Contracts

_____

Understanding Common Contract Terms

Act of God:  In contract law, “act of God” is a legal term, and is not subject to any spiritual interpretation.  Legally, an act of God means a natural disaster beyond human control, such as earthquake, flood, tornado, tsunami, etc.

Addendum:  An addendum to a contract is a subsequently signed, separate document that adds to the terms and clauses of an existing contract.

Amendment:  An amendment to a contract is a subsequently signed, separate document that revises an existing clause or term in an existing contract.

Attachment or Exhibit:  An attachment or exhibit is a separate document that is made part of a contract by reference; that is, the contract should include a phrase somewhat to the effect of “the attached Exhibit A, which is incorporated herein.”  An attachment or exhibit can also be incorporated by reference through an addendum or amendment.

Contract vs. Agreement:  I use them interchangeably, and they mean the same thing when it comes to a negotiated deal between two or more parties.  Often which word is used is just a matter of style or form. 

Choice of Law (or Applicable Law) and Venue:  These two terms are typically combined in a single contract clause that sets parameters for what happens if the parties end up in litigation over the contract.  Ex:  “This Agreement shall be governed by and construed in accordance with the laws of the State of Washington.  In the event any suit, arbitration, or other proceeding is instituted to enforce any term of this Agreement, the parties specifically understand and agree that venue shall be properly and exclusively in King County, Washington.”  Contracts are a matter of state law, and so it helps to declare at the outset which state’s laws will apply in the event of a dispute.  “Venue” refers to the physical courthouse where any lawsuit must be filed.  When venue “lies in King County, Washington,” it means that anyone who brings a lawsuit to enforce the contract must do so in the appropriate federal or state courthouse within King County.

Force Majeure:  This is a French term meaning “superior force.”  A force majeure clause in a contract essentially states that the parties are relieved from their obligations under the contract if extraordinary circumstances beyond their control make performance of the contract impossible or impracticable.  Force majeure clauses cover events such as a war, strike, riot, or acts of God (such as flood, tornado, or earthquake).

Integration, Merger, or Entire Agreement:  All of these terms refer to a contract clause that declares the contract to be the complete and final agreement between the parties.  Ex:  “This Agreement constitutes the entire agreement and understanding between the parties hereto, and supersedes any and all prior agreements and understandings, whether oral or written, relating to the subject matter hereof.”  The purpose of this clause is to prevent the parties from attempting to show evidence of additional or inconsistent terms about their agreement by means of prior emails, notes, or verbal discussions.

Severability:  This contract clause has many variations, but is almost always titled exactly the same.  A severability clause essentially states that if a particular sentence or clause in the contract turns out to be invalid, that doesn’t invalidate the whole contract.  Generally speaking, that is a useful device; however, severability clauses are often poorly drafted, and in some circumstances can significantly affect the parties’ rights under the agreement.

Dispelling Common Contract Myths

“Contracts must be signed to be enforceable.”  Not always, so beware.  In fact, sometimes contracts don’t even need to be written to be enforceable.  It is the intention of the parties that matters, and a contract may be formed during a verbal conversation, email exchange, or just by clicking on a website.  That’s why we prefer to have a contract in writing to memorialize the clear terms of the agreement.  And while signatures are useful evidence of the parties’ intent, they are not necessarily required.  In fact, if a written contract is negotiated and agreed upon but never signed, it may still be binding depending on the circumstances.

“You get your attorneys’ fees paid if you win a lawsuit.”  Again, not always—and definitely not by default.  Typically, the contract must include a clause specifying whether attorneys’ fees will be awarded (i.e., reimbursed to) the winning party in a dispute.  However, there are several state laws that also control when attorneys’ fees are awarded or precluded in certain types of lawsuits.

“A rental agreement (lease) must be notarized.”  Nope, not if the lease term is a year or less.  Generally, the rule is this: a) month-to-month tenancies may be created by verbal agreement; b) year-long tenancies must be created in writing, but need not be notarized or even signed; and c) tenancies for a period longer than one year must be written, signed, and notarized.  See RCW 19.36.010 (Statute of Frauds); RCW 59.04.010 (Tenancies); and RCW 59.18.210 (Residential Landlord-Tenant Act).

“Signatures on a contract must be dated.”  Typically, there is no legal requirement that you date your signature when signing a contract.  A contract can be effective on specific date, or if no date is specified, then it is effective on the date of mutual agreement.  A dated signature basically acts as evidence of when the parties reached mutual agreement, (which would be the date of the last signature).  My professional preference is to date a contract in the preamble language on the first page, for example: “This Agreement is entered into this 1st day of January, 2000, by and between Joe and Mary.”  The reason for this is because contracts will almost always be referenced by their title and date (e.g., “the Professional Services Agreement between Joe and Mary dated January 1, 2000”), which creates a clean and accurate record when amending, supplementing, or terminating a contract.

“One size fits all.”  Many individuals and businesses take advantage of online contract templates, modifying prior existing agreements, or copying and pasting general contract terms from various documents.  Folks—that is not a good idea.  Which contract clauses are needed and appropriate varies widely for different transactions and situations.  More importantly, there is a vast body of contract law that affects the meaning and enforceability of those contract clauses.  It is almost always cheaper to have an attorney prepare a contract properly than untangle a problem caused by faulty drafting.