What is Contracting In Business?
What are the elements of a business contract?
How do you draft one?
Keep reading as I have gathered exactly the information that you need!
Let me explain to you what are business contracts and why they are so important!
Are you ready?
Let’s get started!
What Is Contracting In Business
Contracting in business refers to the process of entering into different types of contracts to achieve a certain business objective.
There are countless contracts formed in business every day.
Businesses operate and thrive by entering into contracts with other parties such as their customers, suppliers, vendors, or other stakeholders.
For a business contract to be formed, you’ll need to have an offer made by one business that is accepted by another.
In most cases, commercial contracts between companies are formalized in writing to ensure that all contracting parties are clear on the terms and conditions of the agreement.
However, a business contract can also be formed orally or implicitly.
Keep reading as I will provide you with more details on this later in this article.
Contracting Business Definition
How do you define contracting in business?
In essence, contracting in business refers to the process of entering into legally binding agreements between two or more parties where the parties oblige themselves to certain obligations in exchange for a certain benefit.
Importance of Contracting In Business
Running a successful business means that you are able to get into contracts as required by your company’s growing needs.
Companies tend to prefer having their commercial agreements set out in writing to avoid any misunderstanding and confusion.
By having a written business agreement, you can:
- Document the terms of the transactions
- Prevent future conflicts
- Ensure your company complies with laws and regulations
- Have clear expectations
- Protect yourself against liabilities
- Avoid and prevent costly lawsuits
Although it’s possible to enter into oral contracts, businesses shy away from them as much as possible as there may be an increased chance of a legal dispute arising from an undocumented contract.
Elements of A Business Contract
How is a contract legally formed?
Let’s look at how contracts are formed and then look at the nature of the contract formed.
In the United States, for a contract to be legally formed, you will need to find the following elements:
- Legality of purpose
- Legal capacity
An offer is when a party (the offeror) proposes to enter into a legally binding contract with another party (the offeree) outlining the terms of the potential contract.
Acceptance is when the offeree accepts the offer and it is when the contract is legally formed.
For a contract to be legally formed and enforceable, both parties to the contract must receive an adequate consideration representing a certain “benefit” driving them to contract.
The legality of purpose means that the purpose of the contract must be legal (for example, contracting with someone to sell illegal drugs will not respect this element).
Legal capacity means that the parties entering into a contract must have the legal capacity to do so (for example, a minor does not have the legal capacity to enter into a binding agreement).
Nature of Contract
In most cases, contracts are considered bilateral contracts representing the exchange of promises by two or more parties where they promise to do something in return for something else.
A contract can be unilaterally formed where one party promises to make a payment, perform an obligation, or legally assume duty in favor of someone else.
No matter if a contract is bilaterally formed or unilateral, a legally binding agreement can be formed either in writing, verbally, or implicitly.
A written contract is when the parties write down the terms and conditions of their contract on paper and sign.
A verbal contract is when the parties exchange their respective promises orally.
An implicit contract is when the actions and conduct of the parties allow the court to deduce that a legally binding agreement was formed between the parties.
Types of Business Contracts
What are different examples of business contracts?
Business Contract Examples
There are many examples of business contracts out there in the business world.
It would not be possible for me to provide you with a comprehensive list of all the different types of contracts in business but I will surely provide you with some good examples.
Here are some examples of business contracts:
- Power of attorney agreements
- Bill of sale contracts
- Construction contracts
- Government contracts
- Sale contract
- Service contract
- Employment contract
- Commercial lease agreement
- Business partnership agreement
- Joint venture agreement
- Development contract
- Acquisition agreement
- Sale of asset agreement
- Stock purchase agreement
The notion of “business contract” or “business contracting” is extremely broad and can encompass any type of legally binding agreement or document used in business.
Common Clauses In Business Contracts
Every contract should be drafted and negotiated by taking into consideration the unique aspects of the transaction.
Business contracts terms and conditions can vary depending on the nature of the transaction, size of the deal, characteristics of the transaction, negotiation power of the parties, and more.
In general though, you are likely to find certain common clauses in business contracts, such as:
- Arbitration clause
- Choice of law clause
- Confidentiality clause
- Definitions clause
- Indemnification clause
- Severability clause
- Hold harmless clause
- Insurance clause
- Liability cap clause
If you are not sure what contract language to include in your contract or how to negotiate each of the contractual provisions, be sure to consult a contract attorney for guidance or legal representation.
Drafting Contracts For Business
How do you write a business contract?
