A contract is a legal agreement that creates obligations between parties that is enforceable by law. The basic requirements of a legally enforceable contract are 1) mutual assent 2) consideration 3) capacity 4) legality. If either party breaches a contract, the other party has the legal right to collect damages.
The Importance of Contracts in Business
Contracts are entered into in all types of business transactions. Many of these contracts are written, while others are oral.
Contracts are important in business transactions because if you run a business, your business depends on different relationships you have with different outside vendors and parties. These parties can be clients, customers, vendors, employees, and service providers.
Each party to the business relationship brings a set of expectations that he or she promises. A contract is important in these business transactions because it captures the right and obligations of each party and provides legal remedies if either party fails to fulfill their promises.
Contracts in businesses are important for many reasons:
- Establishes a Measure of Certainty: Contracts clearly define the terms and conditions of each parties rights and obligations in the business transaction and also provides penalties if either party fails to perform to those terms and conditions.
- Prevents Misunderstandings: A written contact details the parties’ negotiations leading up to the formation of the business transaction and avoids any vagueness and misunderstandings that could lead to a legal dispute later on in the transactions.
- Negotiations and Contract Terms: Contracts could include clauses that could reserve the right for each party to modify the existing contract and make changes or addendums to the agreement.
- Non-compete Clause: Many businesses include a non-compete clause in their contracts to prohibit individuals or other business from offering goods or services that is similar to their business in the marketplace. This allows them to provide unique goods or services without having to compete with another business.
- Protection: Contracts protect all parties rights and obligations in case of a legal dispute
Importance of Contract Negotiations
Negotiating a contract in business transactions is important because both parties must communicate their interest in the business transaction and set up terms and conditions that are legally binding and would be in their best interest. While negotiating contracts, it is important to look for these important factors:
- Parties to the contract must come to a “meeting of the minds” to avoid any misunderstandings and vagueness
- Consideration must be exchanged by both parties entering into the contract
- Contract must be legally enforceable in that current jurisdiction
- The purpose of the contract must be for a legal purpose
- Both parties must be mentally competent and not be impaired by insanity or intoxication at the time of formation
- The intentions of expectations of each party must be clear and understood by both sides
- The contract must be in writing if it falls into the Statute of Frauds
- Both parties must negotiate a proper remedy in case either party breaches the contract
What Are the Different Types of Business Contracts?
If you run a business, there are many types of different contracts that you may enter with customers, vendors, clients, and employees in your business relationship. These business contracts can be the following:
- Agreement for the Sale of Goods
- Purchase Order
- Employment Agreement
- Confidentiality Agreement
- Lease for Real Property
- Franchise Agreement
Why Lawsuits Happen in Business Transactions?
Many lawsuits happen in business transactions because some terms and conditions that many parties agree upon are not put in writing.
Even though both oral and written contracts are both equally enforceable, a written contract will more likely keep you out of court because they provide a more permanent protection of the parties’ negotiations at the time the contract was formed.
Contract disputes also occur because there has been a misunderstanding between the parties and there was no “meeting of the minds” when the contract was entered into.
Should I Consult an Attorney?
Business contracts and agreements are very complex since they all come with many details and conditions. Before you reach a business agreement, its best to consult with an experienced business attorney to determine if there are any flaws within the contract.
A business attorney can help you with negotiations so your interest and requirements are fulfilled. A business lawyer can also help you with the original and final draft and contract review, and explain to you your duties under the contract.
Authored by Kourosh Akhbari, LegalMatch Legal Writer