What Is a Business Contract?
A business agreement is typically formed between two or more business organizations. This agreement can be either be in oral or written form. It can also be a set of reciprocal promises or understanding. Technically, most agreements formed between any businesses could be considered business agreements.
Who Are the Parties to a Business Contract?
Parties to the contract are typically two entities that carry on some or the other business. A contract concluded between two parties typically contains information pertaining to the transaction such as names of the parties, details regarding the business carried out and other terms that regulate and govern the transaction. There are some common rules that agreements must comply with in order to be enforceable. One such key principle is to have the agreement in a written form. Typically, the following contracts are in writing:
- Real estate contracts
- Government contracts
- Contracts that take longer than a year to get completed.
Many countries have their contracts law that determines what makes a contract legally enforceable. A standard business contract template should include a clear set of rules to define performance in the contract. An organized set of obligations provides a safety net against legal insinuations and contests in the court of law.
Purpose of Business Contract:
The purpose of a Business contract is to provide a framework and structure to the business relationship between two business entities. These agreements cover within their scope almost all aspects of the business practice inter alia trade, employment, hiring, partnership, confidentiality, and acquisition.
Key Terms of a Well Drafted Business Contract Sample
A well-drafted Business contract sample should include the following things:
- Term/date of commencement: The agreement should typically be a fixed term agreement and should contain the start and end dates.
- The purpose behind the contract: The contract could have been entered for any purpose. It is imperative that the contract outlines the requisite purpose.
- Terms of offer and acceptance: The basic or core terms of the contract on which offer and acceptance are based on, should be clearly enumerated in the contract.
- Default events: events that may permit a party to terminate the contract with immediate effect should be clearly defined and listed down.
- Confidentiality: The agreement may lead to exchange in confidential information and hence, parties should include the confidentiality clause.
- Breach: What constitutes breach should be provided in the agreement.
- Boilerplate clauses: Boilerplate clauses such as dispute resolution, severability, choice of law etc. should be included in the agreement.
How to Write a Business Contract?
Following guidelines may be followed in order to draft an effective contract:
- Always simple and crisp language should be used. A clear conveying of thoughts and ideas is more important than legalese.
- Understand the clauses before you build them in the contract.
- Enumerate the contract’s purpose clearly and specifically. Avoid ambiguous purposes. For instance, “ The contract is entered for the supply of chairs by business A to business B”, is an example of a specific purpose whereas, “the contract is for ancillary services” is a vague contract.
- Confidential information should include both written and oral information.
- Consideration or fee should be written in figures along with currency and mode of payment. If payment is to be made in tranches, the same should be specified.
- Include Language on How to Terminate the Contract: Both, termination simpliciter and termination for default should be included. In the former, termination can be effected on the giving of a stipulated notice period while in the latter, termination can be made immediately upon the occurrence of an event of default.
- Choice of law: Which jurisdiction should the agreement be contested in or which forum the disputes arising out of the business agreement shall be resolved in should also be provided for in the agreement.
- Remedies such as injunction, damages, etc. should be mentioned. Make sure to make these remedies independent of each other.
- Risk mitigation clauses such as indemnity and limitation of liability should also be included.
- Alternate methods of dispute resolution including arbitration and mediation should also be provided for.
The following points may be negotiated in a contract:
- Consideration/fee: Fee is always a heavily negotiated item. However, as an in-house counsel, you should always keep the financial team of your company in a loop before you start negotiating on the fee.
- Indemnity clauses: Typically, a mutual indemnification clause is provided for, however, one may negotiate for certain carve-outs.
- Limitation of liability: The amount of liability and the carve-outs, especially of indemnity under this clause are important points for negotiation.
- Liquidated damages: If the entities are collaborating for the exchange of goods or services, then this clause may be inserted to prevent delay. However, the percentage of liquidated damages is something on which negotiations take place.
What Happens in Case of Violation?
A violation of a contract elicits the following remedies:
- Litigation: One may approach the court and file a case for breach or damages.
- Injunctive relief: An injunction may also be sought against the breaching party.
- Indemnity: If due to breach caused by one party the other party has become liable to third party claims, then the breaching party will be required to indemnify the party which suffers the breach. No proof of damages is required here.
- Termination: The party which suffers the breach can terminate the agreement with immediate effect.
Benefits and Drawbacks of a Business Contract:
Following are the advantages of entering into a Business Contract:
- It acts as written proof of the terms and conditions which were mutually agreed upon by the parties.
- Clarifies the agreement and prevents any future misunderstandings between the parties to the contract.
- It provides stability and assurance that the recorded terms of the agreement shall not change
- manner agreed by the parties.
- averts any risk of payment and makes parties more certain about their relationship.
- It sets dispute resolution methods.
- Provides for termination of the contract in a structured manner.
Following are the Disadvantages of entering into a Lease Agreement:
- Boilerplate: Boilerplate clauses are common clauses found at the end of the contract. Poor drafting of such clauses may create more confusion than clarity.
- Price Fixing: Fixation of prices can be a very common phenomenon in standard templates.
- Language Problems: Inconsistent or ambiguous language and words make it difficult to effect and enforce the contract.
- Favoring One Party: A contract template may at times be one-sided and lead to a lot of negotiation. This can have the effect of wasting time and money.
A business contract between two parties is entered into in order to establish a commercial relationship among themselves. Such a relationship could be of supplier-consumer, joint venture partner or for any other purpose. This is a broad agreement, which these parties enter into in order to formally affect their business relationship.
It is essential that such a contract, which lays the foundation of their commercial relations be drafted impeccably by both parties. It is always advisable to come up with a rough memorandum of understanding before setting out to draft the contract. A preliminary negotiation on the memorandum of understanding brings both the parties on the same page and helps in drafting the contract smoothly. It is always preferable, to consult an attorney while drafting a business contract.