How to Write Business Contracts

Writing a business contract that meets your objectives requires careful attention and time. To begin with, you must understand what a contract entails. A contract is a voluntary and lawful agreement between competent parties, made for a good consideration, to perform or refrain from performing a specific act." (Robinson v. Magee (1858) 9 Cal. 81, 83.)

There are four essential elements for a contract to exist (CC §1550; Lopez v Charles Schwab & Co. (2004) 118 CA4th 1224): (1) parties capable of contracting, (2) consent of the parties, (3) a lawful object, and (4) sufficient cause or consideration.

1- All individuals are capable of contracting, except minors, individuals of unsound mind, and those deprived of civil rights. Civil Code section 1556. Therefore, be mindful of the age of the person with whom you are entering into a contract.

2- "Consent is not mutual unless all parties agree upon the same thing in the same sense," meaning that for a contract to be valid, all parties must understand and agree to the terms in the same manner, without misunderstandings or discrepancies in their interpretation of the agreement. California Civil Code section 1580

3- Contracts must have a legal purpose; otherwise, they cannot be enforceable, except in specific situations. Let me provide some examples. Illegal contracts are agreements that violate laws, public policy, or legal regulations. Common examples include: Contracts for Illegal Activities, such as a Drug Sales Agreement—a contract to buy or sell illegal drugs; a Hitman Contract—an agreement to harm or kill someone; and a Bribery Agreement—a contract where one party pays a government official to act unlawfully.

Another example involves Contracts that Violate Public Policy:

Non-Compete Agreements Without Reasonable Limits – Courts may consider a non-compete clause unenforceable if it is excessively broad in terms of time or geographic scope.

Surrogacy Contracts (In Certain Jurisdictions) – In areas where commercial surrogacy is prohibited, agreements involving payment may be invalid.

Selling Citizenship or Adoption Rights – Contracts that involve the sale of legal status, such as citizenship or parental rights, are generally unenforceable.

4- Under California Civil Code § 1605, good consideration is defined as follows: "Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise."

Breaking It Down:

Benefit to the Promisor → The promisor must receive or be promised something they were not legally entitled to before the contract.

Detriment to the Promisee → The other party (promisee) must give up something or suffer a legal detriment that they were not otherwise required to endure.

Inducement Requirement → The benefit or detriment must serve as an inducement for the promise, meaning it must be the reason the promisor agreed to the contract.

Examples of Good Consideration:

Valid Consideration: A agrees to sell a car to B for $10,000. B's payment is a benefit to A and a detriment to B, making it good consideration. A contractor agrees to build a house for $200,000. The work performed is a benefit to the homeowner and a detriment to the contractor, making it valid consideration.

Not Good Consideration: A promises to give B $1,000 as a gift. Since B does not provide anything in return, there is no bargained-for exchange, making the promise unenforceable. A police officer promises to arrest a criminal in exchange for money.

Since they are already legally obligated to do this, it does not qualify as good consideration. Make sure that these elements exists in your business contract.

How to Write a Business Contract?

Crafting a business contract requires clarity, precision, and a thorough understanding of legal and commercial considerations. Below are the key steps to drafting a robust agreement:

1. Identify the Parties Involved

Begin by specifying the full legal names and contact details of each party. This ensures clarity on who is bound by the agreement and helps establish legal enforceability. Example: "This Agreement is made between Smith & Co. (123 Business Rd., NY) and Johnson Enterprises (456 Corporate Ave., CA)." This is important to address the correct party in the contract, as we all know company names might be the same in different states. That is why, it is better to identify parties with their addresses. You may also write their Employee Identification Number.

2. Define the Scope of the Agreement

This is the crucial part of the agreement. Clearly define the contract's purpose and the goods or services being offered. Specify quality standards, delivery schedules, and other pertinent details to avoid misunderstandings. For example, a catering contract should include the number of guests, the menu, and the event date. Many issues in breach of contract lawsuits stem from not clearly defining the scope of services or goods expected. Remember, it will be challenging to prove oral promises once a written contract is signed.

