Types of Business Contracts

What Are Business Contracts?

Business contracts are legal agreements between you and another individual or business where services are rendered for a fee or specific duties performed. Businesses create oral and written contracts each and every day.

As a business owner, you’ll enter into countless business contracts. For example, you’ll enter into business contracts with other businesses, people, suppliers, customers, creditors, and landlords.

Some of business contracts will be simple enough to complete with a handshake. But, most business contracts will require complicated, long-term, or financially important information, requiring a written contract.

Most business contracts are simple legal documents. Contracts usually consist of mutual promises to do specific tasks. For example, “Jack promises to pay Diane $100, if Diane caters a lunch for Jack on March 1, 20xx.”, is a contract.

Written business contracts usually include the main terms of the agreement: the price of the goods, important dates, and the time and place of delivery. Contracts are legally enforceable. If you fail to keep your end of the bargain, you can be sued and forced to pay monetary damages to the other party, pay for the other party’s attorneys, or, even forced to do the things you promised to do in the contract.

What Are the Basics of a Business Contract?

Lots of contracts are filled with mind-numbing legalese and gibberish. But, for most contracts, legalese and gibberish are dangerous. Most contracts should be written in simple, every day language.

What Makes a Business Contract Valid?

Contracts are valid if:

  • All parties are in agreement (after an offer and acceptance), and
  • Something of value (such as cash, services, or goods) has been exchanged for something else of value (or there is a promise to make such an exchange).

Some situations, such as the sale of real estate, or certain sales of goods, require the agreement to be in writing.

When Are Parties in Agreement?

It seems like it’s stating the obvious that parties must agree to the terms of the contract. But, in real life, there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. For example, you’re shopping around for a web designer to create the website for your business. One designer confirms, either orally or in writing, that he’ll create your site for $3000. This constitutes his offer. If you tell him to go ahead, you have accepted his offer. When you tell the web designer to go ahead, you create a contract, which means you’re liable for your side of the bargain (in this case $3000). But, if you tell the web designer you’re not sure and want to continue shopping around (or you don’t even respond), you clearly haven’t accepted his offer. But, what if you say his offer sounds great except that instead of providing your own pictures, you want him to provide pictures? There, no contract has been made, since the web designer has not accepted all of the important terms of the offer. You’ve changed one.

Often there is a disagreement over the meaning of a word. For example, you own a restaurant that specializes in fried chicken. You tell your vendor you want fryer chickens. You assume this to mean young, tender chickens. But, your vendor assumes you mean any chicken that can fit in your deep fryer. It’s important that you have an actual agreement on the terms and that you all know what the terms mean.

Delaying acceptance of an offer, revoking an offer, and making a counter offer, are common situations where business transactions lead to confusion.

How Long Are Offers Open?

Offers are open for a “reasonable” period of time unless they include a stated expiration date. “Reasonable” periods of time are open to interpretation and depend on the type of business, the particular situation, past practices, and even the relationship of the parties involved.

What Does It Mean to Revoke An Offer?

Anyone who makes an offer can revoke it if it hasn’t been accepted yet. This means if you make an offer, and the other party needs some time to think it through, you can revoke your original offer. If your offer is accepted while it’s still open, you’ll have a binding agreement.

What are Options?

An option occurs when an offeror promises that an offer will remain open for stated period, and that it cannot, and will not be revoked during that time. For example, imagine you are looking to buy a delivery truck. Someone offers to sell you their delivery truck for $10,000. You want to think the offer over without having to worry that the seller will revoke the offer or sell the delivery truck to someone else. You and the seller could agree that the offer will stay open for say 30-days. However, the offeror will often ask you to pay for an option because they cannot (though they might want to) sell the truck to another interested buyer during the agreed period of time.

What is a Counter Offer?

Sometimes when offers are made, you don’t want to accept the terms of the offer right off the bat, but you’re willing to bargain. Haggling over price is the most common type of negotiation that occurs in business situations. When you respond to an offer by proposing something different, you have made a counter offer. When a counter offer is made, the legal responsibility to accept, or decline, the offer, or make another counter offer shifts to the original offeror.

For example, if your printer offers to print 1,000 flyers for $200, and you respond by saying you’ll pay $150, you have not excepted his offer, but instead have made a counter offer. It is then up to your printer to accept, decline, or make another counter offer.

What Types of Things Can Be Exchanged in a Business Contract?

Even if both parties agree to the terms, business contracts aren’t valid unless the parties exchange something of value in anticipation of the completion of the contract. The “thing of value”, called “consideration”, is often a promise to do something in the future, such as a promise to perform a certain job, or pay a certain fee for a job.

This requirement helps differentiate contracts from generous statements, and one-sided promises (neither of which are enforceable under the law). For example, if your friend offers to help you sweep the store, without asking anything in return, that arrangement doesn’t count as a contract because you didn’t give, or promise him anything of value. But, if he offers to sweep the store, in exchange for pizza, and you accept, you’d better get him pizza if he sweeps the store.

