Business Articles CONTRACT CHECKLIST: Make sure your contracts cover these points. by Mary Hanson

Almost every business deals with contracts of some sort, whether for goods or services.

The primary role of a contract is to make sure all parties to the contract understand and agree to the same goods and services and the same terms for payment and other issues. An unclear contract, or a contract that is so simple that it provides little information, can be a problem waiting to happen.

The following questions can be used to make sure the basic issues have been covered in a contract:

• Who are the parties to the contract?  Make sure each party is correctly identified.   If a party is a corporation, indicate the state of incorporation.

• What is the product or service to be provided?

• What is the price for the product or services? Will other charges be added on? Are all additional costs identified in the contract?

• Who pays for freight? Insurance? Expenses incurred in providing services?

• When will the goods or services be delivered? Where will they be delivered?

• When are payments due? Is there a late payment charge?

• * Can changes be made in an order? Is there a charge for changes? Is there a minimum number of days for requested changes to be made? Do changes need to be approved by both parties?

• Can either party terminate the contract? Is there a cancellation fee? Does the customer owe the full amount if the customer cancels the contract?

• State the addresses of the parties.

• Who will sign the contract? What is this person’s authority to sign contracts?

• Will any confidential information be disclosed by either party? Does the contract make clear that such information is confidential and may not be used or disclosed?

• Will logos, computer programs, or written materials be created under the contract? Does the contract clarify who owns any work product generated under the contract?

• Is any of the work product subject to laws on trademark, copyright, or patent? Did you check with a trademark or patent attorney to make sure the contract treatment is legally correct and enforceable?

• What will happen if one party does not perform or performs obligations late? Is there a charge for late performance?

You must have clear contract terms before the goods are delivered or services are provided. If your only documentation is a letter, a quote, or a purchase order, recognize that this is your "contract," and make sure all the important issues are covered.

Payment for Goods or Services

If your business provides goods or services, the most important issue for you to cover is your customer’s obligation to pay for the goods or services.

If the contract is for the sale of goods, the contract terms only need to cover the basic issues: How much is to be paid for the goods? When is payment due? Is there a late payment charge on any unpaid amounts?

If the contract is for services, the contract terms need to be clear on how the amount to be paid is to be calculated. The amount to be paid may be based on the number of hours worked, the number of days worked, or on completion of a project or milestone. If the cost of materials will be included or expenses will be reimbursed, these need to be set out in the contract.

Will you invoice your customer on a regular basis, or will the customer be required to pay a set amount? Will payments be due weekly, bi-weekly, or monthly? The terms need to be specific, such as stating that the customer will be invoiced monthly and that payment will be due within thirty days from date of the invoice.

A late charge added to an invoice without being agreed to in a prior agreement is not enforceable. If you intend to charge a late fee or interest on any unpaid balance, your contract terms and conditions provided to the other party prior to the provision of goods and services must say so.

Make sure your contract anticipates additional goods, services, or benefits that may be provided to the customer. You need to be able to charge for those extra services. If you do not include appropriate terms and conditions for these additional goods or services in the original agreement, you should not provide these additional items until both parties agree on appropriate terms. If your employees provide more services, or additional services such as installation or training, make sure you have a contractual right to be paid for those services.

For example, if training services are later provided, contract terms must address the issues involved in providing training services. The contract must indicate how the additional cost will be calculated and charged.

Descripton of Goods or Services

Make sure the contract describes the goods or services adequately. Avoid problems with customers expecting something different from what you intend to provide. Avoid the related legal problems of collecting payment and covering freight.

If you are providing a service, remember that it is best to have a less specific description of services. Service providers are more likely to have problems if a description of services is too specific. A customer may demand that the services meet every part of the detailed description before making payment.

If you are providing goods, a more precise description may be preferable, provided the description is correct for the products provided.

In any event, do not use the contract or the description of goods or services as a sales document. Do not try to impress the customer with generous terms or ambitious statements about the nature or quality of the goods or services. A good rule of thumb for the terms and conditions of sale is to underpromise. It is far better to underpromise and then overperform than to make legally binding promises that cannot be kept.

Ownership of Work Product

If services are to be provided that will result in the creation of a product, the contract should make clear who will own the resultant product. If you are paying for services and expect to own the products created, make certain that the contract states that you will be the owner of the product created. If the product is literature or software, copyright law provides that the work product belongs to the author or programmer. Unless you cover this issue in a way that effectively transfers the author's ownership rights to you, the author will remain the copyright holder, no matter how much you have paid for the work.

If work product may be protectable under trademark, copyright, or patent law, make sure you have all the information you need (including advice from patent counsel) to properly preserve or transfer the rights to this work product.

Risk of Loss

If you are selling a product, your contract must cover the issue of potential loss or damage to the products in transit. Shipping terms used in purchase orders are FOB, CIF, and FAS. If you are not absolutely certain what they mean, avoid them. There is no legal requirement that you use any such terms. The important thing is to cover the key issues, which are (1) Who is responsible for loss or damage in transit (and who, if anyone, is required to provide insurance)? (2) Where does title to (ownership of) the goods pass from you to your customer? and (3) Who pays for the shipping costs?

If you are the one paying for shipping, insurance, or other costs, make sure those costs are added to the contract or included in your calculation of the price to charge your customer.

Be sure to cover the issue of acceptance. Your contract terms may provide a number of days that the buyer has to inspect the goods, after which the goods are deemed accepted if no objections are made.

Warranties

If you are providing goods, you must consider whether you wish to provide any stated warranties, and how to disclaim warranties that are implied by law. You are likely to need the assistance of someone familiar with specific warranty laws, since this is not just a matter of what makes good business sense. There are both state and federal laws that apply to warranties.

The topic of warranties can't be covered adequately in such a short article, but there are two key points about warranties that must be understood. One is that warranties must comply with both state and federal law. There are descriptions, such as "full warranty" and "limited warranty" which must be used in compliance with specific statutes.

The second important point is that commercial laws covering the sale of goods provide implied warranties. Almost all terms and conditions for the sale of goods disclaim these implied warranties. In order to make the implied warranties inapplicable, a warranty disclaimer must be stated in language described by law and printed in a print size that meets legal requirements.

Termination

Every contract for services needs to set out the bases for termination, and the consequences of termination. The contract terms should set out how a contract can be terminated, and why. The contract may provide that the contract can be terminated for any reason without cause with a certain number of days' notice, and for cause, with shorter notice provided. Or there may be a period of time in which a default may be cured by the defaulting party in order to prevent termination.

A service contract can also provide that a termination fee be paid in the event of termination without cause. If the services are unique enough, the service provider may be able to negotiate a contract that is non-cancelable, so that the full term (e.g., 18 months) would have to be paid, even if the services were terminated.

Remedies

I recommend including remedies for default in contract terms. For example, in a service contract it is important to make clear that services can be terminated if payment is delayed.

The contract can provide for payments to be made to compensate for late performance, or fees to be paid by one party if certain terms are violated (such as the hiring of an employee of the other party despite contract prohibitions).

It is better to have a remedy agreed upon in your contract than to rely on remedies provided by law, if any. And it is important to anticipate that problems do arise. Have contract terms in place for your protection, and anticipate as many problems as possible.

Copyright 2001 Mary Hanson. All rights reserved.

Mary Hanson, MBA, Attorney at Law (310) 543-1355 Torrance (Los Angeles County), California USA