Business Agreement Format: The Ultimate Guide 2021
Whether you are just starting out or are an established brand, the business agreement is an important part of managing a business. Today, agreements play a vital role in the day to day business deals. Whether you are a freelancer selling your services or a startup selling goods, a business agreement truly binds an agreement with all the parties.
Business agreements can be verbal and written. Although verbal agreements are legal in most situations, most agreements are in the written form. As we move forward, contracts are getting more and more detailed to keep up with present situations.
For example, businesses are adjusting terms due to the global pandemic, something that wasn’t included in most business agreements at the start of 2021.
What is a Business Agreement?
“A business agreement is a statement or a contract formed between two or more business organizations.” The agreement is an exchange of promises between the parties involved.
The agreement is mostly used to outline the details of a transaction along with other details like dues, payment terms, and costs. Apart from the legal requirement it also helps resolve a situation easily if any disagreements arise.
The importance of business agreements format echoes throughout the business. These agreements are required while hiring, creating a partnership, trading, sharing sensitive information, and even for acquisition. For example, an operating agreement is a type of business agreement created to manage and regulate an organization’s internal affairs.
Since business contracts are important to all business practices, an organization must have a lawyer that can be consulted throughout the process. Furthermore, a contract must fulfill certain legal requirements to be considered a legally valid agreement.
Understanding The Business Agreement Format
As we know, business agreements format are important for businesses of all sizes. An agreement should be clear and specific. Furthermore, it should also meet a few legal criteria for it to be legal.
The legal process, or litigation, decide whether the agreement is valid or not. Interestingly, a business agreement format needs to be valid for a court to hear a business agreement or contract dispute.
Contracts vs. Agreements (TABLE)
To put it simply, all contracts are agreements however, not all agreements are contracts. Contracts fall under the large bucket of agreements. Most people use the terms contract and agreement as interchangeable words. However, they don’t exactly mean the same thing. As per a definition by Black Law Dictionary an agreement is said to be a mutual understanding between two or more parties that discusses their relative rights and responsibilities. Whereas, the black law dictionary defined a contract as an agreement among parties that has obligations that are enforceable.
The Major Differences Between a Contract & Agreement Are:
1. Contracts are legal obligations while agreements aren’t necessarily legally enforceable.
2. Contracts are written and registered while agreements aren’t necessarily written.
3. The scope of an agreement is wide while the scope of a contract is narrow.
4. Contracts are covered in section 2(h) while agreements are covered in section 2 (e) of the Indian Penal Code.
|Not legally binding||Legally binding|
|Can be verbal||Needs to be in writing and legally binding|
|Covered in section 2(e)||Covered in section 2(h)|
|The scope of an agreement is wide||The scope of a contract is narrow|
Know More – Not all business agreement formats are legally binding, only contracts are legally binding.
Components to Include in Your Business Agreement Format
A business agreement format must be a thorough document. If possible, a lawyer should be involved in its creation or should at least be consulted for it. Missing out on certain legal requirements will lead to the contract being null and void, thereby dissolving the need for either party to keep their word.
To avoid such a situation, you should make sure that the agreement is airtight and fulfills its legal requirements. Furthermore, do not be shy to consult a lawyer for agreements or lines that you do not understand. A little precaution will help your company in the long term.
Few Elements you Should Include in a Written Business Agreement Format Are:
1. Details of The Party
Start by mentioning the parties involved in the contractual agreement. Every individual or organization that is a part of the agreement should be named along with their business details. Both the parties must mutually agree on the agreement and acceptance of the offer. Both parties must consent to their free will.
Furthermore, any sub-contracting arrangements should also be written in the agreement.
In order for an agreement to be created, something of value must be exchanged between two parties. It should be acknowledged that both parties give something, whether it is monetary or service-oriented.
3. The Duration or Period of the Contract
From when to when does the contract apply? How long is the contract applicable for and what situations is it not applicable in? Mention the terms of the agreement clearly along with any specific details.
4. Definitions of The Key Terms Used Within The Contract
Mention the definition of the certain key terms mentioned in the contract means. For example, if a business is buying a product from another business. If the terms buyer and seller are used in the agreement, clearly mention who is who.
