A business contract is a legal agreement between a buyer and seller of goods or services. Business contracts can be used by anyone making any kind of 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 both the buyer and seller in the event the other party doesn’t hold up their end of the agreement.
1. 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 in order 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.
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, in effect, “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, instead, “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.
2. 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, if the other party fails to meet their obligations, you have the right to legal recourse.
Imagine, for example, your business sells cleaning services. You contract with a business to clean their building nightly, at a rate of $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 $80. Without a written service agreement, you may have a more difficult time 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 you three months.
However, one month after the first order, a second shipment of cleaning supplies arrives. The seller of the supplies 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 details of the sale remain 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.
3. Most Common Uses for Business Contracts
Business contracts are most commonly used any time 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, if money is being exchanged, a service agreement or sales agreement is the best practice.
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, as well as when you purchase goods and services for your business.
4. 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 the contract. 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.|
5. Business Contract Templates
6. Business Contract FAQs
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 a person 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 just make notes on the old contract that document changes?
While it is a good idea to create a new contract, contract modifications reduced to writing on the old contract document may be legally sufficient. Make sure 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.