We Mind Your Business
So You Don't Have To

Protecting Your Business: Why Business Contracts Are Important

Latest News

Running a business is never easy, but legal worries are a beast of their own. Business contracts are necessary to give you peace of mind and protect yourself. Unfortunately, not everyone knows how they work or even why they’re needed.

Business contracts are legal protections but also serve to clarify relationships. They let all parties know what’s expected of them and what happens if they don’t meet their end of the bargain. There are many different types of contracts and some legal jargon, which you need to know.

Read on for a full breakdown of why business contracts are important and what you should know about them.

Defining What Business Contracts Are

A business contract, in essence, is a legal agreement made between two parties. It stipulates expectations and responsibilities and protects your businesses from unforeseen issues. In addition, business contracts help to cover yourself from liability.

A business contract can stipulate the legal terms and conditions of employees. For example, it outlines what their responsibilities are as well as compensation. It clarifies the business arrangement between the employer and employee.

It can also offer protection for both sides. If an employee breaches the contract, you can have legal cause to dismiss or discipline them. Should you overstep your bounds as a boss, a good contract will also offer peace of mind to your employees.

A business contract should serve to clarify business arrangements and protect both parties. It should be fair with no room for abuse or misinterpretation. Every company, even a small business, should know what business contracts are and how to use them.

Why You Need Business Contracts

There is a lot to consider when running a business. Business owners know there are risks, and legal liabilities can sink their enterprise before it even starts. As mentioned above, business contracts help clarify things and offer protections.

This section will clarify how they do this and why you need them. A business contract sets out pretty iron-clad rules. It will stipulate the rights and responsibilities of all involved, down to the smallest detail.

A well-crafted business contract will kill any disputes before they even arise. Should issues still occur, they will protect you from legal attacks, saving you time and money. There are a number of ways they do this.

The Example of Vendors

A contract between your company and a vendor might outline certain expectations. For example, they deliver products to you at a measurable level of quality within a certain time frame and at an agreed-upon price. The details of the contract could protect you from price changes.

It could also protect you if the goods are poor quality or severe delays cost you money. The contract could force the other party to swallow the cost of fixing the issue. It could also protect you from litigation if you refuse to honor the contract since they breached it.

Helping with Disgruntled Employees

Business contracts can also help with your employees. A good contract could protect you if a staff member tries to sue you. It should include everything from rate and frequency of pay, all the way to benefits and jobs expectations.

If an employee tries to sue you for breach of contract, they must prove you did so. Not having one in the first place can make things dicier and more expensive in the long run. Having a contract also stops some employees from abusing their rights or positions.

What Every Business Contract Has

There are various use cases for business contracts, many of which this guide will go over below. That said, every good business contract contains the same essential elements. These are an offer, acceptance of that offer, intention, and consideration.

Offer and Acceptance

For there to be a business contract, there needs to be a desire to engage in an agreement. One party needs to offer something to another which the second party wants. That first party also needs to shoulder the responsibility and risks involved.

A vendor may approach your company, offering to sell you supplies you need. They’ll be responsible for sourcing and delivering on time, as well as any initial costs. As long as you agree to the initial offer, the transaction can develop, and a contract can come into effect.

Your acceptance of the offer is a crucial element. You need to agree to the terms or at least agree to entertain the offer. This acceptance doesn’t have to be in writing but can be in any form.

You are free to counteroffer and negotiate a new contractual understanding. The important thing is you accept that there is potential for a beneficial contract to develop.

Intention and Consideration

There needs to be the intention of both parties to hash out a mutually beneficial contract. This can take the form of a negotiated written contract or a considered verbal agreement. The point is to ensure all parties understand what the others expect of them via the contract.

There needs to be a desire and intent to make a contract with no misinterpretation or unfairness. Neither party should enter into the agreement under duress. Vital to this is understanding what the legal implications are for both parties.

The final piece is a consideration for the value or benefit being directly traded. A fair contract will benefit both parties without privileging one over the other. A contract could be over money, products, or any other resource.

Your business contract has to involve the fair trading of benefits and value to be legal. Failing to consider this may result in your contract being unconscionable. As such, it won’t be upheld in the eyes of the law.

Different Types of Business Contracts

When structuring a business, it’s important to have business contracts. Different businesses will have specific needs, so it’s important to consider that. There are different kinds of business contracts, all of which you should know about.

Cost-plus Contracts

As the name implies, a cost-plus contract deals with financial expectations. In essence, it’s an agreement between two parties about what a project will likely cost. A vendor offering to make something for you will often be the one to initiate this contract.

