A business agreement may be a written or oral agreement that obligates the parties to the agreement to do, or not to do, certain things. A business agreement can take on many forms: it may be a Memorandum of Understanding, a purchase order (used for goods), or an application whose terms and conditions are accepted upon signing.
Typically, businesses purchase goods or services from each other through the use of written contracts. A good business agreement is made up of several elements, as discussed below.
Get the Agreement in Writing
While some small businesses enter contracts orally, it is best to have the details of an agreement spelled out in writing. Oral agreements are generally binding, but hard to prove. Some agreements must be placed in writing under the law, such as the sale of real estate and an agreement whose performance cannot be completed in one year. A written contract reduces confusion and disagreement among the parties.
Identify the Parties
One of the easiest mistakes to make in forming a business contract is failing to fully identify the parties to a contract. A good contract clearly identifies the parties. If a business is solely responsible for a contract, this should be noted. For example, a corporation’s officer could sign a contract as “John Smith.” However, to avoid personal liability, the officer should indicate the full name of the corporation and that he is signing as the corporation’s officer, not as an individual.
Keep the Agreement Easy to Read
While people tend to think that a contract has to be wordy and have all the “right” phrases and words to be “legal,” simpler is better. Sentences that are short and clear reduce confusion. Using descriptive paragraph headings and numbered paragraphs makes the contract easier to understand.
Include the Significant Terms
A good business agreement has the important details of the agreement clearly delineated within the contract. The contract’s material terms and conditions should be stated, such as what good or services are to be provided, what payment will be made and when, what the limits of liability are, each party’s rights and responsibilities, and if there are any conditions that must be met before performance is required. A contract may also specify which state law applies to the contract; ways in which to resolve disputes (such as arbitration), and under what circumstances the contract can be terminated.
Except for the quantity of goods, the Uniform Commercial Code (“UCC”) may provide “gap-filler” terms when these terms are missing from a business contract. However, the most practical way to form a contract is to provide all the material terms and conditions.
Get the Necessary Signatures
A party who wishes to have a written contract enforced must prove that the contract was signed. For example, if a seller wishes to enforce a written contract against a buyer, the buyer must have signed the contract, and vice versa. A signed contract is proof that a person agreed to and chose to be bound by the contract’s terms.
While a business agreement may be made orally, ideally, a written contract outlining the parties’ rights, responsibilities and obligations should be made memorializing the parties’ intentions. A written contract reduces confusion and is generally easier to enforce.