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What To Consider When Drawing Up A Legal Contract In Business

What To Consider When Drawing Up A Legal Contract In Business

Documentation is crucial when it comes to businesses. Everything must be in writing, as every business deal is binding. A legal contract is important, as it symbolizes a formality. They also ensure that every deal or agreement is in order.

Legal Contracts Explained

A contract is a legally binding agreement between two or more parties. The contract may be done in written or oral form. It is a set of obligations and promises that concerning parties would do in exchange for something beneficial.

In order for a contract to be legal and binding, it should have five characteristics:

Legal Purpose – In order for it to be enforceable, the contract should have a legal purpose. Otherwise, it would not be binding.

Mutual Agreement – “Meeting of minds” is needed when it comes to contracts. Each party should reach a mutual agreement on the kind of work to be done, the scope of work, the timeline, the mode of payment and more.

Consideration – One party should give up or offer something that has a value in exchange for the benefit that the other party is offering. It may be in various forms such as money, assets or anything that the other party sees as valuable to him or her.

Competent Parties – Getting involved in a contract with people who are not capable of entering one or fulfilling his or her end of the bargain is non-enforceable. This means that anyone who is entering into a contract must be:

  1. Sane or has a sound mind.
  2. At least 18 years old
  3. Free from any alcohol or drug use

Genuine Assent – Both parties should agree on everything the contract states on their own free will. Coerced consent or agreement is invalid.

Without these, the contract would be null and void.

Types of Business Contracts

In business, various contracts exist. It is important to know the type of contract you are getting into in order to make sure that it is legitimate and adheres to laws and regulations. These are the contracts that one would normally encounter when running a business:

  • Sales and Lease Related:
    • Lease Agreement
    • Bill of Sale
    • Security Agreement
  • Employee Related:
    • Employee Contract
    • Noncompete Agreement
    • Non Disclosure Agreement
  • Other Business Contracts:
    • Stock Purchase Agreement
    • Franchise Agreement
    • Indemnity Agreement
    • Agreement to Sell (Business)

Legal contracts are integral tools and documents to running a business.

Why Contracts are Important

Businesses often have deals or agreements with other businesses, suppliers, employees and stakeholders. Oral agreements are equally binding, however, it is important to have contracts due to several reasons.

Some of these reasons are:

  1. Contract details – A legal business contract contains clear details of whatever agreement is made by the business and other parties. Whether the business is dealing with its suppliers, employees or clients, the contract details will break down everything they have agreed upon.
  2. Confidentiality – Each business transaction is confidential. Businesses usually never reveal their strategies when it comes to their operation. Having a contract allows them to have the level of confidentiality they need or require.
  3. Involved Parties – Contracts enable businesses to determine which parties are involved. It also helps in stating the extent of involvement these parties have when it comes to business dealings and transactions.
  4. DisputesLegal contracts help prevent or resolve disputes in case they arise. Any confusion with the management, employees or business operations can be solved based on what is stipulated in the contract.

Drafting a Legal Contract

Before finalizing any contract, it is important to discuss its creation with your partners or other members of the company. This way, every detail can be discussed and any kind of errors or problems regarding the terms can be addressed or corrected.

Here are the different steps in writing a business contract:

  1. Everything in writing. Although an oral contract is already binding, it is still better to put everything in writing. Written contracts are easier to enforce, especially in court, as there is an actual proof of the agreement. Therefore, they are less risky.
  1. Simplicity is the key. Avoid flowery words and stick with simple layman terms when it comes to creating the contract. This is to minimize or avoid confusion for both parties.
  1. Choose your dealings. Always transact business with the right people. Do not waste your time in trying to close a deal with people who are not directly involved with the decision-making process. Talk with the person in charge. Also ensure that you are transacting with people or businesses that are legal
  1. Write the details. Never forget any details in your contract. All of them must be written. This is to ensure that everything in the stipulation is clear.
  1. Specify payment terms and obligations. Indicate who pays who, the schedule of payments, conditions when making payments and mode of payment.
  1. Other considerations and agreements. Be sure to include a part that indicates the method on how to terminate the contract. A way to resolve disputes must also be indicated.
  1. Confidentiality. Keep everything confidential. The contract must only refer to you and the other parties to avoid any misinformation or misguidance.

When running a business, each contract is important. All business dealings should be documented. Through contracts, businesses are able to uphold their promises to creditors, suppliers, employees and consumers as they operate.

This is a guest post by Anne McGee. She has over 20 years of experience writing about law subjects where she hopes her knowledge can help the common reader understand law topics that may be of relevance to their daily lives. If she’s not reading a good book, then chances are Anne is jogging during her free time.

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