How to Write Effective Business Contracts

Business contracts are legally binding written agreements between two or more parties. They are an important part of business and such agreements need to be created and/or reviewed carefully.

While smaller companies often conduct business based on informal handshake agreements or unspoken understandings, the more that is at stake, the more essential it is to have a signed contract. A contract serves as a guide and a memorial of the agreement that must be followed by both parties. It presents each party with the opportunity to:

  • Describe all obligations they are expected to fulfill
  • Describe all obligations they expect the other party or parties to fulfill
  • Limit any liabilities
  • Set parameters, such as a time frame, in which the terms of the contract will be met
  • Set terms of a sale, lease, or rental
  • Establish payment terms
  • Clearly establish all of the risks and responsibilities of the parties

A contract is, in essence, a written meeting of the minds. While it is typically drawn up by one party and favors the needs and requirements of that party, protecting them from most (if not all) liabilities, it should be thought of, initially, as a work in progress that changes and grows as each party contributes his needs, wants, and terms prior to signing. At this time, it becomes an official document. It is the testament of a mutually beneficial relationship or transaction. Consideration, whether it is monetary or a promise to do work or provide a service by a specified date, is at the root of a contract. It is required for a document to be considered a valid contract.

Obviously, both sides should benefit in some manner before entering into any such agreement. The term “standard contract” is more myth than reality and too often people simply sign on the dotted line without reading or negotiating the terms of a contract.

Consideration, compensation, ownership rights, liability, and risk are all areas that need to be worded carefully; you should seek out help from a qualified attorney who is experienced in contracts to make sure that you have covered all necessary areas in a clear manner.

A contract should stipulate how its terms shall be enforced and what actions can be taken if one party fails to meet his obligations. Some contracts will also include “out clauses” whereby one party can opt to get out of the contract at a certain date. Typically, this is done by informing the other party of his wish to terminate the contract in writing.

There may also be a need to arbitrate disputes that may arise under the life of the contract. How such disputes will be handled (i.e., by a neutral third party arbitrator) can also be included within the contract.

In situations where you do not generate the form of the contract but are entering into an agreement with another business or individual, you should typically:

  • Read the contract over very carefully
  • Highlight anything that is ambiguous or vaguely worded for further clarification and/or possible deletion
  • List any additions you feel are necessary
  • Discuss all changes to the contract with the other party or parties
  • Make sure any requested changes have been added prior to signing as oral agreements can be very tricky and are not always binding
  • Review the contract again, prior to signing
  • Consult an attorney, especially if the agreement is complicated
  • Keep a signed copy of every contract that you sign