Subtitle: 
The essential requirements every contract should have.
Important Tip Often, the party who prepares the first draft of a contract will include terms that are extremely favorable to him or her, at the expense of your business. Take time to carefully review the terms and don’t be afraid to push back and insist on revision of terms that are unfavorable to your business.

Small businesses routinely enter into contracts with individuals and other businesses.  Contracts provide a means for businesses to create legally enforceable rights and obligations between the parties.

Contracts don’t necessarily have to be in writing (though certain types do).  We enter into oral contracts every day.  When you buy a latte at Starbucks, you enter into a contract.  Of course, you don’t hammer out a written agreement when you buy a cup of coffee.  You just tell your barista what you want, hand over your money, and take your drink.  But important commercial agreements are a different matter, and small businesses are wise to put them in writing.  Oral contracts, poorly written contracts, and incomplete contracts can be difficult to enforce.  Memories, sharp at the time an agreement is reached, fade with time; and may diverge from those of the contract counter-party.  Drafting a clear, complete contract helps ensure that misunderstandings don’t cause problems, and litigation, down the road.

There is no magic to drafting a contract.  They can take a variety of forms and contain myriad provisions.  Theoretically, you could draft a contract on a tablecloth (though we don’t recommend it).  There are certain essential features that all contracts should have.  First, contracts should identify the names of the parties and their addresses.  If a party is a corporation, LLC, or other entity, that should be spelled out in the agreement, along with the state under whose laws the entity was formed.  Of course, make sure that all parties sign the contract.

A contract must also identify the subject matter.  What promises are being exchanged between the contracting parties?  For example, if you are leasing equipment, spell out what equipment it is that is being leased, and what the other party is providing in exchange for the right to use the equipment (e.g., cash, services, or other equipment).

Time is also important.  When is the parties’ performance due?  How long will the contract last?  How can it be terminated?  Can it be extended or renewed, and if so, how?  These issues should all be clearly spelled out in a contract so that there are clear procedures in place that leave no room for subsequent disagreement.

Think about what other terms and conditions you should be include in your agreement.  Is either party relying on the other’s representations or warranties?  If so, spell those out in the agreement to prevent the counter-party from later claiming that the representation or warranty was not made.

Consider what happens if a dispute arises concerning the contract.  Parties can contractually agree to in arbitration and/or mediation rather than litigation, which is typically more expensive. 

Drafting a contract provides you with an opportunity to clearly spell out your business’s rights and ensure that your rights are protected should a dispute arise.  Spend the time up front to carefully draft them.  The investment will pay off in the long run.
 

Additional Information
Important Tip: 
Often, the party who prepares the first draft of a contract will include terms that are extremely favorable to him or her, at the expense of your business. Take time to carefully review the terms and don’t be afraid to push back and insist on revision of terms that are unfavorable to your business.