A cost-plus contract will outline all of the various expenses for the project. This includes material and labor costs that are already known, as well as a provision for future costs. These are the most common for expensive construction projects or large-scale product development.

With a cost-plus contract, the vendor fronts the initial costs. The idea is you will pay them back once the transaction is complete. A cost-plus contract protects you from putting up money for an unfinished product.

It also protects the vendor from being stuck with the bill, so long as they meet expectations. You can structure these contracts in different ways to accommodate reimbursements or rewards. It can include provisions for whether the project comes in under budget or unexpected expenses pop up.

You can pay part of the cost yourself upfront, which turns it into a cost-plus-fixed-fee contract. You can also reward the vendor for meeting requirements or exceeding them. In general, this type of contract serves as a legal IOU, which gives both sides peace of mind.

Fixed Price Contracts

Fixed-price contracts are the exact opposite of a cost-plus contract. Here one party calculates and negotiates a set price with the other which doesn’t change. This is the case even if the cost of material or labor goes up or unexpected expenses appear.

This contract type shifts the risk more on the seller and less on the buyer. The other party needs to figure out how to deliver, even if circumstances change.

You can always renegotiate or provide more money if you want, but you aren’t obligated to. The contract will protect you from any such expectations. Some fixed-price contracts include a bonus for meeting certain timing or quality expectations.

These can help the other company power through delays with less financial turmoil.

Unit Pricing and Time or Material Contracts

Two more specific contract types are Unit pricing and time or material contracts. Unit pricing contracts work by setting a fixed cost per item or hour worked. These are sometimes referred to as hourly rate contracts.

This is more common for longer-term arrangements, such as when using regular contractors. Time and material contracts work by billing the business for the labor and material used for a project. It’s sort of like a blank cheque promising to cover any time and material costs that come up.

This is risky, of course, so most such contracts have provisions in place. A common one is to build in a ceiling cap on how high costs can run before renegotiating the contract.

Employment Contracts

There are two major types of employment contracts that you are likely to run across. These are General and Contractor employment contracts. When working with an individual contractor, you’ll be using a contractor agreement.

A contractor agreement stipulates the rights and responsibilities of the contractor. These include payment details, as well as how long their time with the company is to last. Of course, you’ll also include expectations for the project, as well as the rules they have to follow while working for you.

Any penalties or potential disciplinary action should be clear from the start. Payment and schedule should be clear, as should roles and job descriptions.

Employees should know their duties and what benefits they have. If they are privy to confidential information, you should include that. Getting them to sign a non-disclosure agreement is a good idea in such cases.

Be careful to make sure that business contracts use inclusive phrasing. Also, ensure they contain no gender bias regarding rights and responsibilities.

Unconscionable Contracts

You have to be careful not to craft a contract that is unconscionable. Unconscionable contracts are those deemed to be unfair or one-sided. Often they privilege the bigger party without giving the smaller one any benefits.

In many cases, these will get thrown out and voided should a dispute reach a courtroom. A local attorney can help you draft a business contract that is fair and protects your company.

A Bit of Jargon

In addition to the contracts outlined above, there are some terms worth clarifying. These are the differences between an express contract and an implied contract. There are also differences between bilateral and unilateral contracts.

Express contracts are a fancy way of saying an agreement made or promised. It can be in writing or spoken and outlines all of the expectations and details. When you agree to rent a space or buy office supplies from a supplier, you enter an express contract.

An implied contract doesn’t need direct expression out loud or in writing. It is wholly based on the implied intent of the contracting parties and their behavior. If you sit down at a restaurant or pull up to a gas station, your desire to receive and pay for service is an implied fact.

No one needs to clarify, in writing or otherwise, that this is how things should go. Bilateral and unilateral contracts only mean that two or one parties are contractually obligated. In bilateral agreements, both sides accept the terms and are bound by them.

In a unilateral contract, only one side is, with the other party having no obligations. An example is promising to do something for another party without any expectations. In business, unilateral contracts are very rare, but they do have niche uses.

If you’re still having trouble navigating all the terms and definitions, then you aren’t alone. A team of experts can make a big difference.

Breaking Down Business Contracts

Business contracts are a great way to protect your business and are often necessary. Knowing what they are and how they work in a legal sense can help prepare you. They give your company, employees, and contracting partners peace of mind too.

It can be difficult to figure out which type of business contract you need and how to draft a good one. Turning to experts like those at Venerable Law is never a bad decision. With our expertise, you can carry on with confidence, so contact us today.

Related Articles