Posted by Larry A. RothsteinJul 25, 20210 Comments

In prior blogs, I've discussed construction contracts both from the owner's and contactor's points of view.  This article is intended to be applicable more generally.

Many contracts we sign are commonly known as contracts of adhesion, that is, 99% of it contains boilerplate language written by the party with superior bargaining power.  Think bank loans, credit card agreements, rental agreements and general liability waivers.

But what about where two parties have roughly equal bargaining power and can draft their own terms?  Here, the importance of contract drafting cannot be overstated.  How many times have I seen the parties not have a written contract?  Far too many.  And while oral contracts may be enforceable (assuming it does not violate the statute of frauds), they are inherently rife for costly disputes.

Which brings me to Rule 1.  Always have a written agreement.  Always.  If  you spend a few thousand dollars to have a lawyer draft the agreement, it may save you multiple, multiple times that amount in dispute avoidance.

So what makes a good contract?  There are three principles which underscore all good agreements.

First:  Its terms are clear and definite.  Legalese sinks contracts.  If the parties don't understand the contract language, go back to the drawing board.  

Second:  It should be fair to both sides.  If you think your lawyer has drafted a contract that puts you in the driver's seat, think again.  You're only setting the other side up to find a way out.  Now you've got a mess.  Even if the other side has clearly breached the agreement, it may take years (and big bucks) to obtain a judgment.  And will you be able to collect?

Conversely, never sign a contact you don't think you can perform in good faith.  I will never put a client into a contract she can't or isn't likely to perform.  The best contracts have equal (or approximately equal) incentives to encourage bilateral performance.  Similarly, there should be approximately equal disincentives to discourage non-performance.  Sounds easy.  If you (or your lawyer) can't come to good faith agreement on language which promotes these goals, it may be time to take a second look at the deal.  Sometimes the best deal is the one you walk away from.

Third:  Anticipate foreseeable risks and allocate such risks appropriately.  If the other side is to perform a service and you are going to be paying, what happens if they suddenly can no longer perform?  What if circumstances intervene preventing you from making called-for payments?  What about third-party interference?

Naturally, not every future circumstance which may cause an interruption or frustration of purpose can be foreseen, but the more thought and care that goes into the agreement, the less likely such occurrences will not be provided for in the agreement.

Remember the old Fram oil filter commercial?  The mechanic is lowering the hood of his customer's vehicle and wiping the grease off his hands.  He looks into the camera and says, “I just finished putting in a new transmission.  Cost him $375.00.”   (The commercial was many years ago.)  “Just think how much he'd have saved if he'd bought a Fram oil filter for $7.95 instead?”

Better to have an experienced lawyer review your contract before you sign it than hire him or her to fix the mess a bad contract causes later on.