A Business Contract is a legal agreement between a buyer and seller of goods or services. This document can be used by anyone making any business exchange – from large companies to individuals.
Business contracts should include all details about the exchange, including payment, the type of goods or services, and the responsibilities of each party. A business contract will protect the buyer and seller if the other party doesn’t hold up their agreement.
Types of Business Contracts
What is a Business Contract?
A business contract is an agreement in which each party agrees to an exchange, typically involving money, goods, or services. Business contracts protect both buyers and sellers by reducing agreements to writing. The contract can be as long or short as necessary to cover the important details of the contract.
Contracts require the following:
- A meeting of the minds
Contracts are legally binding on the parties who sign them. In business, contracts are typically either sales agreements, for the sale of goods, or service agreements, for the sale of services. If you need to hire employees, use an employment contract.
An offer is the basis for the contract. For example, “I will provide cleaning services for your business at $40 an hour” is an offer. When the business owner says, “I will pay $40 an hour for your cleaning services” that is an acceptance of the offer.
Consideration is the exchange, in this case, of money for services. Both parties must agree to the terms of the offer and acceptance. If the business owner says, “I will pay you $35 an hour for your cleaning service,” this is a counteroffer. In this example, there is not yet a meeting of the minds and, therefore no contract.
Reducing agreements to writing is not always required for a legally binding business contract; however, when agreements are not reduced to writing, some confusion may occur. Consequently, it is best to write out the agreement. Sometimes, you may want to use a memorandum of understanding before moving forward with a legally binding contract.
The Consequences of Not Having a Business Contract
When you have a business contract reduced to writing, you have a clear road map detailing what you and the other party to the contract agreed to. Because contracts are legally binding, you have the right to legal recourse if the other party fails to meet their obligations.
Imagine, for example, your business sells cleaning services. You contract a business to clean their building nightly at $40 an hour per employee. You provide two employees, who take 2 hours to complete the job. In your mind, you are owed $160 per night.
But then the business owner recalls the $40 per hour part of the agreement and disputes that the agreement was for $40 per employee. Rather, the business owner maintains they own you for $80. Without a written service agreement, you may have difficulty proving your version of events was correct.
Similarly, if you engage in an agreement to purchase goods, such as janitorial supplies for your business, without a written agreement, you may find yourself in a position you didn’t anticipate.
For example, if you order cleaning supplies at a cost of $250. Based on your business plan and current clientele, you anticipate these supplies will last three months.
However, one month after the first order, the second shipment of cleaning supplies arrives. The supplies seller insists you agreed to a monthly purchase of $250 in cleaning supplies. You recall an agreement to order supplies on an as-needed basis. Without a written sales agreement, the sale details would more likely remain in dispute.
The absence of written service agreements and sales agreements has led to many disagreements. This can lead to lost business and ill will. In some cases, if the contract is not in writing, it is not enforceable – even if there is no dispute over the terms.
Most states have adopted the Uniform Commercial Code (UCC) which requires all contracts must be in writing if the contract lasts more than one year.
Lawyers often say oral contracts aren’t worth the paper they are written on. This is because proving the terms of the agreement, absent a written document, is nearly impossible.
Most Common Uses for Business Contracts
Business contracts are most commonly used when a business owner agrees to provide a service or good to another or any time a business owner agrees to pay for a service or good. In other words, a service agreement or sales agreement is the best practice if money is being exchanged.
Business owners use sales agreements when selling their products. They also use sales agreements when purchasing supplies to create their product. Finally, sales agreements are used when purchasing supplies for the office, from cleaning supplies to lunch for the staff to office supplies.
Business owners use service agreements when selling their services. They also use service agreements when purchasing services, from office cleaning to instrument and machine maintenance to car services.
Don’t forget to use contracts both when you are the seller and when you are the buyer. Contracts protect you when selling your goods and services and when you purchase goods and services for your business.
After sending a request for proposal, you can use a business contract with your final vendor choice.
What Should Be Included in a Business Contract?
