How To Write A Successful Business Contract
Every business owner has entered into a contract at some point. Although formal contracts may seem confusing or unnecessary for certain agreements, they are there to protect you and your business.
The right contracts help you clearly memorialize an agreement, avoid disputes and limit your liability with the other party. They can also protect your ideas and information from being used by your competitors.
Entering into a business relationship with another party is a serious matter and should not be taken lightly. It's important to enter into a contractual relationship with another party after giving meaningful thought about the relationship you want.
Don't fall into the trap of entering into agreements haphazardly or with complete trust of the other party. Even if the other party is a family member or close friend, your business contract should protect your own business interests first.
To properly protect your business, you'll need to become familiar with some basic guidelines on how to write a successful business contract.
Here are 8 tips on how to make solid business agreements and contracts.
Put it in writing
Whenever you enter into a business contract, you want written proof of the agreement as well as the specific terms that will bind each party.
Oral agreements do occur in the small business world and are considered binding in many situations. However, these agreements are not as easy to enforce. People's memories can be faulty and the details of the agreement can be misinterpreted.
A written agreement is less risky, because it will provide a clear document that spells out each party's rights and obligations in case of confusion or disagreement.
Keep things simple
Contrary to what most people believe, you don't need legalese to formulate a successful contract. Technical language and phrases such as "heretofore" and "henceforth" are unnecessary and can be confusing and intimidating to those who are not familiar with legal jargon.
Instead, create short, clear sentences with simple numbered headings to alert the reader to what the paragraph is stating. By segmenting the contract into precise parts, it will be easily understood by everyone involved – and by the court if it comes to that.
The rights and obligations of each party should be in clear and specific terms. Don't leave things open-ended or create room for interpretation later on.
Also, be sure to include the correct legal names of the parties and businesses involved. If a business is organized as an LLC or a corporation, be sure to identify it by the correct name and use the correct suffix.
If you want a delivery made on the 5th of each month, use the specific number instead of writing, "in the first week of each month." If you or the other party agree on a change, make that amendment in writing rather than relying on an oral agreement or handshake. A court may not accept an additional oral agreement as part of the contract.
Include payment information
Specify how payments should be made between the parties. Money can be a contentious issue, so it is important to make this portion of a contract extremely detailed.
When possible, incorporate dates – whether the sum will be paid up front or if payments will be made in equal installments for a period of time; payment methods – cash, credit, check, and conditions of payment.
For example, whether payments will be contingent upon a job being completed or whether a party can secure financing.
Add termination language
Contracts are not typically perpetual agreements. It makes good sense to set circumstances under which the contracting parties can terminate the contract.
For example, if one party fails to make payments, misses too many important deadlines or violates a major term of the contract, the other party should have the right to terminate the contract without being held liable for breach of the agreement.
Choose a state law to govern the contract
If the parties to a contract are located in different states, create a clause in your contract that discloses which state laws govern. This will prevent confusion if there is a dispute in the future.
Additionally, you can specify where you will arbitrate, mediate or bring a legal action.
Agree on a way to resolve conflicts
In your contract, specify what you and the other party will do if something goes wrong. You can agree to avoid court actions and instead handle issues through arbitration or mediation.
You may also want to include a clause about damages (money awards) if the costs in the contract are not too speculative or hard to calculate.
Keep things confidential
Contracts typically contain sensitive information about each party. Parties may gain knowledge and insight into your business practices, finances, or trade secrets.
If you do not want the other party to share this information, you should add a clause that prohibits them from doing so.
Writing a business contract that represents your best interests and protects your business is essential. Before writing a contract with another party, you should do your due diligence and become familiar with legal terms and processes that create enforceable contracts. However, sometimes it's best to have an attorney review your contract before it becomes binding.
Disclaimer: The writer of this article is a business professional with a J.D. This blog post is intended for informational purposes only and should not be seen as legal or business advice from the writer or Online Labels, Inc. This blog post contains the writer's opinions and does not reflect the opinions or views of the writer's employer, past or present, Online Labels, Inc. or any other organization which the writer may be affiliated. The reader is strongly encouraged to speak to an attorney regarding professional legal and/or business help.