Write a Business Contract

Business contracts are crucial to the relationships between companies and business partners. Contracts specify the terms of agreements, services or products to be exchanged and any deadlines associated with the partnership. Business contracts prevent disputes and misunderstandings, providing for legal remedies if one party does not uphold his end of the contract. Use these tips to write a business contract for your company. Knowing how to write a business contract can protect you and your business.

Steps

Template and Sample Contracts

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Taking Care of General Considerations

1. Determine if all parties are legally able to participate. The contract will not be valid unless everyone entering into the contract is fully able to understand what they are signing. To facilitate this understanding, everyone involved should meet the following requirements:
   • In almost all cases, a contract is not legally valid unless the parties involved are at least 18 years of age. Look up the laws in your state or locality if you think your case might be an exception.
   • As an exception to the above rule, most states allow emancipated minors to enter into binding contracts. Additionally, a parent or guardian usually can enter into contracts on behalf of their children or wards.
   • All parties must have the mental capacity to fully understand the contract. Even an adult may not be capable of understanding what the contract requires him to do.
   • A contract is voidable if a party was intoxicated or otherwise mentally impaired when the contract was signed. When sober and of sound mind, a party is legally able to decide whether or not to continue with the contract.
2. Evaluate the contract's consideration. In a legal contract, something of value must be exchanged for something else of value. This is known as "consideration," and a contract cannot exist without it. Two types of goods or services can be exchanged, though most contracts involve the exchange of a product or service for money.
   • Oftentimes businesses that are involved in selling goods must buy these goods from a manufacturer. To guarantee quantity, quality, and date of delivery, they will often enter into a contract setting out the terms of the sale. Here the manufacturer is giving the business something of value (goods) in exchange for something else of value (money).
3. Determine the legal purpose of the contract. The purpose of the contract (the exchange of consideration) should be established clearly. In creating a legal contract, the purpose of the contract may not be illegal. A contract for an illegal exchange is not valid.
   • For example, if gambling is illegal in your location, you cannot have a legal contract to hire a blackjack dealer to run a blackjack table for an event.
4. Set the terms of the agreement. For a contract to be legal and binding, an offer must be clearly made and accepted. Before you write up a final contract, both parties should have the same idea about what the contract will stipulate. A contract that does not suit the needs of both parties will have to altered.
   • A basic contract may already be on the table before final terms are agreed to. Before the contract is finalized, both the offering party and the accepting party should agree to all terms in the contract. When an offer is made, and the other party -- while responding favorably -- includes additional or alternate terms in his response, that is considered to be a counteroffer, not an agreement.
   • Come to an agreement in good faith. Good faith--an understanding that both sides will fulfill the requirements of the agreement--is presumed to be the basis of all contracts. The exact definition of good faith may vary, but it generally refers to the duty to act honestly toward the other parties to the contract. When a party does not act in good faith, the contract may have been breached. There are a few activities that courts consider a violation of the good-faith agreement. Lying about the condition of a property, bribing the agent who signed the contract, or outright violations of the agreement all serve to demonstrate a breach of good faith.
   • In some cases verbal agreements are considered legal contracts. Generally speaking, verbal agreements are legally binding, as long as they can be proven. For example, if your business is considering hiring a specific wholesaler to provide a certain product, the wholesaler should quote you a price for it. If you call the wholesaler and verbally accept the terms of the agreement, you have entered into a contract. Generally it is better to get a contract in writing. Written contracts do a better job of preventing confusion about terms and assist all parties in understanding their obligations. To avoid accidentally accepting a verbal contract, ask for a written statement declaring the price and other terms before accepting anything verbally.