Hereby, company XYZ will be referred to as the buyer, and company ABC will be referred to as the seller.
Describe the legal obligations of each party in detail. For example, if a company is hiring a contractor to design brochures for them, mention how many pages that brochure has along with other details.
Then move on to write the obligations of the other party, whether there will be a stipend given to the contractor or if there are any other benefits that will be included in it.
6. Payment Details & Dates
Include the details of payment and the process of it in the business agreement. These agreements should include details like what interest will be applied in the case of late payments and what channel of payment will be acceptable for both parties.
7. The Termination Conditions
If there are any situations under which the agreement will be considered null and void mention them in the agreement. This can be in the case of a Force majeure or the impossibility of fulfillment. Mention the worst-case scenarios in the termination conditions to safeguard your business from having to make payments due to damages. For example, A supplier will not be able to ship their products in the middle of a flood or a hurricane. Furthermore, a common reason for the termination of a contract is also breakage of the agreement.
8. Renewal Process
Once the contract has ended through expiration or termination what will the process for renewal be? The contract can either be self-renewing or can be stopped after the expiration of it.
9. Legal Purpose
Every legally binding contract requires a legal purpose. Mention the act and the law under which the contract was created. Not having a legal purpose in a contract is not illegal, however, it is an essential element without which a contract will not be legally binding.
Few other key elements that can be included in your business agreement format are:
1. Key dates and milestones
2. Required insurance and indemnity provisions
3. Guarantee provisions, including director’s guarantees
4. Damages or penalty provisions
5. Renegotiation or renewal options
6. Complaints and dispute resolution process
7. Special conditions by either party
Common Types of Business Agreement
The General Business Agreement
General business agreements is created to mention the business’s structure and to protect its shareholders.
1. Partnership Agreement
A partner agreement lays down the framework of the relationship between partners. Their individual obligations, contributions, and expectations for the business. This agreement is written between the partners who run the business for a profit.
Furthermore, it can also be used when two or more partners come together to achieve a common goal. This can be permanent or temporary.
2. Indemnity Agreement
An indemnity agreement allows a person to not be held accountable or be ‘indemnified’ from the damages of a specific agreement. An indemnity agreement is a contract and legally binding.
3. Nondisclosure Agreement
Nondisclosure agreements give a business owner a legal platform to fight on if a vendor, supplier, service provider, contractor, or employee share any confidential or proprietary information about the business. Information declared for a police investigation is not included in the agreement.
4. Property & Equipment Lease
The property and equipment lease include the terms and conditions that to follow in order to lease a property or an equipment. It includes the details of the monthly payments, deposits, terms, and other related terms.
Sales contracts are a business agreement that covers the purchase and sale of goods, properties, or services. They lay out the legal framework of the transfer of ownership. A few common sales contracts include:
1. Bill of Sale
A bill of sale is legal proof that a sale has occurred. It is a legal document that can be held up in court. On the other hand, it also pushes businesses to pay their taxes and is proof in case a customer requires a return or has been sent damaged products.
2. Purchase Order
A purchase order is a legally binding business agreement format that commits a business owner to purchase an item of certain quality upon an agreed price point. It also entails the details of the payment and the delivery. This agreement is commonly used in a business to ensure that a business will not back out after giving an order for products to another company.
Documenting and carefully managing the employment relationship protects your business in the long run. It provides legal protection to your business from the employees of the business.
Few commonly used Employee agreements are:
1. Noncompete Agreement
A non-compete agreement mentions the time period for which an employee is not allowed to work with a competing company once they leave the company. It prohibited any employee from competing with the existing business and protects the resources.
2. Contractor Agreement.
In the case of hiring an individual contractor, there are strict government criteria that are meant to be laid out. If an individual contractor is hired to provide a certain service and complete an individual project then a contractual agreement can be created which lays out the details of the work, also the terms of service and the remuneration, etc.
3. General Employment Contract
Every business usually shares an employment document with every employee. These include the Non-disclosure agreement, the employment details (remuneration, days on leave, the employee’s title, benefits, etc). This document sets a framework between an employee and the company and protects the business.
