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Whether you have a multi-million business, a startup, or you’re working freelance, as long as you’re conducting business with another person or company, you need to understand the intricacies of business contracts.
After all, you don’t simply high-five or do a handshake with your clients and suppliers.
What is a Business Contract?
Simply put, a business contract is a promise or set of promises that are enforced by the law. Business contracts can protect all parties involved because if a party gets wronged, the law will be on their side.
Because contracts formally memorialize deals, it is considered a business document.
In the Philippines, verbal contracts are very common. However, it is always recommended to get your contract in writing because it is harder to prove the existence of the contract without a signed document.
Whether you go for unilateral contracts where an offeror promises to pay after the service is performed, or bilateral contracts where you and another party exchange promises to perform, a written contract is needed.
The major reason why contracts are needed is that it solves the trust problem. With this binding agreement in place, two strangers can form a business relationship and rely that the other party will do their promise.
Before a business contract is made, the following must be covered:
- A promise to deliver a product, or perform a duty or service
- Parties must have a time requirement to deliver their promise or perform the duty
- They must have certain terms and conditions that relate to the binding agreement
After all these have been established, both parties can do their part of the agreement. When the prices, timetable, and delivery are addressed, the parties involved can have a reference point.
Why are Business Contracts Important?
Legal documentation must be in place in any business environment. At its core, business contracts are simply relationships and transactions.
It means two or more parties are working together and have a beneficial relationship, and the contract is the visual representation of their relationship.
Perhaps the most popular reason why businesses make contracts is to prevent risks.
When you have a contract in place, conflict can be prevented down the line because every comment and changes made are comprehensively audited.
Here are other reasons why you should always have business contracts in place.
- It protects the legal rights of you and your company when making business transactions
- It creates a paper trail of the deal or transaction to promote organization compliance when it comes to documentation
- The process around it helps businesses bring in more revenue
- It fosters collaboration
- It protects and even extends your brand values
- It improves company efficiency
- It layouts all your expectations
- It improves your brand reputation when doing business with other companies
Contracts vs. Agreements
One of the most common mistakes business owners and freelancers make is using the terms “contract” and “agreement” interchangeably.
Although the two have similarities, they are not the same thing.
Agreements are the prelude to a contract. It covers what is done to ensure that the contract meets the needs of both parties.
One of the major purposes of this stage is to prevent mutual mistakes, which happens when both parties believe they agree to a contract clause, only to find out that one or both of them are wrong.
The key to agreements and contracts is that all parties involved should agree with all the written points, especially when it comes to the timetable, deliverables, and other actions in place.
This mutual acceptance can make or break the transaction and make way for a contract dispute.
The major difference between contracts and agreements is that contracts are legally enforceable. So when a party does not perform everything expected of them, they can be held accountable for their actions.
Aside from that, agreements do not need to be written. On the other hand, except for specific types of contracts, contracts are mostly written.
Elements of a Business Contract
Here are the essential elements of a business contract. Keep these in mind because if an element of a business contract is missing, it cannot be enforced by any court.
The foundation of every contract is desire and responsibility. Someone needs something, and someone can help them have whatever they need.
The offer is the first element that encompasses the duty and responsibility of the parties involved. This must also have an exchange of value, which is usually monetary.
When the exchange involves money, it is called unilateral contracts. If not, it is called bilateral contracts.
The initial offer can still be changed to meet all the needs of the party before it is accepted.
When a counter-offer is made, the original offer is rendered useless, and the parties can start bargaining for a new outcome.
This second element means that a party has decided to take up the offer. The acceptance must include a statement of willingness which can be implied or directed to the group.
One of the major purposes of a contract is to give consideration. This includes the value agreed upon. The services, values, and properties are all examples of contractual considerations.
However, you must note that there doesn’t need to be a financial element for this to be valid.
This element means that under the law, each party involved in the contract has the legal capacity for it to be valid. They must not be:
- Someone with a brain disorder
- Someone under the influence of alcohol or drugs
- Someone with insufficient understanding of the language used in the contract
Of course, there are various ways to overcome these things. For instance, a minor can have a legal representative.
The major determination of this element is just for all parties to fully understand the meaning and words of the contract.
The contract made must have a legal purpose. It should not be for something illegal such as selling drugs.
Contracts must also adhere to the jurisdiction laws in the province or city where it is signed.
Common Legal Clauses in a Contract
Whatever industry you are part of, contracts are extremely useful. In almost all types of contracts, different clauses are more likely to be present.
This clause covers the promises and obligations of each party.
If they fail to abide by any of the contract terms, the enforcement clause states the consequences of their actions.
Choice of Law/Choice of Forum Clause
This clause provides the laws that apply if a party files for breach of contract.
