Follow these guidelines to make an enforceable, plain-English business agreement or contract. Don't forget to get your contract in writing, keep it simple and confidential, and spell out all the terms.
Businesses and people enter into business contracts every day. Your business might've signed a commercial lease for some office space or a store. You could've hired an independent contractor to develop your website. Perhaps you signed up for customer relationship management (CRM) software to help you manage your inventory and invoicing. In all likelihood, you've signed more than a handful of business agreements.
It's important to have an agreement when you strike a deal. By having an agreement, all parties can have a final understanding of their expectations and obligations. Just as important as having an agreement is what's in the agreement. You'll need to draft an agreement that's fair and enforceable.
How to Write a Business Contract
While agreements can differ in who signs them (for instance, an independent contractor or corporation) and what they're for (for example, leasing equipment or consulting services), they all share core characteristics. A contract is when two parties agree to exchange one thing for another. Usually, one side will provide goods or services in exchange for money.
Your contract should provide terms and conditions to cover this exchange, including:
- what will be exchanged
- when the exchange will happen (for instance, whether goods and money will be exchanged at the same time or payments will be made in installments)
- where the exchange will happen (such as online or in-store), and
- how the exchange will happen (for example, whether there's an inspection period for the goods or services)
But agreements go beyond describing a core exchange. An agreement defines a relationship between two (or more) parties. You're working with another person to create the terms for how your relationship will work as you enter into a business deal. You'll need to include provisions in your agreement that define the parties and the information the parties exchange. You'll also need to plan for how to end the contract and what the parties can do to resolve any disputes over the terms of the agreement.
Tips on Writing a Small Business Contract
A good business agreement will cover the knowns and unknowns of the business transaction. Follow these tips to create a solid business agreement.
1. Get It in Writing
Although oral agreements are legal and binding in many situations, they're often difficult to enforce in court (and in some situations, they aren't enforceable at all). In the business world, most agreements should be in writing even if the law doesn't require it. A written agreement is less risky than an oral agreement because you have a document that clearly spells out each party's rights and obligations in case of confusion or disagreement.
2. Keep It Simple
Contrary to what most lawyers think, you don't need a lot of "heretofores" and "party of the first part" legalese to make a contract enforceable. Instead, create short, clear sentences with simple, numbered paragraph headings that alert the reader to what's in the paragraph.
3. Deal With the Right Person
Don't waste time negotiating a business agreement with a junior person who has to okay everything with the boss. If you sense that you're talking to a person who doesn't have the proper authority, politely but firmly request to be put in touch with the person in charge.
Make sure the person you negotiate with has the authority to bind the business and has a vested interest in making sure the business performs its obligations under the agreement. If you're not sure who that is, ask. In a smaller business, it might be one of the owners; in a larger organization, it might be a chief executive officer or chief operating officer.
4. Identify Each Party Correctly
You'd be surprised how often businesspeople get this part wrong and how important identifying each party is. You need to include the correct legal names of the parties to the contract so it's clear who's responsible for performing the obligations under the agreement (and who you have legal rights against if things go wrong). For instance, if a business is organized as a limited liability company (LLC) or a corporation, identify it by its correct legal name—including the Inc. or LLC suffix—not by the names of the people who are signing the agreement for the business.
5. Spell Out All of the Details
The body of the agreement should spell out the rights and obligations of each party in detail. Don't leave anything out. If you discuss something verbally and shake on it but it's not in the contract, it'll be next to impossible to enforce. In the world of contract law, judges (with a few exceptions) will only interpret a contract from the terms in the contract itself—referred to as its "four corners"—not from what the parties said to each other.
If you forget to include something, you can always create a short written amendment. Or, if you haven't signed the agreement, you can handwrite the change into the contract. If parties initial the change, it becomes part of the contract.
6. Specify Payment Obligations
You should specify:
- who pays whom
- when the payments must be made, and
- the conditions for making payments.
As you might guess, money is often a contentious issue, so this part should be very detailed. If you're going to pay in installments or only when work is completed to your satisfaction, say so and list dates, times, and requirements. Consider including the method of payment as well. While some people might be okay with a business check or business charge card, others might want a cashier's check or even cash.
7. Agree on Circumstances That Terminate the Contract
It makes sense to set out the circumstances under which the parties can terminate the contract. For instance, if one party misses too many important deadlines, the other party should have the right to terminate the contract without being on the hook legally for breaching (violating) the agreement.
You might choose one of the following circumstances for when a party can terminate the agreement:
- Either party can terminate the agreement at any time for any reason (usually with notice).
- A party can terminate the agreement as soon as the other party has breached the agreement.
- A party can terminate the agreement when the other party breaches only after the party has given the breaching party time to fix (or "cure") the breach.
8. Agree on a Way to Resolve Disputes
Write into your agreement what you and the other party will do if something goes wrong. You can decide that you'll handle your dispute through arbitration or mediation instead of going to court, which takes up a lot of time and money. (For more information, read about arbitration clauses in contracts.)
9. Pick a State Law to Govern the Contract
If you and the other party are located in different states, you should choose only one of your state's laws to apply to the contract. Deciding on one state's laws can avoid sticky legal wrangling later. In addition, you might want to specify where you'll mediate, arbitrate, or bring legal actions under the contract. Agreeing on a state now will simplify your life if a dispute does crop up.
10. Keep It Confidential
Often, when one business hires another to perform a service, the other business will become privy to sensitive business information. Your agreement should contain mutual promises that each party will keep strictly confidential any business information it learns of while performing the contract. Alternatively, you can have a separate confidentiality agreement—also called a "nondisclosure agreement" or "NDA"—that expands on these confidential information and trade secret protections.
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