Commercial contracts are the lifeblood of business. You sign contracts with employees, landlords, customers and vendors agreeing to buy, to sell, to provide health insurance or to carry out services. Oral contracts are technically legal, but having a written and signed commercial contract is way safer.
TL;DR (Too Long; Didn't Read)
A commercial contract is an agreement in which one or both parties agree to do something or to not do something. A contract can be oral, though written documents are more typical.
Types of Commercial Contracts
The business world runs on contracts. A given contract may be a commercial agreement between two companies, between a company and employees or between a company and an independent contractor. Consider some standard commercial-contract examples:
- A supplier agrees to sell you goods or to provide parts
- You agree to provide services to another company
- A new hire signs an employment contract
- An employee signs a noncompete agreement; this is an example of a contract specifying to not do something — in this case, not to work for the competition
- A confidentiality agreement to not discuss or share certain information
- Leasing or buying land or building space
The Written Commercial Contract
An oral agreement can be just as binding as a written commercial contract, though there are exceptions. Real-estate contracts, for example, have to be in writing, or they're not enforceable.
Even when an oral commercial agreement between two companies is legal, it may be a bad idea. For example, if you make an oral contract to provide IT services to a local business, your partner might lie about the terms. You or he might misremember what was agreed upon.
The more complex and the more detailed the agreement, the more important it is to write it down. Suppose you tell your customer that you'll provide services at any time. Did you mean literally any time or only any time within business hours? Writing down a commercial contract makes it easier to spot vague areas and clarify them.
Legally Binding Contracts
A commercial agreement between two companies may not be legally enforceable even if you both sign it. The agreement has to meet the requirements of contract law, or one or both parties may be able to break it.
- Both parties have to make the agreement freely. If someone puts a gun to your head to make you sign, the contract is invalid.
- Both parties have to be legally of sound mind. If you sign a contract with someone who's drunk, high or suffering dementia, it may not hold up.
- A contract to commit an illegal act isn't enforceable. If, say, a competitor signs a contract with one of your employees to steal from you, there's no way that holds up in court.
- The two parties have to exchange "consideration" such as goods, money or services. If someone contracts to provide you with services in return for nothing but a thank you, you can't hold them to it.
- One party has to make an offer and then the other party has to accept it. Without mutual acceptance, there's no contract.
- You must both have a clear understanding of to what you're agreeing, or there's no contract. Ambiguous words in the contract can create problems, like a promise to make delivery "soon" or referring to one party's "affiliates."
- Errors or outright fraud can void a commercial contract.
The Dangers of Signing
Assuming the contract is legally enforceable, you're bound by it once you sign. If you see terms with which you can't live, ask the other party to remove them. Assurances that this or that clause is just "boilerplate" won't matter much once you sign the commercial contract.
One seemingly innocuous clause is to give the other party the "choice of forum" if there's a lawsuit. That way, if they're in Portland and you're based in Miami, they can insist that any legal actions take place thousands of miles away from your business and your life. Other clauses may require that you abide by the laws of the other party's state, even if you do sue in your town.
- UpCounsel: Commercial Contracts: Everything You Need to Know
- Cres Insurance Services: Are Oral Contracts Legal in Real Estate?
- Kesluk, Silverstein, Jacob & Morrison, P.C.: Are Oral Contracts Legally Binding Under California Business Law?
- Legal Information Institute: Contract
- LexisNexis: Contract Drafting Landmines
- UpCounsel: Meeting of the Minds: Everything You Need to Know
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com