Another provision called the choice of forum clause states under what jurisdiction the litigation must happen.
This clause states that if a dispute happens, the parties must go through mediation or arbitration before filing a lawsuit.
This way, they can settle the dispute easily.
Statute of Limitations Clause
This clause refers to the amount of time a party has to file a lawsuit when a breach happens. When it has passed, a lawsuit can no longer be filed.
The execution clause covers how a party will perform its part of the agreement. Here are the various examples of an execution clause:
Time of Performance Clause
This refers to the time frame where the party must fulfill its obligations.
Most contracts provide a specific time frame, but some contracts use the term “time is of the essence.” A party can sue if they suffer from losses due to the delay.
If the contract calls for performance on different occasions, there is a possibility that the party may not be able to perform on one of the occasions. If this happens, the other party can file a lawsuit.
The non-waiver clause states that the waiver of performance in one event does not prevent the wronged party from insisting on regular performance after.
“Force Majeure” Clause
This term is a French phrase that means “superior force.”
It sets the conditions which a party is not obligated to perform under the contract because of forms beyond its control such as pandemics, natural disasters, war, and many more.
This clause covers the legal principles used to interpret an agreement that contains contradictory language or is ambiguous.
Also called the “final agreement clause,” this provides the final terms of the current contract.
These terms will take precedence over the contrary terms in prior agreements.
15 Types of Business Contracts & Agreements in the Philippines
We’ve rounded up the different types of contracts. By having this knowledge, you will know what type of contract to have for your business transactions.
Non-disclosure Agreement (NDA)
This contract establishes a confidential relationship between two parties. The people signing the contract agree that the sensitive information they will find out will not be available to other people.
This type of contract is common for businesses entering into a negotiation with another business.
Recommended Template: LegalTemplates.net
This is a contract between partners in a business. It must clearly outline the terms and conditions relating to the working relationship of these partners such as:
- Roles, duties, and titles
- Ownership shares
- Profit distribution
- Term length
- Termination of partnership
- Buyout terms
Recommended Template: PhilippineLegalForms.com
This binding agreement protects parts of a transaction from the liabilities or other risks created by the other party. It covers the following agreements:
- Release of liability
- Waiver of liability
- Hold harmless agreement
- No-fault agreement
Recommended Template: PandaDoc
Property & Equipment Lease
This is a contractual agreement where the lessor or owner of the equipment allows a lessee to use the equipment or property for a specified period in exchange for payment.
The lessor still retains the ownership of the equipment.
This contract can cover any type of equipment such as vehicles, homes, buildings, factory machines, and many more.
Recommended Template: Attorney.org.ph
General Employment Contract
This type of contract is an agreement between an employee and an employer or a labor union. It establishes the responsibilities and rights of both parties. It covers the following:
- Salary or wages
- Duration of employment agreements
- General responsibilities
- Future competition (non-compete agreement)
Recommended Template: WonderLegal
This binding agreement is done between a consultant and a client. It describes the relationship of both parties during the duration of the contract.
Recommended Template: Documatica Forms
This business is sent by an employer to a freelancer or vice versa. It clearly explains their working relationship, as well as the payment terms and expectations between both parties for a set period.
Recommended Template: Documatica Forms
This proposal is a pitch made by an organization or individual. The goal of the partnership seeker is to convince an investor or sponsor that they are worthy of the project.
This proposal needs to be done in the best way possible and it must highlight the benefits of their future potential partnership.
Recommended Template: JotForm
This is a contract between two parties where the property owner permits another party to use their trademark, patent, or brand. this agreement contains the details on the following:
- Type of licensing agreement
- Terms of usage
- Compensation or payment terms
Recommended Template: LegalTemplates.net
Letters of Intent
A letter of intent declares the preliminary commitment of a party to do business with another. This document is commonly used in business transactions and it is quite similar to term sheets when it comes to the content.
This is a financial instrument containing a promise by one party to pay another party a definite amount of money at a specified future date.
Recommended Template: Filipiknow.net
This is a formal contract between a borrower and a lender that dictates all the details of a loan including:
- Principal amount
- Amortization period
- Interest rate
- Payment terms or payment plan
- Loan term
Recommended Template: WonderLegal
Contract of Lease
This is an arrangement between two parties that allow the lesser to use an asset that belongs to the lessor.
When this binding agreement is in place, the lessee is not allowed to sell or sublease any portion of the property without written consent by the lessor.
Recommended Template: Atty. Marcelino
This is an agreement between a company and a customer. It states that the company will check and repair a piece of equipment or product for an agreed price during a fixed period of time.
Recommended Template: WonderLegal
*Already covered by a general employment contract, but here’s a separate definition
This employment agreement is entered by an employer and employee during the time an employee is hired.