General Terms & Structure of an Agreement
Legally agreements are not required to follow a certain format. Also, they include some terms that form the basis of the agreement. These terms can outline the contract conditions.
These conditions are extremely important to the agreement. If the conditions are not met the contract or agreement can be terminated. Furthermore, a party can also seek compensation for the damages.
Furthermore, contract warranties are less important as you cannot terminate the contract in case the warranties have not been fulfilled. However, you can seek compensation for any losses incurred.
Avoid Unfair Contract Elements
If a contract is seen as unfair, i.e benefiting a party without them having to pay anything in return, then the contract can be terminated in the court of law.
If it is a standard form, the contract or agreement should not include terms that are considered unfair. Examples of such terms are:
1. Allowing one party (but not the other) to avoid or limit their obligations
2. Allowing one party (but not the other) to terminate the contract
3. Penalizing one party (but not another) for breaching or terminating the contract
4. Allowing a party (but not another) to vary the terms of the contract
5. Contracts with a minor or someone under the influence of drugs or alcohol
6. An approach can be taken to share the powerful approaches on either side, however, that is a risky approach to take as it can form significant imbalances. Furthermore, make sure the contract doesn’t have an unreasonable auto-renewal clause in a place where it isn’t required.
Ending a contract or Termination of a contract
1. A contract can be terminated when a breach has occurred or contract conditions have not been met with. Either parties involved in the contract can call for the termination of the contract.
2. Termination of the contract will ensure that the document is no longer legally binding.
3. We’ve listed a few legal reasons for the termination of the contract are the contract.
1. Impossibility of Performance
Typically, a contract or agreement requires both parties to do something. However, in an event where it is impossible for a party to fulfill their agreed-upon duties then it is called the impossibility of performance.
Either one of the parties can raise it as a reason for termination of the contract.
2. Breach of Contract
If a contract is intentionally not honored by a party, it is called a breach of contract. It is grounds for termination of the contract and further compensation for the damages. For example, if a late delivery of products harms your business you have the right to call for the termination of the contract or seek monetary compensation for the losses.
3. Termination By Prior Agreement
Contracts often have certain terms by which a contract can be terminated through a prior agreement in case certain situations arise. The contract must mention in writing the situation of termination and the procedure post the termination of the agreement. Also in most cases, it is agreed upon that a party should give written notice to the other party to terminate the contract.
4. Rescission of the Contract
If an individual misrepresents themselves, acts illegally, is a fraud, for example, the contract can be terminated under the rescission of the contract. For example, if you’ve bought a car, however on further inspection you realize the car isn’t brand new and isn’t in the right condition. You can then ask for a rescission of the contract. This is also applicable if a party isn’t old enough to enter a contract or an elderly cannot make legal decisions because of incapacity.
5. Completion of The Contract
Contracts often have a deadline or obligations set out. Once those obligations are completed the document can be terminated. Both parties should show the documentation of their duties being fulfilled. Documentation is important to protect the company in the case of a dispute in the future.
Before You Sign an Agreement
Signing an agreement is an important part of running a business. However, contracts must be thorough and should be signed with the utmost care. If you are confused, seek legal guidance. This can save you a lot of time and resources in the future. Besides this, we’ve created a small checklist of things to consider before signing a business agreement.
1. Make sure you read and understand every word of the agreement.
2. Ensure the contract reflects the terms and conditions that were were negotiated.
3. Consult a lawyer.
4. Take time to read and understand the document.
5. Do not sign the agreement under pressure, take your time.
6. Make sure that there aren’t any blank spaces left in the document. Either cancel them out or color them so things cannot be added to it later.
7. Keep a signed copy of the contract for your record.
Once the contract has been signed it will be difficult to get out of it without having to pay compensation to the other party. Therefore, it is important for you to be absolutely sure before signing a contract. Compensation costs can even increase if the matter reaches the court. Therefore, an opt-out option should be laid into the contract.
There you have it, an in-depth exploration into what a business agreement format is. We hope we’ve helped you understand the business agreement format better and you feel more confident while dealing with one.
If the correct precautions are taken then contracts can be truly beneficial for you and your company. It helps you stay on track and allows you to plan for the future better.