Updated October 26, 2020

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

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.

Frequently Asked Questions

  • Do contracts have to use legal terms?

No, contracts can be written in standard English. This helps all parties understand the contract.

LOAs are informal agreements that can be sent by mail or email. However, you should make sure that any agreement you use is as legally binding. Consult your state's laws before signing any kind of contract.

  • Which jurisdiction's laws apply to a business contract?

​If the parties do business in different states, specify which state's laws apply to the contract. Make sure you also take into account federal and local laws. These may change the limits of the contract.

  • Can you take a company to court if it breaks your contract?

Yes, but it is usually best to try to solve the problem outside of court first. Include a statement that requires mediation or arbitration before going to court. This allows a third party to try to work out the dispute.

  • Do you have to notarize contracts?

​In general, no.

  • Do you have to make contracts public?

​No, most contracts remain private. You may be required to record secured transactions, such as mortgages and equipment leases, with your Secretary of State or Recorder of Deeds. This tells third parties what is subject to a lien.

  • Are all contracts legally binding?

​A contract might not be binding for several reasons. For example, if the contract includes illegal activities or a party lacks mental capacity, it is not legally binding.

  • When can you break a contract?

If you find that the contract was misleading or if both parties make a mistake in the contract, the agreement can become invalid. You can break a contract if both parties agree to it in a process called rescission.

  • Do you need a lawyer to write a contract?

There are many sample contracts available online. You can develop a contract on your own, but it is almost impossible to know whether a contract could hold up in a dispute unless you get legal advice.

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.

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.