Contracts are a fundamental part of the business world. Contracts are legally binding and enforceable documents that are made among businesses, employees, suppliers, service providers, the government and others.

Essentially, a contract is an agreement among two or more parties that creates a legal obligation. They can be made orally or in writing, although oral contracts are tougher to litigate in court.  If a contract is breached, the party that breaches the contract can be forced to pay damages, in the form of a specific action or a monetary award.

In business, contracts are used to ensure that agreements are acted on, and to enforce the terms of the agreement. Business contracts typically comprise independent contactor agreements, basic sales contracts, leases and rental agreements, selling or buying a business, franchising, joint ventures, partnerships, non-disclosure agreements, etc.

Elements of a contract

There are four basic elements of a contract: the offer, acceptance, intention to create legal relations and consideration.

The offer and acceptance of a contract are the key principle of the legal concept of contracts. Agreement is composed of an offer to another party that he or she is willing to enter a contract on specified terms. The contract comes into existance when the offeree accepts the contract.

This formula rests on the idea that the contract is formed when the parties involved are all of one mind regarding the terms of the contract. However, legal concepts such as promissary estoppel, misleading conduct, unjust enrichement and misrepresentation can be used as arguments in court that the contract is invalid.

The offer and acceptance do not always have to be verbal or in writing. Implied contracts may exist in some cases when the agreement or its terms have not been expressed in words. For example, a contract may be implied in fact when circumstances give credence to the belief that two parties have come to an agreement even when they have not done so expressly in writing or in an oral contract. For example, a patient going to a therapist has an implied contract with the therapist that he or she will pay a fair price for the services offered. If the patient does not pay, he or she may have breached a contract that has been implied in fact.

A contract in law offers courts the opportunity to remedy situations where unjust enrichment may have occured. For example, if a business were installing swimming pools at several homes along a street and mistakenly installed one at a home that did not request installation, and the homeowner allowed installation knowing that he or she did not order the pool and later refused to pay for the pool, a court could hold that a quasi-contract existed and hold the homeowner liable for the cost of the pool.

Intention to create legal relations is primarily the difference between social obligations and obligations at law. An agreement to give your brother a ride in exchange for gas money is a social obligation, an agreement to transport products for another business that’s made orally or in writing is more likely a legal relationship.

Consideration is basically something of value offered by the offeror that will be exchanged for something else of value from the offeree. For example, a product or service may be exchanged for another product or service or a payment.

Requirements for forming a contract

In order to form a contract, five legal requirements must also be met. Each party must have the capacity to contract. That is, the person signing the contract must have the standing and authority to do so. The purpose of the contract must be lawful. Contracts for unlawful purposes are not valid and are not enforcable in court. The form of the contract must also be legal. The two parties in the contract are required to have the intent to form a legal relationship when they agree to the contract. Lastly, each party involved in the contract must consent to the contract.

Contracts with customers and suppliers

Contracts can come in a variety of forms, non-disclosure agreements concerning business secrets, non-competition agreements with former employees or other businesses, employment contracts with independent contractors, etc. However, the most common contracts small businesses will sign are contracts with customers and suppliers.

The following are some tips for understanding contracts and making sure you don’t get trapped in a contract that is impossible to complete or is extremely disadvantageous:

- Make sure the contract is a specific as possible. The very best contracts for small business are clear and specific and focused on a limited number of issues. Terms of the contract such as number of products or services, delivery times, repeat service, etc. should be very clearly defined and unambiguously spelled out in the contract.

- Clarify all questions. Don’t automatically assume that conditions of the contract are implied. Always clearly answer every possible question the other party may ask in the language of the contract.

- Make sure it’s legal. Contracts for illegal actions are not enforceable. For example, if you sign and agreement to rent a facility to a business, and later find out that city regulations prohibit that business from operating there, your rental agreement may become invalid as a result.

- Read and understand the language of the contract. Make sure you understand all conditions of the contract, especially language detailing dates, services to be rendered, etc.

- Hire an attorney. When drafting your run-of-the mill service agreement, ask for an attorney’s advice on the document to ensure it’s legal and that all your bases are covered. If  your business is negotiating a big contract, it’s also probably worthwhile to have an attorney review it before you sign it.