When drafting a business contract, include every detail relevant to the contract. If it is not written into the contract, it is not considered part of it. When writing a contract, at a minimum, the following should be included:
|Offer||This includes details about what is being purchased or sold. For example: Party A will provide 36 widgets, at $3.00 per widget. Or Party B will provide office cleaning services, at $40 per hour per cleaner.|
|Acceptance||If the other party agrees to the offer, they indicate their agreement by signing the contract.|
|Consideration||Consideration is something of value. In most cases, it is money. However, it doesn’t have to be money. It could be an exchange of services, such as “Party A agrees to represent Party B in a divorce proceeding. In exchange, Party A will provide cleaning services 2 nights per week, for 6 months.|
|Details pertaining to the offer||Details may include any or all of the following:
· Date of delivery;
· Condition of the goods;
· Date payment is due;
· Form of the payment;
· Provisions for what happens if the goods or services cannot be delivered as promised due to an act of God;
· Re-ordering provisions; and
· The expiration date of the contract.
|Signatures||Both parties to the contract must sign the contract, demonstrating agreement to the terms.|
7 Tips For Writing a Business Contract
- Keep it simple – in most cases, you won’t need to go overboard on the legal lingo; ensure the crucial information is outlined.
- Correctly identify each party – as simple as it sounds, it’s easy to make a mistake when writing the names of each party. Ensure the correct legal names are included in the contract.
- Include all the details of the agreement – whether it’s a service or a sale, and include everything that’s been discussed in the contract. If you agree on something orally, it won’t be legally binding.
- Outline payment details – document how much needs to be paid, when it needs to be paid, and any other payment conditions, such as using a payment plan.
- Agree on terms to terminate the contract – include a clause to terminate the contract under certain conditions, such as if a payment isn’t received on time.
- Choose a state to govern the contract – if the parties are located in different states, you should choose which state’s laws will govern the contract.
- Use a business contract template – a business contract needs to be accurate and include all the vital information, the best way to do this is to use a template where you have to fill in the gaps.
Frequently Asked Questions
Can I force someone to sign a business contract?
You cannot force someone to sign a contract. However, you can refuse to do business with someone who won’t sign a contract. Losing your business might be the “nudge” they need to reconsider their position.
Is every written contract legally binding?
No. There are certain written contracts that are not enforceable. These include contracts signed by children and contracts signed by people who are not mentally sound. Additionally, contracts that deal with illegalities are not enforceable. For example, you cannot engage in a legal contract to buy or sell illegal drugs.
Do I need a new contract if I want to change the terms of the agreement?
Yes. Any time the terms of the agreement change, this should be documented in a new contract. The new contract should also make clear this contract replaces the old contract.
Do I have to write a new contract, or can I make notes on the old contract that document changes?
While creating a new contract is a good idea, contract modifications reduced to writing on the old contract document may be legally sufficient.
Ensure both parties agree with the language of the contract modification and that both parties initial all contract changes. The initials indicate consent to the modifications.
What is a conditional business contract?
A conditional business contract is a contract predicated on certain conditions occurring.
For example, if you have a snow removal business, your service agreement may read, “Ace Snow Removal will remove snow from parking lots, walkways, and business entrances after snowfalls of two inches or more.” The contract is about snow removal. The condition is the presence of two inches of snow or more.
How to write a business contract?
The best way to write a business contract is by using a template. We offer two templates, one for services and one for sales. If you’re writing a business contract for services, you should outline the services offered and compensation.
If you’re writing a business contract for a sale, you should describe the goods for sale and include the purchase price and payment information.
How to cancel a business contract?
If you want to cancel a business contract, you should see if the business contract you signed has a provision for canceling an agreement for a specific reason.
If you’re canceling a contract, you should request to cancel in writing, preferably using a notice of contract termination.
The contract could also be canceled if there’s a breach of the contract or if the contract is completed.
A contract could be rescinded if an illegal action, mistake, or misrepresentation occurs.