What is a business contract and when should you use one? Let's explore the different types of business contracts, and how they are used in a commercial setting.
If you are running a fast-growth business, you will be making agreements with employees, customers, and vendors on a daily basis. The primary purpose of a business contract is to document and formalize these agreements, which means turning a series of promises into a detailed (and legally binding) list of rights, rules, and obligations that both parties must follow.
Sounds complicated, right? Don’t stress. This post will explain what a business contract is, why they are so important, and all of the different types of business contracts you need to know about.
What is a business contract?
A business contract is a legally binding agreement between two or more parties that governs any transaction made in a business environment.
Typically, these business contracts will be drafted by either the buyer or the seller, and they will describe the specific terms of an agreement, such as: what is being promised by each party, when these promises need to be completed, what will be delivered, and when payment for these products and services will be due. These are also called the elements of a contract.
The definition of a business contract is broad, as legal agreements can be used in virtually all realms of business. Some examples of this include:
- When entering a formal business agreement with an employee
- When providing a product or service to a client
- When buying products or services from another entity
- When protecting your business’ confidential information
How important are contracts to a business?
Now you know what a business contract is. But why do they matter?
Business contracts are important for any business, as they perform various different purposes. In fact, a recent study conducted by the IACCM found that there are a whole host of reasons why businesses use contracts, including that:
- They serve as a visual representation of the relationship between parties, and the obligations they owe each other.
- They enable businesses to apportion and mitigate risk, as well as preventing future conflict.
- They define how each party will deliver products, services, or payment.
- They act as an opportunity to increase revenue since contracts are often used to close and finalize deals.
- They serve as an effective tool for collaboration and communication across business departments.
- They ensure that the business itself remains legally compliant.
That’s not all, either. Contracts are also a perfect opportunity for businesses to demonstrate their professionalism, and that they care about the commitments they make. In fact, contracts are a key touchpoint for business relationships, and they are an effective way to communicate with potential clients, partners, and employees. As a result, contracts also act as an extension of your company’s brand.
What are the types of business contracts?
Business can be broken down into numerous functions, and business contracts can act in the same way. In fact, business contracts can typically be categorized in three ways:
- Sales contracts: Sales contracts are agreements that stipulate how goods and services can be either sold, purchased, or transferred. Common examples of sales contracts include bills of sale, purchase orders, statements of work, and warranties.
- Employment / HR contracts: Employment contracts are used to regulate all aspects of employer and employee relationships. These commonly include general employment contracts, non-compete agreements, and independent contractor agreements, for example.
- Supplier contracts: Supplier contracts are legal agreements between businesses and suppliers that regulate the exchange of goods and products. Examples of common supplier contracts include fixed-price contracts and distribution agreements.
Examples of business contracts
If you haven’t realized already, business agreements come in many shapes and sizes, with each performing a specific job or purpose. Let’s explore the most common types of business contracts, and how they work:
1. Commercial lease agreements
A commercial lease agreement is an enforceable contract signed by both a landlord and a business tenant. This type of contract will grant the tenant the right to use a property for commercial purposes for a set period of time, in exchange for an agreed fee.
Unlike residential lease agreements, lease agreements for businesses tend to have less governmental protection, as the parties tend to be more business-savvy.
However, there are still various commercial lease obligations to follow when renting out a business property, and these should be clearly outlined in this type of business agreement.
2. Consulting agreements
Consulting agreements are created when a client wants to obtain specialized services from a consultant in exchange for an agreed rate of compensation.
These types of business contracts will identify what services will be provided, what expenses can be reimbursed, and the amount of time that the consultant is expected to devote to the service - which is usually measured in hours, days, weeks, or months depending on the business’ needs.
Since this work is typically outsourced rather than completed in-house, it is not uncommon for consulting agreements to include confidentiality clauses, too.
3. Distribution agreements
Also known as distributor agreements, a distribution agreement is a contract between a supplier with a product to sell and a separate business that wants to market and sell this merchandise.
Under the terms of the contract, the distributor usually agrees to purchase products from the supplier and sell them to customers within a specific geographical area.
4. Data Processing Agreements (DPAs)
A DPA is a legal document signed by a data controller and a data processor to ensure that the processor will handle the data provided by the controller in a way that complies with the General Data Protection Regulation (GDPR).
The DPA will outline the scope of the data, its purpose, and which other parties that will have access to the data.
5. Employment contracts
Employment contracts are fairly self-explanatory. They are signed agreements between an employee and an employer that establishes the rights and responsibilities of each party for the duration of their relationship. As a result, they often vary in scope.
However, employment and HR contracts typically describe employment-related matters such as general responsibilities, salary, work schedules, confidentiality, and the duration of a person’s employment, to name a few. Offer letters can be binding contracts too.
6. Franchise agreements
A franchise agreement is used to establish a relationship between a franchisor and franchisee, and it gives franchisees various legal rights. These include:
- The right to establish a franchised outlet
- The right to obtain a license
- The right to utilize franchise trademarks
- The right to use trade dress, business systems, operations manuals, and source supplies
- The right to sell products or services allocated by the franchisor
Franchise agreements are a critical part of protecting a brand and the way it is represented, which is essential in business.
