Key Takeaways

  • Contracts should use clear, plain language to avoid ambiguity and reduce legal disputes.
  • Defining key terms and outlining specific timelines helps ensure mutual understanding.
  • Including procedures for dispute resolution, change orders, and renewals adds clarity and legal strength.
  • Written contracts reduce the risk of misunderstandings and enhance enforceability.
  • Consulting a qualified attorney can help ensure contracts meet legal standards and industry norms.

What Is a Contract?

A contract is a legal agreement between two or more parties. A business contract includes the following:

  • Names of all parties
  • Contract beginning and end dates
  • Payment amounts and schedule
  • Steps to take when a party breaks the contract
  • Signature with date

Business Contracts: What Are They?

Also known as a contractual business relationship or an agreement, a contract describes expectations for an interaction. It ensures all parties agree to the terms of their relationship.

A contract should include:

  • Offer: One party makes the offer, and the other accepts it.
  • Exchange: This includes money, goods, and services.

Why Are Contracts Important?

Contracts are essential to protect your business interests. They define boundaries and solutions to any potential problems and clarify legal liability.

Take every contract seriously. Avoid entering a contract unless you fully understand all parts of it. Make sure you trust the person or business with whom you sign the contract.

Almost all business happens without a contract, either because it is routine or because you trust the other party. However, small and large business owners should consider using contracts when:

  • Hiring an employee or contractor
  • Entering a partnership or a joint venture
  • Franchising a business
  • Selling or renting property
  • Buying or selling goods or services
  • Entering into an agreement that will take more than a year to complete
  • Interacting with government agencies

Benefits of Clear and Understandable Contracts

Clarity is crucial in contract writing. Contracts that are easy to understand are more likely to be followed, less likely to be contested, and more efficient in resolving disputes. A well-written contract should:

  • Avoid legalese when plain language will suffice.
  • Use short sentences and clear formatting for readability.
  • Include headings and bullet points for organization.
  • Avoid vague terms like “reasonable efforts” or “soon.”

Parties are more inclined to comply with obligations they understand. A readable contract reduces misunderstandings and strengthens enforceability if legal action becomes necessary.

Reasons to Consider Not Using a Contract

  • It does not address all possible situations. A business contract should present all problems that may arise and their solutions. If it does not include every possible problem, amend the contract before signing.
  • It is not clear. A good contract is specific. Any contract you sign should have clear terms and conditions.
  • It is verbal instead of written. When entering or amending an agreement, you should always get it in writing. Verbal agreements are hard to enforce. You can't usually sue someone for breach of contract if your agreement is based on a casual comment or an indefinite prediction.
  • You want to make a counteroffer. If you do not agree with all the terms of the offer, don't sign it. Consider making a counteroffer. You can also cross out, initial, and amend the parts that you don't agree with.

Reasons to Consider Using a Contract

  • It can protect confidentiality. A carefully written contract can include a non-disclosure agreement that requires parties not to make some information public.
  • You have already made a verbal agreement. A verbal contract is not enough for most transactions, but it is an important first step before signing a written contract. Before entering a written agreement, speak with the other party about what the contract will include.

Common Mistakes

  • Not including enough detail. Never use general words when you can be specific. That way both sides have the same expectations. The level of detail depends on the kind of project.
  • Not understanding legal terms. You can write a contract using standard language or legal terms, but keep in mind that some words have specific meanings under the law. In most cases, ordinary meanings of words will prevail.
  • Not defining terms. If your contract refers to certain parties, timeframes, or products, define these common terms the first time you use them. The meaning will be clear throughout the contract.
  • Not being clear about how long the offer is on the table. Usually, offers can only be accepted for a reasonable amount of time. What is reasonable is subjective so include a timeframe for accepting the offer.

Legal Drafting Best Practices

To improve the quality and reliability of your contracts, incorporate these best practices:

  1. Use Consistent Terminology: Always refer to parties, timelines, and actions using consistent terms.
  2. Define All Key Terms: Create a definitions section if needed, especially for technical or industry-specific language.
  3. Be Specific and Measurable: Vague obligations can lead to disagreements. Instead of saying “prompt payment,” specify “within 10 business days.”
  4. Include Change Management Provisions: Outline how parties should handle scope changes, delays, or price adjustments.
  5. State Which Law Governs the Contract: Choose a jurisdiction to avoid later uncertainty.
  6. Include a Merger Clause: This confirms the written contract is the full and final agreement between parties.
  7. Avoid Overuse of Boilerplate: Only use standard clauses if they apply to the situation. Modify them to fit the contract's context.