Writing the Contract

1. Begin with the basic information. Write the date at the top of the page, then write the names or company names of both parties in this format: "This contract is between ___ and ___." If there is identifying information you want to include, such as a title or business designation, include it here. If you are contracting on behalf of a business, include both the business name and the names of the people who are authorized to contract on behalf of the business. This could include names of the CEO, president or director.
2. Detail the exchange of items. Clearly describe what services or goods are being exchanged. For example, "Business A agrees to provide 100 sweaters per month to Business B. Business A will charge $20 dollars per sweater for a total of $2,000 to be paid in full by business B within 30 days of delivery."
   • Use plain language, rather than legalese. If you end up going to court, the judge will adjudicate the case based on how the contract would be interpreted by the average person.
   • Use concise language. It should explain what one business is offering and promising to deliver and what the other business agrees to pay or do in exchange. State exactly what is being sold.
   • If payments are to be made, include acceptable means of making payments (cash, check, or credit card, for example) as well as the amounts that will be due and the due dates.
   • If your business is selling property, provide a legal description of the property and its exact location. The description may pinpoint the location of the subject property within its particular Township, Range and Section. To find the legal description of a property, go to the records office nearest the property. The clerk there can look up the legal description based on the address. Additionally, some property deeds include the legal description.
   • When selling goods or services, describe them in detail. Describe the color, size, make, model, delivery date and any other identifying details. If services are in consideration, indicate what services will be performed. Specify who will perform the services, for whom, where, when, for how long and for how much money or other consideration.
3. Consider adding a confidentiality clause. If you don't want the other party to share the information in the contract with others, you can add a confidentiality clause. All businesses have some important, confidential information, be it a sales plan, a recipe, or the company's marketing strategy. Companies often insert a confidentiality clause into an employment contract if the employee will deal with sensitive information. This type of clause is not necessary when the other party to the contract will not be exposed to any secret information.
   • The basic principles of a confidentiality clause are similar to those of non-disclosure agreements.
   • You may also want to include a non-compete clause, which would prohibit someone from engaging in a similar service for a competitor for a given period of time (such as one year) after termination of employment with you.
   • A confidentiality clause can be worded like this: “The parties acknowledge that each may receive or have access to confidential information. For the purposes of this agreement, the party that receives the confidential information will not reveal this information to anyone for any reason.”
4. Add dispute resolution terms to the contract. The contract should specify how the issue will be handled if a breach occurs. Note who will pay attorney's fees and court costs, and what the remedy for breach is. Also note the state or district in which disputes will be settled, particularly if the parties to the contract reside or are licensed in different localities.
   • If a party to the contract breaches, and lawyers get involved, it is usually customary for each party to pay their own legal fees. However, parties can require the losing side in a legal dispute to pay the winner's attorney’s fees. To include a provision for payment of attorney fees, include language such as: “The winning party has the right to collect from the other party its reasonable costs and attorney’s fees incurred in enforcing this Agreement.”
   • If the contract is for a small business, consider adding an alternative dispute resolution (ADR) clause. Alternative dispute resolution is a term for the methods of settling a legal dispute short of litigation. ADR is usually faster, simpler, more efficient and more flexible than litigation. In addition, ADR is a private proceeding, which is good for businesses that do not want to hurt their reputation in public litigation. Types of ADR include mediation, arbitration, and negotiation. In mediation proceedings, a neutral third party helps the contracting parties talk through their dispute and find a compromise. Arbitration is more like a trial but is outside the court system. An “arbitrator” hears evidence from both sides and then makes a binding decision. In negotiation the parties resolve the dispute themselves, possibly with attorneys.
   • Although the parties to the contract agree to use ADR after a dispute arises, it is usually difficult for them to reach an agreement at that time. To write an ADR clause into a contract, use language similar to the following: “All claims and disputes arising under or relating to this agreement are to be settled by [mediation/arbitration/negotiation] which will be conducted in the [city/county/state/province] of [whatever jurisdiction the parties agree on].”
5. Include a clause describing the termination of the contract. Specify how long the contract will last. If it's for a one-time exchange of services, state that it will be terminated upon completion of the transaction. If it's a contract for ongoing services, you may want to state terms for either party to terminate the contract.
   • The contract should contain language allowing for termination if one party is in violation of the agreement, including a provision for how much termination notice should be given (such as two weeks). For example, you could include language stating what constitutes a breach and what the other party will do if there is a breach: “If Company X does not deliver [the product] within three weeks of signing this Agreement, X has breached the contract. Company Y is entitled to buy [the product] from another vendor and recover any difference in price from Company X.”
   • If neither party breaches the contract, it will terminate whenever the performance is completed. This does not need to be explicitly spelled out in the contract. Whenever both parties have done everything the contract stipulates, the contract will automatically terminate.
6. Make sure the contract is in accordance with applicable law. Research which laws pertain to the contract so you can ensure that it is legally enforceable.
   • For example, certain contracts must be in writing to be enforceable. Additionally, different places have different rules regarding the way contracts are interpreted if there is a breach.
7. Reserve the last page for the parties to sign and date the contract. Provide spaces for each name and accompanying dates.
8. Hire a lawyer to review your contract. A lawyer can ensure that your contract is written in accordance with applicable law. S/he can also help with the termination clause, suggesting appropriate cover (recovery of losses) in the case of a breach of contract.

Making a Deal

1. Make an offer, and consider any counteroffers. When the contract is ready, send it to the other party. The other party will examine the contract to ensure that the terms suit them. In some cases the other party will sign and return the contract right away. More often, he or she will respond with a counteroffer. If there is a counteroffer, be sure to read any changes carefully and decide whether they are acceptable before you sign.
   • If you want to speed things along, you can include a date by which the contract should be either accepted with signature or rejected. Without such a stipulated date, the other party is obligated to respond "within a reasonable amount of time," but this is highly subjective.
   • You can revoke an offer that has not yet been accepted. For example, if you present someone with an offer, and he is considering it but has not accepted the offer, you can tell him that you have changed your mind. However, once the offer has been accepted, you've entered into a binding agreement.
2. Negotiate until an agreement is reached. It's common for parties to pass a contract back and forth making changes until both parties are satisfied with the terms.
   • The parties are welcome to change the contract in any way they want, so long as the other party sees the changes and has the opportunity to respond.
   • Make sure that you are completely satisfied with the terms before signing the contract. It is very important to read through the whole contract just before signing it to ascertain that there are no changes added without your knowledge. After signing, you are legally obligated to perform under the terms of the contract.
3. Understand your liability. After signing the contract, you are legally bound by its terms. If one party does not do what is specified in the contract, the other party has legal remedies and can sue. The courts can either try to enforce the contract or award monetary damages. Any ADR options listed in the contract are also available to dissatisfied parties. The legal system will usually support contract terms, however, and can be used against a violator.

Tips

• During negotiations, discussing any changes to the contract with the other party or parties will serve to prevent confusion and ill will.
• In the United States, the Uniform Commercial Code governs most contracts for the sale of goods. This document specifies requirements for contracts for the sale of goods and gives wording required for certain kinds of contracts.
• Keep a copy of any contract you sign.

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Sources and Citations

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