It clearly outlines the nature of their business relationship, as well as other important details like specific work performed, and payment terms.
How to Write a Business Contract
You have probably lost track of the number of contracts you have signed throughout the years. But now, you’re wondering how you can make one.
Before knowing how to write a business contract, you must know the different fundamentals of one. This includes:
- Date the contract was drafted
- The expiry date of the contract
- Damages for breaking the terms
- The amount the parties must pay, as well as the time
- Names of every person or parties involved
- Signatures on the signature field
Write down your agreement
If you want to get the law involved and make enforceable agreements, you simply can’t rely on oral contracts. Therefore, it makes sense that the first thing to do is to write everything you have agreed on with the other party.
Spell out the terms of the agreements while making sure to avoid contradictions and ambiguity.
When writing your contract, use a language all parties involved can understand. This way, you are sure that every person understands what they are signing, as well as every single provision detailed in the contract.
The obligations and rights of every party involved in the business contract must be laid out with little to no room for interpretation left. This way, a contract dispute can be avoided. Do not forget to include the payment details.
For instance, if you want to receive the payment at the end of each month, do not just write “end of each month.” Instead, write “every 29th.”
It is also important to outline how each party should make their payments. This could be an installment or a one-time payment plan. A lot of contracts also have terms for late or delayed payments.
If you decide to change anything in the contract, add a written amendment rather than sticking with oral agreements.
Include terms of terminating the contract
Although nobody wants this to happen, you need to be prepared to face a contract dispute issue.
Contracts do not last forever unless they are perpetual contracts, and even if this is the type of contract you want to make, you should still outline the grounds for contract termination if one party wants to end the contract.
Add confidentiality when needed
If you are making a business contract, the other party may gain insight into your trade secrets and other business processes.
To ensure they don’t share this information with others, include a confidentiality clause. This will bind them from sharing any information included in the contract with your competition or other parties.
If you think that you’ll sue over the contract, you need to include a clause that awards the attorney’s fee to whichever party wins. If you don’t have this clause, you have to pay for your attorney.
Include a mediation or arbitration clause
The key to writing a contract is preparation. It may be advantageous on your part to include a mediation or arbitration clause to require the parties to enter mediation or arbitration when conflict occurs.
This process allows the parties to work out differences and issues with the help of a neutral mediator instead of immediately pushing for a costly lawsuit.
Tips for Writing a Business Contract
Writing a business contract is no walk in the park. If the idea of writing a contract makes you weak in the knees, keep these tips in mind to make the process easier.
Double-check the names
Contracts should always correctly state the name of the parties involved. When done inaccurately, this will render your business contract useless.
Always check the names before signing the contract to ensure you don’t run into issues. For example, many companies have the same name. This is why the contract should specify the full name of the business, as well as its address, so there won’t be any confusion.
Another thing you should ensure is to only deal with the right person. Do not accept a deal with a junior member of a company or an assistant that is not authorized to sign contracts.
At the end of the day, these people should not be signing on your contract’s signature field. Instead, identify the right person to handle the contract. This is usually the CEO.
Make it simple
Although you want your contract to be legally enforceable, do not fill it up with legal jargon that an average person does not understand. Make sure every sentence is clear and straight to the point.
Don’t rush the discussions
Before you make any enforceable agreements with anyone, you should talk with the parties involved. Never rush this stage since this is where you will come up with the best beneficial contract.
Some of the topics you should discuss properly before putting it into writing include, but are not limited to:
- Payment plan
- Rights and obligations
- Contract termination
- Duration of the contract
These sections do not have to be written in a fancy way, but it has to be carefully worded.
Consider Hiring an Attorney to Write your Business Contracts
This is the best tip we can give you when it comes to business contracts and legal agreements.
You may think it’s expensive to hire a lawyer for your contract, but you may end up saving money in the long run because of this professional. Some of the risks involved in not hiring a lawyer include:
- Paying for more than you should
- Exposing yourself to financial risks like costly lawsuits
- Losing the right to your property
By hiring a lawyer, you’re protecting yourself from having a poorly written contract. Even if you plan on writing the contract yourself or using a free contract template you found online, you should get a lawyer to review it so it can be easier to enforce in court.
People who do not know the law often do not realize how vague or generic their contracts are, and this could pave way for various issues.
Lawyers have a thorough understanding of contract law, and they know the standard contracts needed by businesses in your industry.
Having their legal advice is crucial especially to small businesses because lawyers can easily spot unfair terms and help you figure out what to put in your contract instead.
Thankfully, working with a lawyer is so easy. Through this, you can protect your interests, and serve the legal needs of your company better.