3. Establish Payment Terms

Detail the cost, payment schedule, and any late fees or penalties. Ensure that the terms are clear and fair to both parties, avoiding vague language that could lead to payment disputes. For example: "Client agrees to pay $5,000 in two installments of $2,500. Late payments incur a 5% penalty." I just want to remind that if the breaching party doesnt pay your entitlement you have four years to compensate the damages, if you file a lawsuit after

4. Address Intellectual Property Rights

Identify the ownership of any intellectual property generated during the agreement and detail the licensing or usage rights. This is essential in sectors like software development, creative services, and branding. For instance, "Photographs captured during the project are owned by the photographer, yet the client receives unlimited commercial usage rights." This is particularly important in employment or independent contractor agreements, as employees or contractors might assert intellectual property rights on the work produced in your project.

5. Include Confidentiality and Non-Disclosure Provisions

Protect sensitive business information by defining confidentiality obligations and specifying consequences for breaches. These clauses help maintain trust and safeguard proprietary data.Example: "Employee agrees not to disclose client lists or financial records for five years after contract termination."

6. Define Termination and Renewal Clauses

Specify the length of the agreement, conditions for renewal, and procedures for termination. This part should address situations like contract expiration, violation of terms, or mutual termination. For instance: "Either party can end the agreement with 60 days' written notice." It's advisable to retain the right to renew contracts, allowing you to continue benefiting from a contract you are satisfied with.

7. Specify Dispute Resolution Procedures

Detail the procedures for settling disputes, such as mediation, arbitration, or litigation. A well-defined dispute resolution clause can avert protracted and expensive legal conflicts. For instance: "Any disputes shall initially undergo mediation in Orange County, California, prior to moving to arbitration." Mediation and arbitration are two alternative methods for dispute resolution. If you seek a swift resolution of legal issues stemming from the contract, including a mediation and arbitration clause is advisable. However, note that this can be more expensive than traditional litigation due to arbitrator fees.

8. Identify Governing Law and Jurisdiction

Specify the legal system that will govern the contract and identify which courts will have jurisdiction in the event of disputes. This provides clarity on how legal matters will be addressed. For example: "This agreement shall be governed by the laws of the State of California." Including such a clause can potentially save significant legal expenses if litigation arises. Consider living in Orange County, California, while the defendant resides in New York. If you already have a trusted attorney in California, choosing Orange County as the venue for dispute resolution and California law as the governing law means you won't need to hire an attorney in New York or travel there for litigation proceedings.

9. Define Warranties and Representations

Include assurances from both parties regarding key facts or conditions. This section clarifies expectations and reduces the risk of legal claims due to false statements or misrepresentations. Example: "Vendor guarantees that all goods delivered will meet FDA safety standards."

10. Include Indemnification Provisions

Establish which party will be responsible for any losses, damages, or liabilities arising from the agreement. This protects parties from financial risks associated with unforeseen circumstances.Example: "Supplier agrees to indemnify the retailer against any claims resulting from defective products."

11. Add a Force Majeure Clause

Account for unforeseeable events such as natural disasters, pandemics, or political upheavals that could prevent contract fulfillment. This clause ensures that neither party is unfairly penalized for circumstances beyond their control.Example: "Neither party shall be held liable for delays due to earthquakes, floods, or government-imposed lockdowns."

12. Review and Finalize the Contract

Thoroughly review the contract to ensure clarity, accuracy, and fairness. Both parties should have an opportunity to suggest revisions before signing. Once finalized, keep signed copies for reference. Example: "Both parties have reviewed and approved the terms and will sign two identical copies, one for each party.

Need a solid business contract or help enforcing one? The experienced attorneys at Sari Law Firm led by Yakup Sari, Esq. have you covered. Contact us today! 📩 info@sarilaw.us | 📞 949-426-5071.