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Communication and Successful Family Business Succession PlanningJanuary 22, 2013
When you were a child, do you ever remember saying “But you promised…”? As children, none of us were required to sign formal agreements. The three reasons I often hear for failing to create clear, enforceable agreement are:
- “I trusted them”
- “I thought we understood each other”
- “I’ve never required a formal contract before”
This article emphasizes the need for clear, enforceable contracts to help you protect your relationships, preserve your wealth, and plan for the future.
What is a contract?
A contract is a legally recognized agreement between two or more persons which gives rise to an obligation that may be enforced in the courts. A lawyer can help you create a legally binding agreement.
By making a contract, you are suggesting to the other party that you value your relationship with them.
Even when parties intend to contract, the essential terms of the bargain must be agreed and be clear before a legally binding agreement can be said to exist. Even if the parties may have thought they were bound, no binding contract will have been created, if:
- essential terms have not been settled;
- the agreement is too general or uncertain to be valid; OR
- the understanding of the parties is that their legal obligations are to be postponed until a formal contract has been signed.
In determining whether you have reached agreement for legal purposes, the starting point must be the contract itself. You have a legal contract if there is a written contract with clear wording.
Enforcing a Contract
A lawyer can advise whether your contract can be enforced. There are consequences and remedies for breaching a binding contract. Rather than trying to find the real intention of each party, the courts use the objective test of the reasonable person in the same circumstances.
In some circumstances, a proposed contract is only agreement to agree or an agreement to negotiate, which is not legally enforceable. Sometimes, the parties may have agreed on all important terms, not expecting to negotiate further. In these cases, the court may find that they are bound by their agreement. This is so even if the parties haven’t signed a formal written document.
Before you enter into a contract
- Have a lawyer prepare and review the contract
- Ask yourself: “What if…” and “What is missing?”
- Use plain language, define new words
- Be simple and precise
- Clarify consequences
- Understand what you sign
Two parties must agree on all essential terms to create a binding contract. Also, the terms must be clear, certain, and specific. When you negotiate, and reach a tentative agreement, you must then create a formal contract containing the entire agreement.
Clear, enforceable contracts will help you protect your relationships, preserve your wealth, and plan for the future.
Instead of thinking: “I trust you”;
Say: “I want to protect our future agreement and relationship”
Instead of thinking: “I thought we understood each other”;
Ask: What would an outside person understand the terms of this agreement to be?
Instead of a mere handshake;
Have a lawyer prepare and/or review your written contract.