Write a Business Contract: Key Considerations
A contract is a legally enforceable promise or, more accurately, a binding agreement. There's a party who makes an offer and another party who accepts the offer. A court will enforce the contract in most cases as long as something of value is exchanged. When writing a business contract, all of these elements must be present so that a court can enforce the business deal if there's any dispute.
While oral agreements are sometimes used, it is always a good idea to have a written contract, especially in business. Memories are notoriously fickle, and people often misremember contract terms. Also, if one party doesn't want to honor the deal, proving to a court the contract terms becomes an exercise in "he said, she said." Therefore, it becomes crucial to have a written agreement that can serve as proof in legal disputes.
Whether you are a small business owner, a startup, a freelancer, an independent contractor, or a business partner, understanding contracts and some contract law is vital.
Write a Business Contract: Know the Basics
When writing a business contract, keep in mind these fundamental elements:
- Intent to make a contract by both parties
- A legal subject matter (you can't make a valid contract about something illegal)
- An offer made by one party
- Acceptance of the offer by the other party
- An exchange of something of value (called "consideration" in legalese)
- For certain subject matter, a contract must be in writing
There may be additional legal requirements depending on state laws where you live and the subject matter of the contract. For instance, a real estate or sales contract may have specific requirements. But if you keep these necessities in mind, you'll be on the right track.
Offer and Acceptance
When a contract is formed, an offer and acceptance process occurs between at least two parties. For example, your mechanic calls you and tells you he can replace your muffler for $300. If you say yes, you've accepted his offer. If you tell him you need a day to think about it, there has been no acceptance, and therefore no valid contract has been made.
Length of Time an Offer Stays Open
The time an offer stays open is also essential to the contract. When an offer is made, the person making it isn't expected to keep it open forever. On the other hand, offers stay active even if they're not immediately accepted.
An offer stays open for as long as the offer states. Without such a date, they stay open for a "reasonable" time. A reasonable time considers factors such as the industry you're in, the subject of the contract, and past dealings between the parties. "Reasonable" leaves much room for interpretation, so the smartest course of action is to include an expiration date on an offer.
For example, if you're a clothing retailer and a manufacturer offers to send you a shipment of clothes, that offer may stay open for several weeks or even months, according to industry standards. However, waiting a year to accept the offer and then expecting the manufacturer to honor the offer isn't a good idea because the offer will likely be found to have lapsed.
Revoking an Offer You've Made
If you've made an offer, but it hasn't been accepted, you can revoke it any time before acceptance. However, once the other party accepts the offer, a binding agreement is formed, and you're bound by the contract terms, even if you've had a change of heart. If you've agreed to keep an offer open for a certain time, you can only revoke the offer once that period has ended.
Rejections and Counteroffers
A rejection is simple -- one party makes an offer, and the other party declines it. Another form of rejection is the counteroffer, which is the hallmark of haggling and bargaining for a better deal. When the other party replies to an offer with a new term (lower price, more product, etc.), this is a rejection of the original offer and a new offer for the original offeror. Now, it's up to you whether to accept the counteroffer.
In the example from above, if you decline the mechanic's offer to replace your muffler for $300 and instead offer to pay him $250 to do the same service, you've rejected the original offer and created a new one. If the mechanic agrees, you have an offer, acceptance, and exchange of something of value -- and, therefore, a valid contract.
Accepting an Offer
The act of acceptance is typically very straightforward. Someone makes an offer, and you agree to the terms. However, depending on the type of contract, there are different requirements for acceptance. For a contract for the sale of goods (anything tangible), a valid contract requires acceptance of every single term. For a contract for services (mechanics, painters, etc.), there may be reasonable, minor differences between what the parties believe to be the contract terms.
The following are different methods by which a party can accept an offer:
- Clearly stating or writing acceptance
- Fully performing based on the offer
- Promising to perform
- Performing improperly based on the offer (someone orders Vaseline from you, and you mistakenly send them grape juice — you've accepted the offer and formed a valid contract, though your performance is faulty)
You can include language regarding what constitutes acceptance in your business contract.
An Exchange of Something of Value (Mutual Consideration)
For any contract to be valid, there must be an exchange of something of value. Essentially, there must be an exchange of services or goods in any contract. It can be a promise to pay in the future (which is the usual arrangement), an immediate payment, or a promise to act (or not to act). This is called "consideration" in legal terms. For example, if you offer to sell used books to someone for $40, the consideration is books on one side and money on the other side.
When you write a business contract, more than likely, none of the terms will be for anything other than money, goods, or services, and you won't need to worry about the absence of an exchange of things of value. Be aware that the requirement exists.
When entering into any contract, include the basic elements noted above. The absence of any of them may be used to attack the validity of a contract and could result in the loss of time, money, and business.
Write a Business Contract: Best Practices
The above information covered the fundamentals of contract formation. The following information outlines several contract best practices.
A confidentiality clause or nondisclosure agreement prevents the parties from revealing sensitive information about each other or the business relationship. This protects trade secrets, intellectual property, and other proprietary data. The clause should clearly define what information is confidential.
A noncompete agreement restricts an employee or contractor from working for a competitor or starting a competing business for a certain time after leaving your company. This protects your business, including your client list and trade secrets. However, the restrictions must be reasonable in scope, duration, and geography.
A termination clause states the conditions under which either party can end the contract. It can cover contract termination for situations such as breach of contract or nonpayment. The clause should explain the notice required to end the contract and the consequences of termination.
Clearly explain the payment details, including deposits, amounts or rates, installments, due dates, late fees, and payment methods. You may want progress payments for large projects as contract milestones or required deliverables are met.
Scope of Work
Clearly define each party's scope of work, deliverables, timeline, and responsibilities. Define what approvals and sign-offs are required.
Intellectual Property Rights
Explain who owns the rights to any intellectual property, creative work, code, or inventions produced as a result of the work.
Even a well-crafted contract can lead to disputes. Arbitration and mediation are alternative methods of dispute resolution. They provide a way to resolve disputes through a private dispute resolution process rather than going to court. Arbitration generally costs less than litigation and can resolve issues quicker than a lawsuit. The arbitrator's decision is legally binding. In mediation, a neutral party helps those involved in the legal contract to resolve their issues.
Legal Names and Signatures
Use the proper legal names, including the correct business name and titles of the parties involved in the agreement. Type out the name and title under the signature line.
Sample contract templates can be a good starting point. Findlaw offers a range of legal documents suitable for all businesses, including employment contracts, protecting confidential information, service providers, nondisclosure agreements (NDAs), disclaimers, etc.
Have an Attorney Review the Contract Before You Commit
Before committing to a contract, seeking legal advice from a business lawyer is crucial. A contract law attorney will undertake a step-by-step review of the legal document. This helps ensure that all the necessary elements of the contract are in place and that you're protected in the case of legal action.
While business owners, including startups, write and sign contracts quite regularly, sometimes it's essential to get an attorney's assistance. Find a qualified business and commercial law attorney near you.
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