Normally, the exchange of a thing of value requirement is met by exchanging the things you promised. But, actually doing the work, or paying the money, can also satisfy the rule. For example, if you tell your printer that you’ll pay an extra $100 if your printer cuts and staples the brochures, and the printer doesn’t respond, he can create a binding contract by actually cutting and stapling the brochures.

Do Business Contracts Need to Be In Writing?

Most contracts can be oral. But, as a practical matter, you should put all of your contracts in writing. California has a law called the “Statute of Frauds”. The Statute of Frauds require certain contracts to be in writing. The Statute of Frauds typically requires the following types of contracts to be in writing:

  • any agreement that can’t be completed in a year or less,
  • any lease with a term longer than one year,
  • any sale of real estate,
  • any agreement that will not be completed during the lifetime of one of the parties, and
  • any time someone promises to pay someone else’s debt.

In addition to the Statue of Frauds, California has a special body of law, on commercial issues, called the Uniform Commercial Code. Under the UCC a sale of goods for $500 or more requires at least a brief, written note or memo indicating the agreement between the buyer and the seller. The written memo can be much less detailed than a formal contract. The written memo only has to show an agreement between the parties, and the quantity of goods being sold. The price of goods, or the time and place of delivery, isn’t even required. This written memo usually has to be signed, although if one party doesn’t object to the memo within 10 days of receiving it, then his or her signature isn’t required.

What Goes In a Basic Business Contract?

Remember, the goals of ALL business contracts are to clearly outline what each party is agreeing to, anticipate areas of confusion or points a potential conflict, and provide for recourse (remedies) in case the agreements are not follow through with. The more you have to say, the more carefully you’ll have to consider the task of putting together your contract. For complex agreements, you probably need an attorney. If a transaction is big enough, or complicated enough, to make you a little nervous, you should probably see a lawyer. Otherwise, let’s move on.

Generally, contract clauses are organized in a series of numbered paragraphs for easy reference to specific terms. Most contracts have:

  • the title of the agreement (for example, “Purchase Agreement”),
  • the names and addresses of all the parties (for example, Henry Jones (“Seller”) and Marcus Brody (“Purchaser”),
  • a brief description of the background of the agreement, and sometimes referred to as “recitals”,
  • a full description of what each party is promising to do as part of the agreement, sometimes referred to as “specifications”,
  • the price of the product or service,
  • payment arrangements,
  • a statement of any warrantees made by either party regarding the product or service being provided,
  • a statement whether either party may transfer the contracts to an outside party,
  • the contract term,
  • a description of any conditions under which either party may terminate the agreement,
  • an outline of how you will deal with any breach,
  • a statement of which state’s laws apply (if any out of state entities), and
  • signatures, dates, and addresses

If your business contract includes any hard to articulate details such as the specifications of a software product, a company logo, or architectural blueprints, you can include them as attachments to the main contract. If you include them as attachments, be sure to label them and refer to them in the main contract. To officially make it a part of the contract, you must state somewhere in the main contract that you “include the attachment in the contract” or that you “incorporate the attachment into the contract.”

Are Electronic Business Contracts Enforceable?

The above generally applies to any contract. But, there are new and emerging rules applying specifically to business contracts created online. An “electronic contract” is basically an agreement, that is created, and executed, in electronic form (no paper or other hardcopies are used). Typically, electronic agreements are created via email, or on interactive web pages. For example, many companies use interactive forms on their website. These interactive forms require users to complete the purchase goods or software, join the membership organization, participate in an email survey, or do whatever else the company is offering. In addition to asking the user for various forms of personal information (name, phone number, and email address typically), these forms typically display the terms of the contract or “terms of service” between the company and the user. Then these forms typically have a button that says “I Accept”. If the user doesn’t click “I Accept” then they don’t get whatever goods, or software, or membership, of whatever else.

They are normally “take it or leave it” contracts. It’s not like you can negotiate with Apple before updating to the newest iOS. Internet “click to agree” contracts, often called “clickwrap”, “webwrap”, or “browsewrap”, and “shrinkwrap” agreements are facing legal challenges for being “contracts of adhesion.” Courts have generally upheld these agreements. But, courts have found some of these agreements too burdensome or unfair to the consumer. Back in 2002 one user sued Netscape. The court found that downloading Netscape software alone did not indicate acceptance of Netscape’s license terms. To make sure a clickwrap agreement is binding, your site must be set up to ensure users can clearly indicate consent to the license terms of any downloads.

Are Electronic Signatures Valid?

The traditional way to indicate your acceptance of a contract was to sign it with your unique signature. That’s how it has been for centuries. But, electronic contracts can’t be signed this way. Instead, people use other means to indicate they accept the terms of the contract. These other means include simply typing your name into the signature areas of documents.

