Business Contracts Kit for Dummies

This guide to business contracts for dummies will hopefully give a non-intimidating reference for people involved in business transactions. All business transactions are backed up by business contracts. To stay ahead of the game, you must be aware of terms used in the contracts, concepts to be cautious of in a lease, and how to conclude a contract.

Key Business Contract Terms

When dealing with business contracts, you should be able to speak and understand the language. Some of the terms that you will come across in business contracts include:

  • Boilerplate- These are the standard terms used in contracts. These terms are important and often found at the end of the contract but are no reflection of the essence of the deal. Some common examples of boilerplate terms are payment of attorney's fees, governing law, and provisions describing notice.
  • Breach- This is a claim by one party under the contract suggesting that the other party has failed to perform under the requirements of the contract.
  • Conditions: These are the provisions in a contract dealing with the happening or not happening of certain events. They work like a trigger, in that when they are pulled, they cause other parts of the contracts to occur or come into effect.
  • Considerations: These are the promises to do or not to do something, such as a promise to lease your working space or not to lease your working space. No matter what is exchanged by the parties, each party's considerations must have a value attached to it.
  • Damages: These refer to the remedy offered under the breach of contract conditions by a party. An award of money is usually offered to the non-breaching party.
  • Recitals: These refer to language used at the beginning of a contract that explains why the parties have agreed to enter into a contract. Significant contract terms are often repeated in the body of the contract especially after words like “the parties agree as follows,” because recitals aren't legally enforceable.

What to Beware of in a Business Lease

A business lease is a business contract for rental of space for your business or house. This is often done if your business operates from a physical presence. You need to be aware of some conditions some landlords use:

Common provisions to watch for include:

  • The landlord's right to pass to the tenant the raised operating costs of the building.
  • The obligation of the tenant to pay any raised taxes resulting from the building being sold by the landlord.
  • The landlord's right to end your lease early per their convenience.
  • Disclaimers on the service provided to tenants and any information about the building.
  • Limitations of subletting your office space in case your business shrinks.

How and When to Write Business Contracts

It is important to avoid getting into contracts with complete trust of the other party (especially a family member) or haphazardly. Your business interests should always be first when you write business contracts.

The parties taking part in the contract are given the opportunity to:

  • Define clearly their expectations and obligations to each other
  • Limit their liability
  • Lay out the payment terms
  • Split up the business risks
  • Ensure that each party understands their responsibility

A valid contract is made of four main elements:

  1. Both parties meet and show they have a proper understanding of the contract's essentials and that they both agree to it.
  2. Both parties exchange something of value (considerations). It could be money, goods, or a promise to perform something.
  3. Both parties agree to enter into the contract. They can do this orally in some situations or by signing a written contract.
  4. The legal competency of each party is defined and confirmed provided the parties are of sound mind and are not minors.

Steps in Creating a Contract

  1. Both parties must ensure they are discussing the same thing.
  2. Both parties should communicate to each other their understanding of the deal and each should listen carefully when the other party talks back.
  3. After a meeting of the minds, they show their understanding of the deal and must exchange a consideration.
  4. Both parties should consider the state laws governing the terms of the contract. If the parties are located in different states, they should decide which state laws they should use to govern their contract. An attorney could help with this.
  5. The contract should include remedies and attorney's fees.

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