A business contract is a legally binding written agreement between two or more business parties. It governs business transactions, terms and conditions, warranties, and other legal matters.
When writing a business contract, you will need to cover a number of bases to ensure that your document is legally enforceable and fully protects your business’s best interests.
A well-written business contract can ensure that your company is always protected, making it more difficult for another party to win a lawsuit against you.
This guide will explore 11 things to include in a business contract to protect your company and maximize your next collaboration.
1. Information of Parties Involved
Every good contract begins with a formal introduction. The introductory clause sets the scene for the entire document that follows.
In any business contract, you should introduce the businesses by name and state what they do. Then, you can follow up with the legal names of any parties and their titles in their organization.
Larger companies often have professionals sign on behalf of the entire organization. For example, C-level executives will typically sign contracts on behalf of their corporations or enterprises.
When entering any business contract, ensure that every party has the legal authority to sign on behalf of their company.
Here is an article about business contracts and what you need to write them effectively.
2. Legal Purpose of the Contract
There are many types of business contracts in effect. Therefore, your document should clearly state what you and the other parties are signing this document for.
In other words, the legal purpose also lays the ground for the formal agreement to all terms and conditions.
A legal purpose must be shared between all parties to be enforceable by law.
Common types of business contracts include:
- Employment agreements
- Partnership agreements
- Profit sharing agreements
- Nondisclosure agreements
- Enterprise service agreements
- Franchise agreements
- Amendments to original contracts
Here is an article that explores 31 types of common business contracts.
3. Consideration
In contract law, consideration is a benefit each party receives as a deal. Therefore, consideration plays a large role in enforceability. It places something at stake for each party, giving them a reason for signing the contract in the first place.
In business, a contract often creates a promise between two or more parties. This means they agree to do or not do a certain action in exchange for something of value.
Consideration can be tangible assets, like money or real estate, or a promise to perform or not perform certain actions.
Here is an article that explores legal considerations.
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4. Transaction Details
Business is rooted in the principle of exchange. The company does something in exchange for something in return. In contractual terms, this could be providing a salary and benefits to someone in exchange for their services, as in an employment agreement.
You should clearly detail the terms and conditions of your business transaction in any contract.
Be sure to include details such as:
- The nature and scope of the transaction
- The duration of the transaction
- Both parties’ responsibilities
- Limitations of both parties
- Expected outcome of the transaction
- Consequences of not fulfilling the terms of the agreement
Here is an article with an example of a typical business transaction agreement.
5. Competency
Competency shows a business’s ability to perform certain actions. For example, in business law, competency means that a company has the rights and abilities to act to enter an agreement and follow through with its requirements.
In a broader sense, legal competency reflects a signer’s ability to enter and maintain a contract. For example, people with intellectual or cognitive impairments, minors, and those with mental handicaps typically require a parent or appointed guardian to sign on their behalf.
Here is an article that provides more information on what competency means in law.
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6. Acceptance
The executed contract must have the acknowledged acceptance of all involved parties. Acceptance usually arrives through a process of negotiation.
Negotiating business contracts is the best way for all parties to receive a fair deal and reach a mutual decision.
In legal terms, acceptance also means that a buyer agrees to the terms and conditions of a seller’s offer. In business contracts, one or both parties agree to the obligations placed upon them in the contract.
Here is an article about legal acceptance and different types.
7. Termination Clause
A termination agreement gives either party the right to end an agreement if the other party breaches the contract.
A contract termination agreement, also known as a termination clause, can allow parties to end a contract without legal penalties. This can make it easier to avoid financial loss or lawsuits if certain events make it impossible for a party to fulfill their part of the contract.
Termination clauses offer guidance on how the parties agree to respond and conduct business after a breach of contract. It can also give a business the right to end a contract for particular reasons without legal dispute.
Here is an article that covers termination clauses in greater detail and includes several real-life examples.
8. Dispute Resolution Agreement
In any contract, it is helpful to have a dispute resolution agreement. This clause guides parties on what methods they can use to resolve any disagreements arising over their agreement.
Dispute resolution can include:
- Negotiation
- Mediation
- Arbitration
- Evaluation
- Rule making
These practices are drawn from Alternative Dispute Resolution (ADR) methods. These practices help both parties avoid lawsuits and legal penalties.
The exact type of dispute resolution a business contract includes will depend on the contract's nature and its signers' agreement.
Here is an article with more information on alternate dispute resolution (ADR).
9. Indemnification Clause
An indemnification clause prevents either party from holding the other legally responsible for damages and losses that happen in the future.
An indemnification clause, also known as a hold harmless agreement, is a safeguard for all parties in the agreement.
An indemnification clause can waive a business’s responsibility for certain events, such as financial losses and personal injuries outside its control.
Indemnity clauses are common between customers and businesses. They allow the business to provide products and services without being held liable for customers’ unmet expectations, financial losses, or damages from third-party events.
Here is an article with more information about indemnification and how it works in law.
10. Warranties
Warranties are promises about certain characteristics of a product or service. For example, a business may offer a money-back warranty for a product if it does not meet its quality standards.
In contract law, warranties can be expressed or implied.
Express warranties are written in the contract. Implied warranties are assumed assurances based on a sale of a good or service.
Warranties can also relate to intangible events, like third-party damages or financial losses on a business partner’s behalf.
A good business contract must clearly express what warranties each party offers and what their warranties will not cover.
11. Signatures of Parties Involved
All contracts must be signed and dated by the appropriate parties. Make sure that signatures are legible and printed on a designated signature line at the end of the document.
Signers should only use their legal first and last names. They must also include any relevant titles, such as their professional role in a company.
Datelines beneath each signature make a contract valid. They can also confirm or establish an effective date.
Here is an article where you can learn more about effective dates in contracts.
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