7. Letters of intent
A letter of intent is a legal agreement used by two or more parties to express their intention to do business together. They are often drafted in the early stages of commercial relationships, and are used before a formal contract has been entered.
That said, they are similar to contracts in many ways. For example, like contracts, they often include the important roles and responsibilities of parties. These business contracts are designed to eliminate any pain points and bottlenecks when it comes to formalizing the agreement and move towards a more efficient contract workflow.
8. License agreements
Under the terms of a license agreement, a property owner gives another party permission to use their brand, patent, or trademark.
These business documents provide details about the type of licensing agreement involved, the agreed terms of usage, how the licensor will be paid, and clarity that will prevent any future disputes relating to sales, royalties, and quality issues.
9. Membership agreements
A membership agreement is a contract between a business and its customers (aka members) that outlines what is expected of both parties.
Whilst the specific details of a membership agreement will vary depending on the type of service on offer, it is fair to assume that this business agreement will provide details on the obligations of each party, any restrictions on use, the fees to be paid, and matters relating to privacy.
Like most business contracts, a membership agreement is designed to avoid misunderstandings and friction between a business and its customers.
10. Non Disclosure Agreements (NDAs)
NDAs are commonly used in a commercial setting to protect sensitive information about a business, meaning they establish a confidential relationship between the signing parties.
Since NDAs are used so frequently in business, it is unsurprising that so many legal and business teams are seeking to digitize, scale and automate NDAs.
If you are looking to reduce the time your business spends on creating and negotiating confidentiality agreements, try our free NDA template.
11. Order forms
When a buyer wants to purchase merchandise from a wholesaler, manufacturer, or retailer, they typically complete an order form.
If executed well, this document will provide an organized, straightforward summary of a customer’s needs and expectations when placing an order.
12. Purchase orders
A purchase order is a business document that buyers provide to sellers to document the sale of products and services that will be delivered in the future.
Purchase orders benefit a customer since they can place their order with a supplier without the immediate need for payment. However, sellers also benefit from the knowledge that the buyer is legally required to make a payment upon delivery, so they are able to offer credit to buyers without any risk.
13. Software as a Service agreements (SaaS)
Software as a service (SaaS) agreements will lay down the terms and conditions of software delivery, whereby software and data are hosted centrally, with users accessing these over the internet.
Since the data is uploaded into a system and then saved in the cloud, no additional software or hardware is required in the SaaS model, and no physical goods are exchanged.
14. Sales contracts
Sales contracts are among the most common types of business contracts. A sales contract is an agreement between a buyer and a seller that covers the sale and delivery of goods, securities, and other types of personal property.
According to the Uniform Commercial Code, a written sales contract should specify the parties involved, what will be sold, and any material or special terms or conditions. Some states also require that the amount and type of payment be specified within the contract.
15. Share Option Agreements (SOAs)
A share option agreement is a contract between the holder of stock shares and a third party that gives one party the right (but not the obligation!) to purchase or sell shares in the future at an agreed price.
This type of agreement will contain detailed terms regarding the shares, the option, and the circumstances in which the option can be exercised. If the share option is exercised, the other party is obliged to purchase or sell those shares and the purchaser has a contractual right to become a shareholder.
16. Service Level Agreements (SLAs)
Service level agreements are an essential part of any technology vendor contract, and they are used to define the service expected from a vendor. In particular, service level agreements will specify the metrics a service will be measured against, as well as the remedies available if the service falls short of these expectations.
17. Statement of Work (SoW)
A Statement of Work is a routine legal document in the world of project management that provides a detailed overview of a project’s requirements. This overview will typically include a breakdown of activities, deliverables, and timelines involved in a project, as well as details on pricing and other relevant regulatory conditions.
Looking for business contract templates?
The IACCM found that inefficient contract processes are costing businesses thousands. So why not automate the mundane aspects of contracting and spend more time on high-value work?
With Juro’s business contract templates, you can. Our contract templates provide a basic contract framework and enable your teams to self-serve with customisable fields for critical details like order dates, delivery requirements, warranties, and payment terms.
Business contract template examples
Here are some examples of how Juro has helped businesses automate their contracts and reduce the time they spend laboring over scalable contracts by up to 75%:
Deliveroo: Juro automated the employee contract workflow at Deliveroo, allowing the popular online delivery service to issue 1,400 legal documents to employees across 13 markets in just two weeks. The company found Juro’s system intuitive and easy to learn, preventing team members from falling back on spreadsheets, PDFs, and email.
Secret Escapes: Juro’s implementation specialists trained Secret Escapes to set up contract templates, and within a week, the business was using the platform to automate contracts. With the proper safeguards in place, employees confidently create agreements from a set template in Juro, adding relevant information from smart fields as needed.
Farmdrop: Juro empowered Farmdrop to create a formal and robust contract process that is both flexible and user-friendly. From supplier contracts to onboarding forms, the company’s adoption of Juro created a more manageable workflow within just a few days.
Make your business contracts more efficient
Juro has empowered more than 3000 business teams to streamline their routine contract workflow, and yours could be next. Juro is an all-in-one contract automation platform that helps visionary legal counsel and the teams they enable to agree and manage contracts in one unified workspace.
To supercharge your contract workflow with Juro, hit the green button below.