How To Write a Business Contract
Entering into a contractual business relationship as a business owner requires precise legal documents. Don't fall into the trap of making agreements haphazardly or with complete trust of the other party. Even if it's a family member (some would argue, especially if it's a family member), the business contract should protect your business interests.
Whether you're dealing with business partners, protecting confidential information with nondisclosure agreements (NDAs), or simply setting the foundation of your startup, you'll need to familiarize yourself with some guidelines for writing a business contract.
Generally, you will want to keep two things in mind when writing a business contract:
- Does the agreement address all of the possible situations that may arise? It's also good to have contingency plans.
- Do the provisions leave room for ambiguity? Contract disputes often arise over unclear terms or provisions.
Read below for tips on writing business contracts for your small business.
Get It in Writing
Anytime you enter into a business contract, you want written proof of the agreement. You also want a written contract that reflects the specific terms by which each party is bound. Oral agreements are a type of contract. Verbal agreements are valid. However, such agreements are difficult to enforce because the contract terms might be misremembered or misrepresented.
The first lesson in how to write a business contract is always to get it in writing. This is key because you want a written agreement for business relationships with business partners, employees, freelancers, independent contractors, or other parties.
Use Language You Can Understand
Business contracts don't have to be written in "legalese." The best contracts, particularly in the small business context, are written in plain English so that both parties know what they're signing and what the provisions mean. Just be sure that the terms you write are specific as to each party's obligations and scope of work under the binding agreement. Explain the specific remedies available if the other party violates the agreement.
The contract should include headings for each section to help organize the information and make it easier to reference. Number and label each paragraph and only include that topic in the paragraph. By segmenting the contract into individual units, it will be more easily understood by the parties (and by a court, should it come to that).
Also, remember that certain terms have specific meanings in the law.
The rights and obligations of each party should be laid out in specific language that leaves little room for interpretation. Describe as much as you can in a "step-by-step" manner. If you want delivery on the 15th of each month, use the specific number instead of writing "mid-month."
If you and the other party agree to a new term or decide to change an existing term in the agreement, be sure to add a written amendment to the contract rather than relying on an oral agreement. A court may or may not accept the oral agreement as part of the contract.
Limit liability with a disclaimer. A disclaimer is a statement that limits a party's liability in certain situations. It's important to ensure that your contract includes a disclaimer to protect your interests.
Include Payment Details
Include a section that explains payment terms. It's important to specify how payments are to be made. If you want to pay half up front and the other half in equal installments during the contract's life, state that and the terms under which you will release payment.
For example, if you contract with someone to paint your business offices, include a provision stating that payments are contingent upon a certain number of rooms being painted to your satisfaction. List the period of time, requirements, and payment methods (cash, check, credit) whenever possible. Contract disputes often center on money, so be as specific as possible.
Include a confidentiality clause. When entering a business contract, the other party will often gain access and insight into your business practices, trade secrets, and intellectual property. If you do not want the other party to share this information, include a clause that prevents the other party from disclosing your business information or information included in the contract to other parties.
Include Language on How to End the Contract
Contracts aren't meant to last forever. Include a termination clause. If one party continually misses payments or fails to perform their duties, you want to have a mechanism in place to terminate the contract. It could be a mutual termination agreement (when the objectives of each side have been met through the contract) or, more likely, an agreement that either side can terminate if the other side violates a major term of the contract after giving proper notice of intent to terminate.
Consider State Laws Governing the Contract
Contracts can stipulate which state's laws will govern if there's a dispute. If the other party is in another state, you should include a clause explaining which state law will govern. If you don't, and there's a dispute, there may be another legal argument (which costs more money) about which state's laws should be applied to the contract. Avoid this headache and agree to it at the contract's inception when both parties are agreeable.
Include Indemnification, Remedies, and Attorneys' Fees
If you believe it's more likely that you'll sue over the contract (as opposed to the other party suing you), you might want to include a clause that awards attorneys' fees to the winning party. Without this clause, each party must pay for their own attorneys.
Consider a Mediation and Arbitration Clause
In the event of a dispute or some form of legal action, including a provision that requires the parties to enter mediation, arbitration, or both may be advantageous. Mediation and arbitration are alternatives to litigation.
Mediation is a voluntary process where both parties try to work out their issues directly with the help of a neutral third-party mediator. Both parties must approve a settlement.
Arbitration is a more adversarial process than mediation. The arbitrator hears both sides' arguments and makes a decision that binds the involved parties. It's similar to a trial, but the arbitration process is much quicker and cheaper than litigating in court.
Include a "force majeure" clause. Force majeure is French for "superior force." It's a provision that frees both parties from liability in case of a significant, unexpected disruption beyond their control, such as a natural disaster, war, or pandemic.
Specificity is key when writing a force majeure clause. Don't mention "acts of God" or "circumstances beyond our control" because that's vague. It is more effective to explicitly list the types of events that would trigger this clause, such as:
- Terrorist acts
- Government actions
Signing the Business Contract
Make sure to sign your legal name on behalf of the company and include your title. Make sure the business name is correct. The party who signs the contract is bound to the agreement. If you sign on behalf of yourself, you are liable for the agreement. So, be sure you are binding the company to the agreement.
Make Sure Your Business Contract Is Enforceable: Work With a Lawyer
Writing a business contract that protects your interests while balancing your business objectives is critical to your business's success. Business contracts cover a variety of situations, including:
- Real estate
- Noncompete agreements
- Nondisclosure agreements
- Dispute resolution
- Service providers
- Sales contracts
- Employment contracts
- Freelancer agreements
- Independent contractor agreements
Contract templates can help. But while you should get acquainted with the guidelines for writing a legal contract, sometimes it's best to have an attorney review the agreement before it becomes final.
An attorney with contract law experience can help if you need legal advice. If you are unsure about any aspect of drafting a business contract, consulting with a business lawyer is always the best course of action. Find a small business attorney in your area.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.