More than 99% of business is transacted without a contract, either because the transaction is routine or because you trust that the person with whom you are dealing will treat you fairly. For example, you go to a plumbing supply company, select the fixtures you wish to install, pay your money and walk out with the fixtures without a contract ever being mentioned. However, if you are running a small business or find yourself involved in a business or commercial transaction, you may have to deal with a contract.
A contract is often called an “agreement”. The 2 words usually have the same meaning.
In either case, there are some basic concepts that you should keep in mind.
Generally speaking, a contract is a promise by one party to another. Each party to the transaction expects the party making the promise to honor their promise. Even though neither party may say so, there is an expectation by both that a party making a promise may incur some legal liability if he fails to honor it.
A contract exists only where there is a clear-cut promise or commitment. A casual comment like, “I usually charge $2,500 for painting a room of that size,” or an indefinite prediction about what might happen under certain circumstances is not a contract. For example, you could not sue someone for “breach of contract” if all he says is, “If I get some time later this summer, I might be able to paint that new office space for you.”
Must a contract be in writing?
There are laws in Illinois and other states that require certain kinds of contracts to be in writing. The most common are
- A contract for the purchase and sale of real estate
- A contract that cannot be performed within one year
- A contract with certain governmental authorities.
While there is no such requirement with respect to the great majority of business transactions, it is generally a good idea to “put it in writing” when the transaction is complex or may be difficult to prove, if all you have is your testimony about what the parties agreed to verbally.
Must a contract be recorded?
The answer is “no,” except in very rare cases. A business contract is a private matter that no governmental authority and no member of the general public is entitled to examine.
The principal exceptions are equipment leases, mortgages, and other kinds of “secured transaction.” In these cases, the contract must be recorded with the Secretary of State or Recorder of Deeds so that third parties can determine from what has been recorded whether the equipment or real estate is subject to a “lien” by another buyer or lender.
Must signatures be notarized?
The general answer is “no,” except for special cases that you will recognize immediately because there will be a space on the form for the signature and seal of a notary public. Otherwise, do not let the person with whom you are dealing talk you into having your signature notarized.
How to deal with printed forms
You may wish to use standard printed forms in your business. These can usually be downloaded free of charge from the internet, purchased from a office supply store, or modeled after forms being used by other companies in your industry. Common examples include a contract for the design of a web site, a “consignment agreement” if you are operating a resale shop, a professional services agreement if you are offering translation services, an enrollment form to be signed by the parents of children attending your pre-school program, and a landscaping contract if your business offers such services.
You will be asked to sign a printed form from time to time. There are 2 important things to keep in mind when you are asked to do so:
- Read the form carefully before signing. If there is a provision you do not understand or that causes you concern, do not hesitate to ask the company providing the form what the provision means. If you do not get a satisfactory answer, do not sign the agreement.
- You may be able to negotiate for an amendment to a printed form that you find objectionable. This can be done in various ways:
- By crossing out and initialing the provision that concerns you;
- In cases where the change is a small one like, a single word, number, or date by writing the amended word, number or date in the margin of the printed form, and having it initialed by both parties; or
- By attaching a one or two page “rider” saying, as an example, that “Paragraph 12 of the attached form shall be amended to read as follows: “__________________.” Spell out the change.
How to prepare your own contract
As indicated above, there are several sources where you can get standard forms from and adapt for use in your business. If there is a lot of money or important property rights involved, you should have a lawyer do this for you. For most transactions, the attorneys’ fees will be too great for you to pay. Remember, some kind of written document is usually preferable to an oral agreement with nothing in writing, even if it is not as comprehensive and well-written as what you might use if you could afford the services of an attorney.
Read more about if:
- You are unable to find a sample from which to work; or
- You feel that a formal written contract might be viewed as “insulting” or not the best way in which to establish a good business relationship with a prospective customer, supplier, or independent contractor.
1. E-mail and letter agreements
For most transactions, an e-mail message or “letter agreement” might be enough to protect your rights. Either can provide the same protection as a formal contract without being considered by the recipient as being “unfriendly.”
In the case of an email message, you might send the other party something like this:
“It was good talking with you this morning. This will confirm our agreement that for the rest of this year that I may park my truck at the southwest corner of your lot for $125 payable on the first of each month. Thanks so much.”
A letter agreement would look like this:
“Dear Mr. Olson.
I am writing to confirm our understanding about the website you asked me to design for your craft beer company:
1. The details of what you want are set forth in the attached document.
2. You will pay me $2,500 on the approval of this letter agreement.
3. A second payment of $5,000 will be made when the website is submitted to you for preliminary approval.
4. A final payment of $2,500 will be made after testing and after I have made whatever reasonable modifications are requested.
5. The design and content of the website will remain my property until the final payment is made, at which time it will become the property of your company.
If I have correctly set forth our agreement, please sign and return a copy of this letter for my file.
Very truly yours,
A lease is almost always on a printed form, although a short-term arrangement of only a few weeks or a few months may be less formal.
Here are some things the lessee, or the tenant, might want to negotiate and set forth on an attached rider:
- A right to renew the lease on certain stated terms and conditions.
- A “first option” to rent the adjoining space if it should become available. This is a legally enforceable right to be the first person to whom the vacant space is offered.
- A waiver of the first several months of rent so that the lessee can use its limited cash resources to remodel and equip the space rather than pay rent.
If the lessee is a small company with less than an A+ credit rating, do not be surprised if the lessor, or the landlord, demands a co-signer or a personal guaranty from the individuals who own the small company.
It is also important to keep in mind that once you sign a lease, you or your company are responsible for the rent every single month of the lease even if you go out of business (less whatever rent the lessor can obtain from a new lessee). You cannot simply walk away from a signed lease.
Check the municipal zoning ordinance to be sure that the space being rented can be used for the purpose intended and that there are no regulations requiring certain kinds of plumbing or electrical work or special features to serve handicapped persons. Exterior signs may be subject to local rules or shopping mall regulations.
3. Employment contracts
There are many different kinds of employment contracts. These include individual and union contracts. Some are on standard forms. Others are buried in employee manuals. Special rules apply to these contracts.
4. Partnership agreements
If you are going into business with a partner or as one of 2 or more shareholders of a corporation or members of a limited liability company (LLC), there must be a written contract among the owners. You can try to draft this by yourself using a sample form on the internet and “filling in the blanks.” It is recommended, however, that an attorney be hired to draft the agreement.