recommended that hiring an attorney to draft a contract is a good idea. The Statute of Frauds requires that contracts for certain transactions must be written, and writing a valid and fully enforceable contract can require sound legal contract knowledge. Many times, the agreement to perform is minor in contrast to ensuring that the contract complies with federal and state laws in the event a dispute takes place. Many boilerplate contracts exist that include clauses that generally meet legal guidelines, but each agreement is as unique as the parties involved and even the most fundamental issue may not be written to protect a wronged party.

Some laws state specifically what terms should be included in a contract, such as the rescission period in a real estate sales agreement. Other regulations require disclosures, like the early balance computation clause in credit agreements. A vendor wishing to sell goods must ensure his agreement meets the standards under the UCC. Individual agreements do not generally have the same requirements, but if a dispute arises, it is better to have more in the contract than less.

Written contracts can be as unique as necessary. However, contract language should be specific, clear, and concise; ambiguous, complex, or confusing terminology can make a contract less enforceable if disputed. Drafting an outline before creating the agreement can be helpful. Accuracy of all data (such as party names and addresses) is important, as is consistency of tone and usage of abbreviations and grammar. Defining important phrases or vague terms will help avoid confusion. As with any legal document, a lawyer should review the final document prior to obtaining signatures.

Clauses

If a promise is unfulfilled or a performance is unsatisfactory, the clauses included in a contract are the elements that most often get scrutinized (and challenged) when disputes arise. In written contracts, the clauses shape the agreement to conform to each party's wishes and statutory requirements. When writing a contract for a business transaction the clauses used in contracts of one industry may not be applicable in another, which has led to the creation of special disciplines in contract law. We'll discuss some specific clauses that are typical of special contracts (such as financing agreements) in Module XI. The important thing to remember is that clauses must clearly indicate the subject matter pertaining to that provision.

There are a few clauses that are generally standardized across contract types. They include:

Time is of the essence. States that each party will act as quickly as possible to perform. Any delay may cancel the contract. Subject matter that includes perishable goods, critical deadlines, or weather-related influences typically requires this clause.

Force majeure. States that parties can be relieved of obligations or may amend the contract in the event that an extraordinary event or catastrophe occurs that prevents one or more parties from fulfilling its obligations. Literally meaning greater force, it can protect a party that cannot perform because of an element beyond their control, from charges of wrongdoing.

Indemnification. States that party A must either 1) repay party B for damages that party A caused, or 2) ensure that party B will not be held responsible for claims, damages, injury, or other loss that party A creates because of his own negligence, an accident, or other adverse conditions.

Notices. States the method and process for conveying official statements, such as a default claim. Typically includes the offeror's mailing address.

Amendment. Typically states that the agreement may not be amended unless done so in writing and agreed to by all parties.

Governing Law. States the jurisdiction (typically by geography) under which dispute claims will be filed. Most U.S. contracts list the state court in the state where the agreement is executed.

Assignment. States that obligations committed to by a signatory party may or may not be assigned to other parties. If assignment is given without the third-party's consent, that assignment will likely by voidable.

Negotiating and writing a contract is the most effective way for a party to get exactly what they want from another party, and protect them from false or damaging claims. But while most efforts result in successful contracts and satisfied parties, there are cases where a contractor enters into an agreement that is less than proper.


 
 
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