Every business owner intuitively knows that they need to protect their company. A written business contract is an excellent way to accomplish this objective while complying with the law. Not only do written business contracts leave a record of the transaction, but they can also serve you well in the event of a dispute.
However, a poorly agreement can have the opposite effect. The article below will help you understand how to write business contracts and the various types available:
What Is a Written Business Contract?
Written business contracts are legal documents that govern a business transaction between businesses while defining the contractual relationship. This type of contract is in direct contrast to verbal contracts, which are not always enforceable. A written business contract contains the terms that specify an offer, exchange of consideration, and other industry-specific provisions.
How To Write A Business Contract – Step by Step
Written business contracts lay the groundwork for company operations internally and externally. Your agreements will also go through a lifecycle that requires careful and documented management for the best result. Regardless of your business type, most owners will generally follow the same process.
Here are the three steps of writing a solid business contract:
Step 1. Preparing a Legal Document
The first step is determining which type of document you’ll need and the issues it will have to address. If you have a larger company, appoint a contract person to work with your legal team. Smaller companies should research their options carefully and spend time learning about industry-specific contract negotiations and provisions for a better result.
Step 2. Pre-Contract Planning
Pre-contract planning involves the legal drafting of the initial iteration of your document. Review what’s included in a business contract below to learn about most commercial agreements’ various terms and conditions. Ensure that you negotiate provisions that are fair and reasonable for both parties.
Step 3. Implementation
After reaching a mutual agreement, send a print or digital version of your contract to all signing parties. The offering party should retain the signed original, if any, and distribute photocopies to the others. At this point, you have a written contract that’s active.
What’s Included in a Business Contract?
Every industry uses business contracts. Due to the vast possibilities of written agreements, it’s essential to understand the basics when first approaching the process. They should also adhere to terms and conditions standards while complying with applicable rules.
Below, check out the various provisions found in most business contracts:
Term 1. Confidentiality
Confidentiality is a crucial component to maintain a company’s competitive advantage. These provisions can limit what employees, stakeholders, and vendors may say about your internal practices. A confidentiality clause can be one or two-sided where both parties agree to not share information about each other.
Term 2. Force Majeure
Force majeure provisions protect businesses when situations are out of their control. For example, not delivering on specific products due to COVID-19 can trigger the force majeure clause. However, you cannot claim force majeure for just any situation, and you must be able to prove that there was no other way to deliver on your contractual obligations.
Term 3. Termination
Termination clauses give parties a chance to get out of their contracts without penalty. Things don’t always go as planned, and a termination clause is helpful if this situation arises. We caution you to use termination provisions carefully and offer restrictive or non-restrictive language as it makes sense for your specific transaction.
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Term 4. Choice of Law
Choice of law clauses state which governing laws it recognizes. For example, a business in Connecticut may have customers in Washington that sign contracts following Connecticut laws. The choice of law clause will clear up confusion regarding which rules apply to the agreement.
Term 5. Dispute Resolution
Just because you have a contract doesn’t mean that there won’t be any problems. Dispute resolution clauses allow you to specify how to handle disputes if an issue arises. Many companies opt to use an arbitration or mediation clause here or allow for traditional civil proceedings in the event of a lawsuit.
Term 6. Damages
Damages are a legal word that relates to financial or economic losses caused by the negligence or malice of another party. Your business contracts can specify when you’re owed damages, including failure to perform. The number of damages awarded will ultimately depend upon a judge or jury’s opinion.
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Types of Business Contracts
Business contracts come in many forms. However, they fall under a few broad categories, including sales, service, employment, rental, and entity-related contracts. If you’re unsure which type of business contract to use, refer to your local contract laws for guidance.
Types of business contracts include the following:
Type 1. Service Contract
Service contracts set the terms between a business and an independent contractor or service provider. Types of companies that use service contracts include web designers, mechanics, house cleaners, and accountants. These business contracts are unique since they don’t generally involve the direct sale or purchase of services.
Type 2. Sales Contract
Sales contracts define the terms in a transaction between a buyer and seller. These contracts identify parties, outline payment terms, and establish parties responsible for facilitating the delivery of the asset.
Type 3. Partnership Agreement
Partnership agreements are used between business partners. They describe profit-sharing, liabilities, and responsibilities. Business owners that use a partnership agreement include construction companies, law firms, startups, tech companies, and insurance agents.
Type 4. Joint-Venture Agreement
Joint-venture agreements, also called JV contracts, exist between parties when working on a specific project collectively. An example of a joint venture is microchip companies working with cell phone manufacturers to produce a more efficient process. JV contracts address issues such as facilities, intellectual property, and capital management.
Type 5. Commercial Lease
Commercial leases are agreements between a business and a landlord. They’re far more complicated than a standard residential lease due to legal and economic factors. A commercial lease agreement can vary in length and work well for office, salon booth, and retail space rentals.
Type 6. Confidentiality Agreement
Confidentiality agreements impose a strict obligation on employees to not divulge trade secrets. They’re sometimes called non-disclosure agreements or NDAs. A confidentiality agreement gives a business the right to pursue an employee for damages if they share proprietary information that costs the company their competitive advantage in some way.
Type 7. Asset Purchase Agreement
Asset purchase agreements (APAs) are the best contract to use when purchasing a non-real estate asset. Assets can exist in tangible and non-tangible formats. You can use an APA when buying or selling intellectual property, construction equipment, telecommunications equipment, and other industry-related assets.
Can I Write My Own Business Contract?
Yes, you can write your own business contract. However, consider hiring a business lawyer from your state to help out with the contract drafting process. They will ensure that your documents are valid and appropriate for the given transaction while avoiding legal mistakes entirely.
Who Writes Business Contracts?
Company owners and managers generally write business contracts. From car dealerships to independent contractors, written business contracts are an essential component of an enforceable transaction. Business lawyers are trained and adept at navigating the complexities and offering guidance if you need legal advice.
If you need help drafting a business contract, post a project in ContractsCounsel’s marketplace to receive free bids from lawyers in our network. All lawyers are vetted by our team and have peer reviews for you to explore before hiring.
