How to Write a Business Contract
Every business contract should include a few important elements to protect your interests.
Entering into a business relationship with another party (whether it's a person or a company) is a serious task with important ramifications 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 contract.
Generally speaking, you will want to keep two things in mind when entering or writing a business contract. First, does the agreement address all of the possible situations which may arise (or at the very least, the most probable ones). And second, do the provisions leave too much room for ambiguity. You want the contract to cover the important points and do so in a way that is clear and doesn't leave too much room for interpretation.
Read below for tips on writing business contracts for your small business.
How to Write a Business Contract: The Basics
- 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 they are not advisable because such agreements can lead to enormous problems. Oral 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.
- Use language you can understand. When writing a business contract, there's no need to be intimidated by a false sense that the document 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.
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). For example, after a brief introduction of the parties with their names and intentions for the contract, you would write, "1. Terms" and in that paragraph describe the obligations of the parties. The second paragraph could read, "2. Valid Dates," and so on.
- 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 15 th 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.
- Include payment details. Directly related to the above is 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). Perhaps you'll want to include a provision that states you will only perform work after the checks clear the bank. Contract disputes often center on money, so you'll want to be as specific as possible regarding this term.
- 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 parties.
- Include language on how to terminate the contract. Contracts aren't meant to last forever, and 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 under these circumstances. 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 (e.g., 60 days).
- 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 agreeable.
- 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 attorneys.
- 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. The advantage with mediation is that often times a compromise is found and the parties can continue doing business with a minimal amount of acrimony. Arbitration is a more adversarial process where the arbitrator (sometimes a panel of arbitrators) 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, which allows the parties to continue their business operations with a minimal effect on their wallet. On the other hand, if there's a dispute, you will not get your day in court.
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.