A contract is a legally binding agreement signed by two or more parties. It's one of the most important business tools in existence. Why? Because without contracts, businesses would be uncertain of their rights and obligations, leaving them open to all sorts of risks. Imagine if you didn't have any kind of agreement in place between yourself and your supplier, right down to things like payment and delivery dates not to mention guaranteed quality.
Business contracts offer the following functions:
Each party involved in the contract must be identified clearly and precisely. It is important to specify the name of the corporation, company, partnership firm or any other legal entity. It should also mention who represents that entity. The contract must mention the roles and responsibilities of each party. This way, there is fairness in the agreement and it’s clear for all to see who is what. Lastly, it should answer the question “who is what?”, such as who is the supplier and who is the customer.
A consideration clause includes terms pertaining to the money paid by one party in exchange for the promise of something valuable (having monetary value or capable of being ascertained in a monetary terms). As an instance, consider a service, property (tangible/ intangible), or a promise to carry out an act or not to carry out an act. Each party who enters into a contract and profits from it must be taken into account. It is the monetary value of something that is being exchanged for a price. For example, consider a contract for supply of Air Conditioners, the Manufacturer has undertaken to deliver to the Wholesaler, the Air Conditioner at a price of Rs. 25,000 per unit. This is referred to as mutual consideration in law.
One of the major components of a business contract is the mutual promises made between parties. What kind of air conditioner will be delivered? Is it brand new or used? When will it be delivered, and how will it be delivered? When and how can the buyer make payment for the devices? How much should they pay, and in what form (single payment or monthly instalments)? The parties' mutual commitments must be completely and appropriately understood; there must be a wholly consensual and informed agreement. A contractually binding contract cannot be uncertain or ambiguous pertaining to these bilateral agreements.
The agreement must address all questions that affect the promised performance of the agreement. What happens if the air conditioner malfunctions? Is there any sort of guarantee? What is the seller's recourse if the purchaser's cheque bounces? How about predefined damages for breach for contract terms. For instance, there are predefined damages for early termination of the contract, or what to do if the purchaser's credit card expires and they don't have another one, or where to collect if something comes up in the middle of the project. This can all be sorted out by determining what happens first, second and third, and who gets priority. It may be necessary to resort to alternative dispute resolution methods such as mediation or negotiation rather than litigation, which can be costly and time-consuming. These situations, and many more, should be specified in the Terms of Performance.
It’s not enough to just have a contract. You need to sign it! In some cases, this might require the signature of an authorised signatory, as well as their company seal. This assures that the company agrees to the terms and conditions on the contract. There are some situations where a business contract can be oral—but in practice, it should be written and requires a third party witness and notarised. This is required by law! A business contract can be oral, in theory. In practice, it should be in written form and is often required to be legally enforceable.