Mistakes To Avoid When Writing Your Own Business Contracts

Business owners draft contracts every day. A contract may be nothing more than an invoice from an auto mechanic explaining the terms and conditions to repair a car and the owner's signature. What matters is that both parties agree to the terms of the contract and that the contract has all elements of the contract.

You don't need a law degree to write a contract. But getting legal advice before signing a contract is a good idea. It's easy for the layperson to make common mistakes in drafting contracts. These mistakes can render your contract void even if made in good faith.

This article reviews some common terms in contract drafting and gives you some tips on what to look for when writing or reading a contract. But you should always consider having a contract reviewed by an attorney if you're unsure of its meaning.

Types of Mistakes

When business owners do their own contract drafting, they make errors. These errors sometimes result from using "legalese" or legal jargon rather than plain language. There is no reason a contract must include fancy legal terms when plain language works. Drafters of simple contracts, like car repair invoices, do this daily.

Using unfamiliar language leads to mistakes in understanding between the parties.

• Mistake of fact means the parties do not agree on a term relating to the items or services in the contract.
• Mistake of law means the contract is unclear about what law or regulation applies to the contract.
• Unilateral mistake occurs when only one party confuses the terms of the contract. This can happen if the drafting party changes the terms erroneously, believing that the other party knows what they did.
• Mutual mistake occurs when both parties are mistaken about the contract terms. This happens when the parties give different meanings to terms or use different words for the same item.
• Ambiguity means the contract itself is unclear. The contract is ambiguous if two clauses conflict or a term has more than one reasonable meaning.

Legal Issues in Contracts

Contract law is complex. Attorneys spend their first year in law school studying the elements of a contract. Even laypeople can write contracts for daily use with some care if they understand the legal issues involved.

• Offer — All contracts must contain an offer. The offer must state an "intent to be bound" on the part of the offeror. For instance, "Joe's Auto Shop will repair your car on Thursday."
• Acceptance — The contract must have a clear acceptance by the recipient. A signature on the contract indicates the contracting party approves the document.
• Consideration — Both parties must receive something of value from the offer and acceptance. Joe's Auto Shop will fix your car, and you will pay. This must be clear in the terms of the contract.
• Legality — Contracts for illegal acts or services are unenforceable in court.
• Mutual assent — Both parties must affirm they understand and agree to all the terms in the contract.
• Misrepresentation —A type of fraud where one party misstates a material fact about the contract. If Joe knows your car only needs an oil change but tells you it needs a new timing belt, that is a misrepresentation.
• Warranties — A warranty guarantees that the item purchased is suitable for the advertised purpose. In a contract, it can also mean that the seller will repair or replace the item if it fails in a certain amount of time. Auto warranties are the best-known types of warranties.

Going to Court

Business owners sometimes find themselves in litigation over contracts. There may have been a breach of contract. A breach occurs when one party does not adhere to the terms of the contract. The non-breaching party can sue for:

• Compensatory damages — After a breach of contract, the non-breaching party can sue for monetary damages that will restore them to their position before the breach.
• Specific performance — If monetary damages do not restore the non-breaching party, the court may order the breaching party to perform on the contract. For instance, an auto mechanic might have to repair the car after failing to do so.
• Cancellation and restitution — Sometimes, the court will cancel the contract and order restitution to the non-breaching party. Cancellation terminates the contract. Restitution compensates the non-breaching party for the benefit they provided to the breaching party.
• Rescission — Rescission is a court order that terminates the contract. Rescission relieves all parties of any further obligations on the contract.

Common law, state law, and case law govern contract formation. Merchants who deal in goods can look to the Uniform Commercial Code (UCC) for guidance on writing legal contracts.

Litigation is expensive, so smart business owners should consider other dispute resolution methods, such as:

• Mediation — An informal method of dispute resolution. Parties and their attorneys meet with a neutral third party to discuss their differences. Mediation is not legally binding, but it is helpful when the parties are willing to discuss their options amicably.
• Arbitration — Another out-of-court option, arbitration, is legally binding. An administrative law judge hears the parties and rules on the matter.

Contract Terms to Watch For

Whether writing a new contract or reviewing one with your business partner, these terms can trip up any contract. Look out for anything unclear or confusing and consult a contract law attorney.

• Void ab initio — Void at the outset. A contract that is void ab initio is unenforceable, and failing to abide by the terms creates no legal penalties for the parties.
• "Shall" vs. "May" — In most contracts, "shall" is imperative, and "may" is permissive. If something "shall" get done, it will happen. If something "may" get done, it might happen.
• Definitions clauses — Long contracts often have "definitions clauses" at the beginning to define the terms in the contract. Drafters can define their own terms as long as all parties agree on the definitions. One example is declaring the company's name will be "Company" throughout the contract.

Contracts Are Confusing: Get Professional Legal Help Today

Small business owners generally must become "Jacks of all trades" to run their operations. But the finer points of business law are best left to a specialist. If you are drafting or about to sign a contract and need help understanding the terminology, you may want to consult with a business and commercial law attorney first.

See FindLaw's Drafting Contracts section to learn more.