Finding blank form contracts is fairly easy. A simple Internet search will find most of the service agreements, leases, independent contractor agreements, etc. Occasionally, however, you’ll need to draft your own contracts for certain business functions.

When drafting a contract or adding to a contract template, your aim should be to clearly state what each party in the agreement is agreeing to do and how they’ll do it. Ambiguity should be kept to an absolute minimum.

When drafting a contract, there are four basic things you need to do: clearly state what the parties are agreeing to, anticipate and resolve potential conflicts or areas of confusion, and provide for recourse should the agreement not be followed.

Most contracts include:

- A title which sums up the basic point of the agreement being made. For example, a customer service agreement might be entitled Acme Cable Customer Service Agreement.

- The names and addresses of all the parties to the contract and their role in the contract (landlord, tenant, employer, employee, etc.). This helps establish the identities of all parties involved and their roles with regard to the contract. Being clear on this point is important, especially if there are multiple parties involved in the contract.

- A background description of the contract agreement, explaining what types of businesses the parties operate and the activities they’re pursuing together. For example a contract between a business and a pest extermination service may spell out that Acme Cable Corporation is a company with 20 offices in the Atlanta area and that Marco Pest Control is an extermination company providing pest control services in the Atlanta area, and that the subject of the contract is an agreement between Acme and Marco to provide pest control services for Acme’s offices.

- A full and complete description of what each party in the agreement is expected to do and how they will do it. For example, if the contract is a service agreement between Acme and Macro, the contract would describe the work expected of Macro by Acme, when it will be performed, how it will be performed, possible deadlines and criteria for successful completion.

- The price of any products or services involved. The price of services provided should be clearly spelled out, along with a description of pricing for any additional services provided.

- Payment arrangements. This should outline how payment is to be made, by what means and whether payment will be made as a lump sum, or in installments. This part of the contract should also address late payment and interest if applicable.

- Warranties provided regarding the product or service provided. This should detail any obligation by a service provider or product maker to repair or replace faulty work or products and remedy any damages caused by faulty work or products.

- Transferability of the contract. Your contract should address whether the contract is transferable to another party. For example, a contract between Acme Cable and Marco Pest may contain a clause allowing Marco to hand off the job to another pest company.

- Termination clauses. Your contract should contain language that addresses whether the contract can be cancelled and under what conditions. For example, a contract for an ongoing service may require a 30 day notice of cancellation.

- Breach of contract clauses. This should address the remedies available to parties if the agreement is breached, including damages, mediation or arbitration. This clause should also spell out potential breach of contract circumstances.

- State law agreement. This portion of the contract should detail what state law applies to the contract should the agreement be between parties in different states.

- Signed and dated. Your contract should have the signatures of the parties, the date the contract was entered into and the addresses of the parties.

Organizing the contract

Once you’ve included all the information necessary, you’ll need to make sure that it is written in a professional, but user-friendly format. Most of the terms above are broken out by numerals for better accessibility and easy reference to terms.

Complex aspects of the contract, such as architectural blueprints or design schematics, should be included as attachments to the contract. Any attachments should be labelled and referred to in the contract, and it should be noted in the contract that the attachment is a formal part of the contract.

Changing a contract

As you review your contract, you may find terms you’d like to change. This is common, as contracts are typically negotiated back and forth via offer and counteroffer.

When changing a written contract, there are a number of ways this can be done, such as scratching out offending language and filling in new language directly on the contract, and having parties initial the changes to show their assent.

Chances are, however, that your contract will be on a computer, where changes can be made easily and neatly. Just change the items you need to change, print out a new copy and have both parties sign when they’re in agreement. Read documents carefully before signing to ensure that you are signing the revised version of the agreement, and not the original.

Addendums

Contract terms can be changed later if both parties are in agreement. Addendums to contracts are changes made after the contracts are signed. An addendum basically adds to or modifies the existing contract. The addendum should clearly spell out that it supersedes the original agreement, and both parties must sign it for it to be valid.

By understanding how contracts are written and the need to clearly and unamiguously write contracts, you can draft agreements that are clear, concise and designed to minimize potential conflicts. As contract disagreements can result in costly litigation, it is very important to have solid contracts governing your agreements with other businesses and clients. For complex contracts, you may want to seek the advice of an attorney with experience in contract law to avoid making costly mistakes.