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Essential Elements of Every Good Business Contract

Contract EssentialsWhen drafting a business contract, there are several things you should be sure to include in order to best protect your interests. Forming a business relationship with another individual or entity can be a serious undertaking, and should not be taken lightly; having a business attorney represent you for any contract drafting is usually a good idea. You should only enter into a contractual business agreement after careful thought regarding exactly what kind of relationship you want to have with the other party. Also, you should never fall into the habit of entering into business agreements on a whim, even if the other party is a friend or family member (sometimes family members can actually be the last people you should contract with). Whoever you contract with in the business realm, the contracts you sign should always be protective of your business interests, first and foremost. To make sure this is the case, you will need to educate yourself on some essential elements of a good business contract.

In general, you should remain aware of two things: first, an agreement should include provisions to cover every possible situation that might come up, and at the very least, for the most likely situations. Second, the provisions in your business contract should be clear and definite enough that they do not afford much room for ambiguity. Ideally, a contract should cover the most important things in a way that is sufficiently clear and leaves little room for interpretation. Read on to find out what you should include in your business contract, and how contracts should generally be drafted.

The Basics of Drafting a Good Business Contract

Put it in writing: Every time you enter into a business contract, written proof of the agreement being made, along with the agreement’s specific terms, is essential. In fact some contract must be made in writing, see our article on the statute of frauds for more information. Though it is true that an oral agreement can sometimes take place in the context of a small business agreement or transaction, it is almost always better to cement an agreement in writing. Enforcing an oral agreement can be tough, and unenforceability can lead to big problems. People’s memories can be bad, which can lead to the terms or an oral agreement easily being misinterpreted or remembered incorrectly. So, writing down the terms of an agreement is key.

Use language that can be easily understood: When you draft a business agreement, you need not do so under the impression that the contract be written in fancy lawyer language, or “legalese” as it’s commonly referred to. In fact, the best business contracts are the ones that are written in plain English, and where each party knows exactly what he or she is agreeing to and what each contractual provision means. Just make sure that the contract’s terms are written so as to clearly express each party’s obligations and specific remedies available should one party breach the agreement. See our article for more information about recovering damages for breach of contract.

The simplest way to draft a good contract is to label each paragraph with a number and/or title, and stick to only the specified topic in that paragraph. When you divide the contract into these individual units, the contract will be clearer and more easily understood, and it is unlikely that you will leave out anything important. For example, after a short introduction of the contracting parties, including their names and intentions for the agreement, you could label the following paragraph, “1) Terms” and in that paragraph, discuss the obligations of each party. Then, the next paragraph could be labeled “2) Valid Dates,” and would discuss important dates regarding the parties’ obligations, and so on.

Be detailed: Each party’s rights and obligations should be explained in language that doesn’t leave any room for interpretation. If you prefer that payments be delivered on the first day of each month, then say that, rather than saying “at the beginning of each month.” And, if you and the other person agree to a new contract term or you both decide that a term should be changed, you must include a written amendment to your contract, instead of banking on the other person remembering the contents of a subsequent oral agreement.

Include payment details: Along the same lines as the paragraph above, you should specify how payments will be made between the parties. If you plan on making payment of half the total owed, and then paying the rest in installments, then include that. Also, write out the terms of when you will accept payment- not just a date, but under which conditions. For example, if you enter into a contract with someone to clean your office, you can write that payment is contingent upon certain tasked having been completed. If possible, also describe dates and payments method requirements. If you are the party to be paid under the contract, you might also want to include a provision stating that you will do the work only once the other party’s check clears, if this is appropriate under the circumstances.

Consider a confidentiality provision: In many cases, the other party will gain information regarding your business practices, and maybe even trade secrets, when they enter into a business contract with you. If you don’t want this information to be shared, you would be wise to include a confidentiality provision in the contract, which ideally should bind the other person to keeping the information learned regarding your business a secret.

Include termination language: A contract shouldn’t last forever, especially if one party doesn’t hold up their end of the bargain and the other party needs a way out of the agreement. Ideally, there should be some way that if you are the wronged party, you can get out relatively easily under certain triggering circumstances. The termination clause could be a mutual termination agreement stating that the contract shall terminate when the objectives of the contract have been achieved, or an agreement that either party may terminate the agreement if the other party commits a violation of a major contract term, and the terminating party then provides notice of his or her intent to terminate the agreement.

What state laws govern the agreement: A contract can include a stipulation as to which state’s laws will control if a dispute arises. If the contracting parties are located in different states, you should definitely specify in the terms which state’s law will control. If you fail to do so and a dispute does arise, a whole new dispute may arise over which state’s contract laws apply. This can add time and costs to an already costly hassle. You can avoid this if you and the other party specify which law governs before the contract is signed, at a time when both parties are more apt to agree. A contract can also spell out where a lawsuit must be brought.

Attorney’s fees and other remedies: If you anticipate that if things go wrong, you may need to end up filing suit against the other party, then in this situation especially you should include a provision stating that the losing party will pay the winning party’s attorney’s fees in the event that the parties end up in court over the contract. If you leave this provision out, you’ll have to pay your own way if you end up in court, even if you are not at fault. In some situations, the inability to recover attorney’s fees (because there was no clause allowing recovery of such fees in the contract), may make a lawsuit not worth pursue economic when weighing to costs of hiring an attorney.

Arbitration or mediation clause: Should a dispute arise between you and the other party, it might be best that the contract includes a provision requiring you both to attend mediation or arbitration before taking a dispute to court. Generally, mediation is a process by which the parties work through their issues with each other, and with the help of a mediator, voluntarily. Meditation can be advantageous in that it often results in compromise between the parties, which allows both to move forward and continue doing business. Alternatively, arbitration is more akin to court proceedings in that it is more adversarial than mediation. An arbitrator will hear each party’s side of the story, and will then hand down a decision that the parties must adhere to. It is sort of like a court hearing or trial, but it is quicker and less expensive. In this way, it allows the parties to proceed with business quickly and without spending too much money.

In conclusion, drafting a business contract that will protect your own interests while at the same time facilitating your business goals is imperative if you want your business to succeed. This, of course, is not an inclusive list of all the essential contract terms; a contract attorney in your state should be consulted for maximum safety when entering into a contractual obligation.