What Are Business Contracts?

A business contract is a legal document that spells out what is expected and required by the parties involved in an agreement. It outlines the services and responsibilities to be rendered by each party to ensure that these expectations are met or compensated for in the event of a breach. Although they may be settled orally, written contracts are necessary to make the agreement legally binding and enforceable in the court of law. That’s because it would be difficult for a party to defend their rights and prove their claims without a valid document as evidence. Business contracts are generally comprised of the following key elements: the parties, considerations, terms and conditions, competency, and legal function.

The Reason Why Contracts Matter in Business

There was a time when transacting business was easy for traders and investors. A simple handshake was even enough to ensure that both parties honored their word. But when the 21st century came around, business professionals began to notice the rise of lawsuits and deal-breaking cases caused by the absence of a formal agreement. As a result, contracts became a significant requirement for an organization’s daily operations.

There are numerous reasons why experts would advise using a contract to settle your terms. In addition to minimizing the risks of failed ventures and wasted resources, contracts establish a clear understanding of the business relationship at hand and the scope of work discussed in the document. They protect both the writer and the client by specifying the rights purchased and retained by either party. Payment amounts and settlements are also indicated in the document to make sure that the services delivered are paid for accordingly.

Samples of Business Contracts

Have a look at some of the most common types of contracts used in business.

FAQs

What if one party chooses to terminate the contract? 

When one party fails to meet what’s expected and continues to perform poorly throughout the course of a contract, the other party does have the option to terminate the agreement before the contract has ended. The circumstances under which the contract may be terminated would depend on what is reflected in the document. Guidelines on how this event will be handled should also be found in the contract.

What happens when a contract closes? 

A project will eventually end and you’ll move on to your next venture as the business cycle continues. But even when a contract has been fulfilled and you are no longer bound to it, it’s still important to keep a copy of the contract on file for later use. You never know when an issue could arise and cause problems that could easily be addressed by what was stated in the contract. You can also use the document as a reference should you find yourself in a similar business situation.

Although some clients can be a bit doubtful about the use of contracts, it won’t hurt to explain your intentions to them for the benefit of both parties. To close a deal without a contract in place is a risky move you wouldn’t want to get yourself into, so be sure to negotiate on your demands before finalizing a business deal.