Steps to Writing a Contract

  1. Cover page - Use this to outline the basic information like the names of the parties, the offer, and the exchange.
  2. Introduction of the parties involved - Mention each party's legal name.
  3. Beginning and end dates - State how long the contract lasts and if it is renewable. If it is renewable, explain when and how to renew it.
  4. Reasons for early termination - Explain how and why the contract could end early. Reasons could include failure to pay, filing for bankruptcy, failing to hold up part of the agreement.
  5. Details about the exchange - Provide details about the goods or services you are exchanging. Be clear enough to prevent other parties from asking for more than you have agreed to offer, which is also known as scope creep.
  6. Ownership specifics -Clarify who will own the intellectual property during and after the contract period.
  7. Schedule - Write a timeline for each step of the contract. Specify what the client needs to do before the next step can be taken.
  8. Format - State the types of files you will use and how you will deliver them.
  9. Approval and revision - Specify how you will know that the expectations in your contract have been met. Include whether and when you expect feedback.
  10. Business policies - Include any policies that apply. These might include how you handle contract cancellations or how many edits you offer for a creative project.
  11. Payment information - Specify how much the payment is, when it is due, and who is responsible for expenses. Include whether you will send an invoice or if the other party must automatically pay. Include a timeline.
  12. Specifics about your legal relationship - State whether you are entering into a partnership or not. If you are creating a partnership, explain how you will share profits, make decisions, or give resources. If you aren't creating a partnership, state this explicitly.
  13. Representations and warranties - Outline the promises you're making. For example, state who owns the intellectual property rights to the goods and services you offer. Discuss how you will solve problems that arise.
  14. Disagreements - Explain how you will solve problems. This section often includes how to handle legal fees.
  15. Assignment - Outline whether an assignment of rights or responsibilities is possible.
  16. Legal boilerplate - Include general provisions, such as addresses, waivers, and amendments. You can also specify which state's laws apply or that the rest of the contract is valid if one part is found invalid.
  17. Signature page - Leave space for each party to sign and date the contract. It must be signed to be legally binding.

Final Steps Before Signing

Before executing the contract, perform these essential checks:

  • Proofread for Typos and Inconsistencies: Mistakes can lead to ambiguity and weaken enforceability.
  • Check That All Attachments Are Included: Appendices, exhibits, or referenced documents must be attached and labeled properly.
  • Verify Signatory Authority: Ensure the person signing on behalf of a business has the legal authority to do so.
  • Make Copies for All Parties: Distribute signed copies and store them securely.
  • Consider Electronic Signatures: E-signatures are legally binding in most jurisdictions and enhance efficiency.

If the contract is complex or high-value, it's wise to have a legal professional review it. You can find an experienced attorney through UpCounsel to help ensure your contract is both comprehensive and enforceable.

Tips for Structuring Your Contract Effectively

A well-structured contract improves clarity and reduces legal risk. Consider these structural elements:

  • Use Headings and Subheadings: Organize content into logical sections such as “Payment Terms” or “Termination.”
  • Number Each Section and Clause: This makes referencing easier in discussions or disputes.
  • Highlight Key Dates and Responsibilities: Use bold or underlining sparingly for emphasis.
  • Create a Table of Contents: Especially helpful for long or complex agreements.

Additionally, ensure the document is visually readable, including spacing between clauses, consistent fonts, and standard margins.

Frequently Asked Questions

  1. Do I need a lawyer to write a contract?
    Not always, but having a lawyer review or draft important contracts can help you avoid costly legal issues later.
  2. What should I avoid when writing a contract?
    Avoid vague terms, ambiguous timelines, and undefined legal jargon. Also, steer clear of verbal-only agreements for serious matters.
  3. Are electronic signatures valid on contracts?
    Yes, in most cases. U.S. federal law and many state laws recognize electronic signatures as legally binding.
  4. What makes a contract legally enforceable?
    A contract must have an offer, acceptance, consideration (something of value exchanged), mutual intent, and legal purpose.
  5. How long should a contract be?
    It depends on the complexity of the agreement. The key is to be thorough but concise—include all necessary details without unnecessary filler.

If you need help with writing a business contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.