Drafting the right contract for business is very important to ensure that you get what you have bargained for and also that you properly define your legal obligations.
Depending on the complexity of the contract, you may consider different options.
Some business owners will want to draft something by themselves setting out the terms and conditions they feel relevant to the contract.
In other cases, the parties may look for contract templates online hoping to find one that fits their specific needs.
In other cases, the commercial contract is drafted in a customized fashion specifically for the transaction in question.
When you draft a contract yourself or use templates, you’ll need to be mindful of the fact that you may not be drafting the contract properly leaving holes and gaps in the agreement and exposing you to risk.
On the other hand, by writing the contract yourself or using templates, you will potentially save a lot on legal fees and reduce your transaction cost.
If your contract is complex or is for a large value, you may have contract lawyers and professionals handle the drafting and negotiation for you.
In that case, you are mitigating risk as much as possible but you should be ready to pay hefty charges to the lawyers involved.
If you are looking to draft your own contract, here are some tips that I can give you:
- Make sure you obtain as much information as you can relating to the transaction
- Identify the decision-makers
- Identify the contracting parties
- Make sure that your contract contains the essential terms you need
- If you are drafting yourself or using a template, have it reviewed by a professional before signing
- Try to keep the terms of the contract as simple as possible
- Make sure that all parties sign and date the contract
Enforceability of Business Contracts
In general, business contracts are enforceable under private laws, state laws, or the common law.
For example, the Uniform Commercial Code regulates certain types of contracts when there’s a sale of goods or for secured transactions.
Let’s look at the main aspects of contract enforceability.
For a contract to be legally enforced, there must be adequate consideration for each contracting party.
This means that each party should receive some sort of a benefit for legally obliging themselves under a contract.
You can say that “consideration” is the main reason or motivation behind a company’s desire to contract.
There is a saying that goes “no consideration, no contract”.
In essence, for a contract to be legally formed and enforceable, there must be an adequate consideration for the parties.
Breach of Contract
When a contract is validly formed between two or more companies, the parties are bound to respect the terms and conditions of the contract.
In other words, the contracting parties have a duty to carry out their obligations under the contract in exchange for the benefit or consideration they expected in return.
Should a party fail to respect the terms of the contract, the non-breaching party can have the courts legally enforce the terms of the contract on the breaching party or obtain damages for the harm caused.
For a business contract to be enforced in court, the rights and obligations of the parties are fairly balanced and proportional.
The contracting parties have the freedom to choose and negotiate the rights and obligations they would want to legally impose on one another.
The court’s job is not to measure how much benefit a party received under a contract, so long as the parties entered into a contract where they received a consideration of some sort.
However, in extreme cases, when the contract is unfairly negotiated or there is an unreasonable balance in the parties’ rights and obligations, the courts may consider the contract to be unconscionable.
When a contract is considered unconscionable, the courts will not enforce the terms of the agreement.
Business Contract Takeaways
So there you have it folks!
What Is Contract In Business
Entering into contracts and agreements is probably one of the most important aspects of running a business no matter the size of the company.
For a business to grow, it will need to enter into contracts with employees, clients, suppliers, vendors, and other stakeholders giving it what it needs to produce goods and services, and create value in exchange for a profit.
Business contracts allow contracting parties to document the terms of their agreement, provide clarity as to their legal rights and obligations, and reduce the potential for conflict and litigation.
In contract law, a contract is legally formed and binding when the main elements of a contract are satisfied: offer, acceptance, consideration, the legality of purpose, and legal capacity of the parties.
Most of the time, businesses tend to contract in writing to ensure that they document the transaction and its terms.
However, a business contract can also be orally or implicitly formed.
Now that you know what is a business contract, why it’s important, its elements, and how to draft one, good luck in your company contracts!
My Investing, Business, and Law Blog
By the way, on this blog, I focus on topics related to starting a business, business contracts, and investing, making money geared to beginners, entrepreneurs, business owners, or anyone eager to learn.
I started this blog out of my passion to share my knowledge with you in the areas of finance, investing, business, and law, topics that I truly love and have spent decades perfecting.
You may find useful nuggets of wisdom to help you in your entrepreneurship journey and as an investor.
I’d love to share the insider knowledge that I’ve acquired over the years to help you achieve your business and financial goals.
You May Also Like Related to Contracts Business
Offer and acceptance
Personal service corporation
Small business contract
What is a contractor
What is a freelancer
What is an offer
What is consideration