Are you a business owner looking to learn ways to protect your interests and hedge against risk? A business contract is a great way for your company to protect itself and its customers by defining terms and conditions to a transaction in advance.
While contracts can be very helpful to your business, they must be written in a way that is effective and enforceable under the law. Read on to learn about how to draft a business contract example that will work for your company!
Know Your Industry
Before you put pen to paper on your contracts you should consider the industry that you work in. What is unique about the way you operate your business? How is your industry different from others?
The answer to these questions can help you brainstorm the important terms and conditions you’ll need to include in your contract. It will also allow you to focus your time and effort on the things that matter for the agreement.
For example, if you operate a shipping business, how will you address delivery deadlines and handling costs that you will pass along to customers?
Terms That Are Easy to Understand
Writing up a formal contract should make things easier, not harder, for your business now and into the future.
There are more than 40 million lawsuits filed in the United States each year. One of the most common causes of action is a breach of contract. A breach occurs when one party fails to fulfill its obligations under the terms of the agreement.
To make your contract enforceable and easier to understand, you should ensure that its terms are clearly defined. One of the ways to do this is to prepare an initial draft and revise it as needed to fit your needs.
As you read through each sentence of your draft, ask yourself if you would understand the terms if you were a third-party with no knowledge of the industry or transaction. This is important because if you have a problem with your contract later, the decision about its terms may rest with an arbitrator, judge, or jury in court.
Use Lots of Detail
In today’s fast-paced business world, it may be tempting to cut corners to keep your contract short and simple. The truth is that while you don’t want to overcomplicate things, don’t overlook important details to help make a disagreement easier to resolve later.
For example, when you are including terms about the transaction or work that you will perform pursuant to the contract, you need to include a detailed description. The more detailed your description of terms and conditions, the less room for interpretation.
It also makes it less likely that there will be a disagreement later because things will be easier to understand. If you are in a time crunch, you can access 100+ business contract templates to find the best one for your company to use!
Include Payment Terms
When you are drafting a business contract you can’t afford to include important payment terms. Whether your agreement is for one transaction or a series of transactions, your business must be able to predict cash flow.
Knowing how much money you have going in and out, and when, will help you operate a smoother business. That’s because you will know when to expect payments and how you will handle non-payment by a customer.
Perhaps the most important term for payment is the timeframe for when payments are due. When you are deciding this timeframe, consider the norm in your industry. Is it “Net 30 days” or longer? The term “net 30 days” means that payment is due from your customer to you within 30 days from the date of the invoice.
For some customers, you may want to do cash on delivery (COD). This will prevent you from taking on the risk of non-payment but some customers may not feel comfortable with this arrangement.
Another important payment term is the interest you will charge a customer when payment is overdue. When you are drawing up this term, you should know the maximum interest rate per annum (year) allowed under the law in your jurisdiction.
Use Applicable Law
A contract is only useful if it is enforceable according to the law that applies to your business dealings. Some of the most useful terms and conditions to address these potential issues are the venue and choice of law clauses.
The Venue Clause
What is the ‘venue’ term in a contract? The venue is the court where any dispute will be handled in the event of a disagreement or breach by one of the parties. This can be extremely important for your budget.
For example, let’s say you headquarter your business in Delaware but conduct business throughout the country. Although your business is present in many states, its main operations are in Delaware.
In the event of a lawsuit, you will want to sue and be sued in your home state instead of another one you operate in. You can resolve uncertainty about this by stating that any litigation to take place in the state courts of Delaware.
The Choice of Law Provision
What is the ‘choice of law’ provision in a contract? The choice of law term in a contract is the one that puts the parties to the agreement on notice of the law that applies to govern the contract.
Using the same example as above, where your company conducts business in many states. You may want the laws of the State of Delaware to govern your contract.
When you choose a state’s law to apply to your agreement, it’s important to ensure that you are drafting terms that are enforceable in that specific state.
Attorney’s Fees Provision
Another important thing to include in your contract is an attorney’s fees provision.
This term lays out that in the event of a dispute, the prevailing party in the dispute is entitled to reasonable attorney’s fees. This kind of term in your contract may help a customer think twice before breaching the contract.
Wrapping Up: The Best Business Contract Example
The best business contract example is the one that protects your company while also helping it operate in a more efficient way.
Before you begin to draft the contract for your company, speak with other colleagues in your industry. They may be willing to give you advice about how they drafted their contracts or give you other insight to make your experience an easier one.
Are you interested in learning other helpful tips and tricks for your business?
Check out our blog post section for more information to help take your company to the next level!