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Business Contracts: The Basics

A business contract is a legal promise made between two or more parties. A contract may be drawn when the associated parties wish to enter into a transaction like buying or selling, performing services, leasing properties, collaborating in joint ventures, advertising, manufacturing, distributing or selling goods, etc. The business contract is considered a surety against cheating by any of the associated parties. 

The length of a business contract depends on the number of clauses being mutually agreed upon. It may be of a single page or it may run into a dossier of several pages. Every business contract is legally binding. So make sure you use a good attorney whom you trust to negotiate and draft the legal terms of the contract because you may feel the effect of it in years to come. 

The first page of a business contract usually contains the names and addresses of the signatories. These can either be companies with authorized representatives signing, or individuals in their personal capacities. The date of signing the contract is put up on the first page and often repeated at the end. 

The next part of the contract is called the recitals. This is a very short description of the type of transaction the parties are going to enter into. The number of paragraphs is usually directly proportional to the complexity of the transaction. After recitals follow the specifications, in which there is a detailed description of the job the parties are to undertake. This part may run into several pages and it contains a very succinct description of the exact details of the transaction. It sometimes contains formulas, diagrams, sketches and graphs in order to better explain the nature of the job. The goal is to be as clear as possible so there are no misunderstandings between the parties as to their responsibilities under the contract as well as what they are due to receive in return. 

Payment terms usually come in the next section. A very clear mention is made of the remuneration that one of the parties is to give to the other. Either the exact figure is mentioned, payment terms over time if necessary, formulas perhaps including percentages or at least the determining factors are outlined. If time is extremely relevant in the completion of the job, then the phrase “Time is of the Essence” is included and often times will get its own section in the contract. The reason being when a time certain to perform is listed it puts great pressure on the parties as there is little margin for error on the time of performance. Whatever the conditions regarding the payment may be, they are to be put down in the contract. 

Apart from all this, there are several legal points covered. It is written in the contract which state jurisdiction will apply in case of a lawsuit. Also, the tenure of validity of the contract is mentioned. Often methods of dispute resolution are listed to help manage legal fees and costs in case of a conflict. It is in these sections of legal points that some lawyers can get creative in customizing the contract to benefit their client. 

A business contract is a very delicate matter. It takes several deliberations between the associated parties along with the involvement of their lawyers to reach a final draft. There are sometimes several negotiations and amendments in the agreement, until it becomes satisfactory to all concerned. Only after mutual agreement and consensus between the parties is reached are the signatures put down on the document. All concerned parties should preserve a copy of the contract as long as it’s valid. Referring to it in the future might be necessary to demonstrate the responsibilities and duties of the parties. The good contract will be clear and should minimize the risk of misunderstanding and the need for conflict resolution saving you and your business money.

Harrison Baron