If you are starting your own business, merging companies or hiring another company for contracted work you will most likely be drafting at least one contract. Contracts are crucial because when everything is put in writing and agreed on by all parties then everyone is held accountable for their parts. To effectively write a business contract, consult an attorney and read the article below from FindLaw.com to get your wheels turning.
How to Write a Business Contract
Entering into a contractual business relationship
with another party is a serious task and should only be entered into
after giving real 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 it’s a family member (some would argue
especially if it’s a family member), the business contract should
protect your own business interests first and to do so you’ll need to
familiarize yourself with some guidelines on how to write a business
Generally, you will want to keep two things in mind when entering or writing a business contract:
- Does the agreement address all of the possible situations which may arise? It’s also good to have contingency plans.
- Do the provisions leave too much room for ambiguity? Contract disputes often arise over unclear terms or provisions.
Read below for tips on writing business contracts for your small business.
1. Get it in Writing
Anytime you enter into a business contract, you want written proof of
the agreement as well as specific terms by which each party is bound.
Oral agreements do occur in the small business context, but such
agreements are difficult to enforce and people’s memories can be faulty
and terms easily misremembered or misinterpreted. The first lesson in
How to Write a Business Contract 101 is to always get it in writing.
2. Use Language You Can Understand
There’s no need to be intimidated by a false sense that a business
contract has to be written in “legalese.” The best contracts,
particularly in the small business context, are written in plain English
where both parties know exactly what they’re signing and what the
provisions mean. Just be sure that the terms you write are specific as
to each party’s obligations and the specific remedies that you have in
the event that the other party violates the agreement. Also, keep in
mind that certain terms have specific meaning in the law.
The easiest way to write a contract is to number and label each
paragraph and only include that topic in the paragraph. By segmenting
the contract into individual units, it will be more easily understood by
the parties (and by a court should it come to that).
3. Be Detailed
The rights and obligations of each party should be laid out in specific language
that leaves little room for interpretation. If you want delivery on the
15th of each month, use the specific number instead of writing,
“mid-month”. If you and the other party agree to a new term or decide to
change an existing term in the agreement, be sure to add a written
amendment to the contract rather than relying on an oral agreement. A
court may or may not accept the oral agreement as part of the contract.
4. Include Payment Details
It’s important to specify how payments are to be made.
If you want to pay half up front and the other half in equal
installments during the life of the contract, state that, as well as the
terms under which you will release payment. For example if you contract
with someone to paint your business offices, you might want a provision
stating that your regular payments are contingent upon a certain number
of rooms being painted to your satisfaction. Whenever possible, list
dates, requirements and methods of payment (cash, check, credit).
Contract disputes often center on money, so you’ll want to be as
specific as possible.
5. Consider Confidentiality
Often when entering a business contract, the other party will gain access and insight into your business practices and possible trade secrets.
If you do not want the other party sharing this information, you should
include a clause that binds the other party from disclosing your
business information or information included in the contract to other
6. Include Language on How to Terminate the Contract
Contracts aren’t meant to last forever. If one party continually
misses payments or fails to perform their duties, you want to have a
mechanism in place so that you can (relatively) easily terminate the
contract. It could be a mutual termination agreement (when the
objectives of each side have been met through the contract) or more
likely an agreement that either side can terminate if the other side
violates a major term of the contract, after giving proper notice of its
intent to terminate.
7. Consider State Laws Governing the Contract
Contracts can stipulate which state’s laws
will govern in the event there’s a dispute. If the other party is
located in another state, you should include a clause that states which
state laws will govern. If you don’t, and there’s a dispute, there may
be a whole other legal argument (which costs more money) about which
state’s laws should be applied to the contract. Avoid this headache and
agree to it at the inception of the contract, when both parties are
8. Include Remedies and Attorneys’ Fees
Especially if you believe that it’s more likely that you’ll sue over
the contract (as opposed to the other party suing you), you might want
to include a clause that awards attorneys’ fees to the winning party.
Without this clause, each party will have to pay for their own
9. Consider a Mediation and Arbitration Clause
In the event of a dispute, it may be advantageous to include a provision that requires the parties enter either mediation or arbitration,
or both. Mediation is a voluntary process where both parties try to
work out their issues directly, with the help of a neutral third party
mediator. Any settlement must be approved by both parties. Arbitration
is a more adversarial process where the arbitrator hears both sides’
arguments and makes a decision that both parties must abide by. It’s
akin to a trial setting, but the arbitration process is much quicker and
cheaper than litigating in court.
10. Consider the Help of a Legal Professional
Writing a business contract that protects your interests while
balancing your business objectives is critical to your business’
success. Learning how to write a business contract is the first step on
the road to success. But while you should get acquainted with the legal
terms and processes for writing a contract, sometimes it’s best to have
an attorney review your contract before it takes on the force of law.
Find a business and commercial law attorney near you for assistance.