Whatever kind of business you have, you’ll need to write contracts from time to time. In most cases, you’ll need a written contract if you want to:
The content of a contract depends, of course, on the type of transaction you’re getting into. Here is a list of clauses you should consider including in your contract. You'll need to decide which ones are relevant given your particular circumstances.
Names and addresses of the parties.
Date. The date that the contract is signed.
A short preamble (“recitals”). This provides some of the background of the agreement.
What each party is promising to do. Pay money, provide a service, sell something, build something, or so on. Often this section of the contract—particularly if it involves a product or a construction project—is labeled “specifications.” In many situations, such as designing software, constructing a building, or providing consulting services, the specifications require lengthy attachments that may include drawings, formulas, or charts.
When the work will be done or the product delivered. If strict compliance with contract deadlines is important, be sure to include the phrase: “Time is of the essence.”
How long the contract will remain in effect.
The price—or how it will be determined.
When payment is due. Will there be installments, and will interest be charged? In contracts for consulting and other services, it’s common to have a payment schedule tied to interim completion deadlines.
Warranties. If one party guarantees labor and materials for a certain period of time, what steps will be taken to correct warranty problems?
Termination. Conditions under which either party can terminate the agreement.
Liquidated damages clause. In cases where actual damages for breach of contract would be difficult to compute, the parties can establish in advance a fixed dollar amount to be paid by a party who fails to perform its contractual obligations properly.
Assignment clause. Whether or not either party can transfer (assign) the contract to another person or company. A contract that allows assignment of contract rights may be okay if it involves just the right to receive money, but not if it means that some other, unknown party will wind up performing skilled services called for by the contract.
Amendment clause. How contract can be amended or changed (often by writing only signed by both parties).
Arbitration or mediation of disputes.
Attorney's fees clause. Whether or not a party who breaches the contract is responsible for the other party’s attorney fees and legal costs.
Notice provision. Where notices of default or other communications concerning the contract can be sent. Typically, the notices are sent to the parties’ business headquarters.
What state law applies if questions about the contract arise. If the parties have operations in different states or the contract will be performed in more than one state, you may avoid potentially knotty legal issues by specifying which state law applies.
Many states require specific provisions in contracts that cover certain types of transactions. Areas where special requirements are likely include:
If you’re in one of these regulated businesses, you not only need to use a written contract—you also need to make sure it conforms to your state’s legal rules. Among other things, you may have to put certain information or warnings in type of a certain size, including a statement about the customer’s right to cancel the deal under certain conditions. In some states, you may have to print the contract in Spanish as well as English.
You should make sure your contract form reflects the specialized nature of what you do, be it creating software, selling produce, publishing books, or cleaning buildings. This is especially true if your business is subject to consumer laws that require specific contract language. Typically, you’ll need several basic types of contracts for your business, each with spaces to fill in the details of the specific transaction.
If you’re new to your business, start by gathering copies of contracts used by other people in your field. Some kinds of contracts, such as commercial leases, are widely available. For other kinds, you may have to dig a bit. Trade associations, which commonly publish material containing sample contracts, are one good source. Other people in your line of work may be willing to share their contracts with you. Form books published for lawyers are an excellent starting point for developing your own specialized contract.
Once you find a simple contract that’s more or less suitable, make sure that you understand every word. Obviously, contracts written in plain English are better than those filled with legalese. Next, write a rough draft of any additions you may need.
Professional help. If you plan to use a form contract for major transactions, consider reviewing it with a lawyer who has small business experience—ideally, one who knows something about your field.
Excerpted from Legal Guide for Starting and Running A Small Business, by Fred Steingold (Nolo).