As technology advances, better ways of signing contracts online are being developed. Now people use fingerprints, retinal scans, and cryptographic technology known as Public Key Infrastructure (“PKI”). These methods are collectively known as electronic signatures. Until relatively recently, most states have any laws about what forms of electronic signatures were acceptable. But, now most states, including California, have adopted the Uniform Electronic Transactions Act (“UETA”). UETA basically provides that electronic signatures (in all forms) are just as binding as their paper counterparts. In addition, the Federal Government passes the Electronic Signatures in Global and National Commerce Act, which is similar to the UETA. Some contracts still require good, ol’ fashioned paper (like wills, at stuff like that). But, most e-commerce can be done without paper contracts. But, you should use caution when entering into any electronic contract. If you’re uncomfortable creating a contract online, or by email, then don’t do it. Insist on a paper copy instead.

Do I Need a Commercial Lease?

Chances are good that you’re renting rather than owning a space for your business. Most small businesses don’t have the funds to purchase real estate. Just because you’ve rented plenty of apartments over the years, you shouldn’t assume you’re an expert on leasing business space.

There are significant differences between commercial leases and residential leases. For example, commercial leases are not subject to most consumer protection laws. There are on no caps on deposits. There are no rules protecting tenant’s privacy. Commercial leases are also generally subject to much more negotiation because businesses often need special features in their spaces, and landlords often are willing to extend special offers.

Keep in mind that the success, or failure, of your business may ride on certain terms of the lease. The amount of rent is an obvious concern. So is the length of lease. You probably don’t want to tie yourself to a five, or 10-year lease if you can help it. What if your business outgrows the space? What if you decide to move? What if you decide to shut down? But, there are plenty of other concerns. For example, if you expect your downtown shoe repair business to depend largely on walk-in customers, you should make sure that your lease establishes your right to put up a sign that’s visible from the street. If you’re counting on being the only sandwich shop inside a new commercial complex, you should make sure your lease prevents the landlord from leasing to your competitors. If you’re starting a new service company, and you expect to grow quickly, you should make sure that there’s room for expansion.

It’s critical to pay attention to terms regarding:

  • rent, including allowable increases and method of computation,
  • whether the rent includes insurance, property taxes, and maintenance costs, or whether you’ll be charged for these items separately,
  • whether the rent includes heat, air-conditioning, phones, garbage collection, water, and other utilities,
  • the security deposit and conditions for its return,
  • who is responsible for code compliance, security, and fire safety,
  • the length of the lease and when it begins,
  • how the lease may be terminated, including notice requirements, and whether there are penalties for early termination,
  • exactly what space is being rented, including common areas such as hallways, restrooms, and elevators, and how the space is measured (some measurement practices include the thickness of the walls, others include proportionate shares of common areas),
  • specification for signage including where signs may be placed,
  • whether there will be improvements, modifications, or fixtures added to the space,
  • who will pay for improvements, modifications, or fixtures added to the space, and
  • who will own any improvements, modifications, or fixtures added to the space after the lease ends (generally, it’s the landlord),
  • who will maintain the premises and provide janitorial services,
  • whether the lease maybe assigned, or subleased to another party,
  • weather disputes must be mediated, or arbitrated as to an alternative to court, and
  • who will pay for any needed modifications, like adding ramps, or widening doorways, to accommodate wheelchairs in compliance with the Americans with Disabilities Act (“ADA”- The ADA requires all businesses open to the public, or that employ more than 15 people, to have premises that are accessible to people with disabilities- many restaurants have met their demise because of the ADA).

What Are Licensing Agreements?

Licensing agreements are legal contracts between two parties, known as the licensor in the licensee. In typical licensing agreements, the licensor grants the licensee the right to produce and sell goods, apply brand-name or trademarks, or use patented technology owned by the licensor. In exchange, the licensee usually submits to a series of conditions regarding the use of the licensor’s property and agrees to make payments known as royalties.

When Should I Get a Licensing Agreement?

You should get a licensing agreement anytime you are using someone else’s intellectual property. For example, retailers reach agreements with professional sports teams to develop, produce, and sell merchandise using team logos. Food companies reach agreements with companies like Disney to use Disney characters on their packaging. Small manufacturers license proprietary production technology from larger firms to gain a competitive advantage rather than spending the time and money trying to develop the technology themselves.

What Should I Include in a Licensing Agreement?

Licensing agreements tend to be fairly lengthy and complex documents. But, they generally cover the same basic points. They typically include:

  • the scope of the agreement,
  • financial aspects including advances, royalty rates, and how royalties are calculated,
  • guaranteed minimum sales,
  • time schedules,
  • licensor’s rights to monitor and control quality,
  • minimum inventories,
  • returns, and
  • allowances.

Licensing agreements can be tricky propositions. Licensors run the risk of giving away their intellectual property. Licensees run the risk of infringing on another’s intellectual property. Either can be devastating.