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How To Write a Business Contract

A Business Contract can be constructed to cover the sale of goods or the exchange of services between two companies. If one business is providing goods or products to the other, a “Contract for Sale of Goods” should be created. If one business is providing services to another, a “Contract for Services” should be created. Following are common clauses found in a Business Contract template, along with a description and additional information about each clause.

Description of Services

The description of services clause in a Business Contract lists the services that are to be provided according to the terms of the contract. Not all contracts involve services, but those that do often include a description of services provision. Listing the services clearly in the contract prevents uncertainty and helps to avoid disputes. 

Items Purchased

The items purchased provision lists the products that are being purchased according to the terms of the Business Contract. Not all contracts involve the sale of goods, but those that do often include an items purchased provision. Listing the items being purchased clearly in the contract prevents uncertainty regarding the goods that are being purchased and helps to avoid misunderstandings and disagreements. When possible, goods should be listed using identifying numbers such as serial numbers and universal product codes. The quantity and price of each item should also be listed in the items purchased provision. If the goods are unique, they should be listed in enough detail to clearly identify the goods that are being purchased. 

Product Standards

The product standards provision in the Business Contract states the specifications that the product must meet. This is important because it clarifies the expectations regarding product specifications and ensures the parties are on the same page, which reduces the risk of disputes. The product standards could include specifications such as tolerances for the product, dimensions, grade of the product, and quality of the product. The product standards may also include a statement that the products must comply with industry standards. For many industries, there are certain standards that are used to measure goods and to assess whether a product is sufficient enough to be marketable. 

Title / Risk of Loss

A title/risk of loss provision allocates shipping and delivery risks and costs. This provision also states when the title to the goods transfers from the seller to the purchaser. Often the title/risk of loss clause will state that the title to and risk of loss of goods transfers to the purchaser upon delivery FOB at a certain location (such as the purchaser’s warehouse). Free on board (“FOB”) is generally used to define when the responsibility for shipping and title to the goods transfers to the buyer. A Business Contract could state FOB Origin, FOB Purchaser’s Address, or FBO some other location. If the contract is FOB Origin, then the purchaser is responsible for all risks once the goods are with the delivery carrier. For an FOB Purchaser’s Address contract, the seller is responsible for all risks until the goods arrive at the purchaser’s address.

The title/risk of loss clause will also typically allocate which shipping expenses each party is liable for. In addition to allocating the actual delivery expenses, this clause should allocate which party is responsible for shipping insurance, customs fees, and other expenses that might be necessary to have the goods delivered.

Having a clear title/risk of loss provision in the Business Contract template minimizes disputes and litigation (lawsuits) if the goods are damaged during transit. This provision also helps to avoid disputes regarding shipping and delivery fees because the parties can refer to the provision to determine which fees each party is required to pay.  

Payment

The payment clause provides details regarding how much the payment is, how the payment is to be made, and when the payment is due. The payment clause should state the total amount that is due on the contract. If the parties are located in different countries, then the payment clause should state which currency the Business Contract is referencing.

The payment clause should also cover when the payment is due. The parties may decide that the payment is due upon execution of the contract, upon delivery of the goods, within a certain number of days from the delivery of the goods, or at some other time. If a discount is being offered for an early payment, the terms of the discount should be clearly stated.

Sometimes the payment is made based on milestones. The milestones should be listed in sufficient detail to avoid confusion or disputes as to when a milestone has been reached. Other times the parties may agree that the payment will be made in installment payments. When installment payments are used, the payment provision should detail the frequency of the installment payments, the due date of each payment and the amount due for each installment.

It is common for interest to be added to the amount due when a payment is not made timely. The payment clause should state how much interest is due when a payment is late. 

Delivery

A delivery clause states when the goods will be delivered. The delivery clause also states who the delivery carrier will be or will provide which party is responsible for selecting a delivery carrier. For some contracts, the goods will not be delivered and will instead be made available for pickup. In that case, the contract will generally list a date when the goods will be available for pickup. For contracts that involve multiple goods, the contract should clearly state if all of the goods will be delivered or available for pickup on the same date or if there will be multiple dates when the goods will be delivered or available for pickup.

When additional delivery information is known, it is reasonable to include that information in the delivery clause. For example, if the weight of the delivery is known and useful, then that information should be included in the delivery clause.

Payment of Taxes

A payment of taxes provision allocates the tax responsibility among the parties to a contract. It is common practice to have each party be responsible for their own income taxes. Other types of taxes, such as sales tax, state taxes, excise taxes, and municipal taxes, should be allocated amongst the parties. Allocating the payment of taxes in the Business Contract ensures that the parties know who is responsible for the various taxes that result from the contract. This prevents a party from later being surprised with unexpected tax bills because of the contract. 

Warranties

A warranty is an assurance from the seller that the goods will be free of certain defects for a specified amount of time. Warranties in a contract can be either expressed or implied. An expressed warranty in a contract is a warranty or guarantee that is written in the contract. For example, if a contract states that the engine of a vehicle will last for 150,000 miles, that is an expressed warranty.

An implied warranty is a guarantee that applies to a contract even though it is not written in the contract. There are various types of implied warranties, such as warranty of fitness, warranty of merchantability, and warranty of habitability that may apply depending on the type of contract. For example, if you purchase a boat from a boat manufacturer, there is an implied warranty of fitness that the boat will float on the water.

Business Contract drafters frequently try to limit warranties to those expressly stated in the contract. To do so, the drafter of the contract will typically state in the warranties provision that there are no warranties, either expressed or implied, except as specifically stated in the contract. This provides certainty to the parties with regards to what warranties are applicable to that specific contract.

The warranties provision may also state the remedy that is available if the goods are defective. For example, the warranties provision may state that defective goods may be replaced, repaired, or refunded in the sole discretion of the seller.

The warranties provision may also provide limitations on the duration of the warranty. While some warranties last for the lifetime of the purchaser, others will be limited to a certain amount of time or may be limited to a certain amount of use. For example, a warranty provision may state that the warranty for a vehicle engine lasts the shorter of 5 years or 150,000 miles. A warranty provision may also state that refunds are prorated based on the length of ownership of the product. For example, a vehicle battery warranty may state that the amount of refund for a defective battery is reduced by 20% for each year after the purchase date.

A warranty provision is important because it sets the expectations for each party as to how long the goods should last for and helps to avoid disputes between the parties regarding the quality of the goods.  

Inspection

For contracts involving goods, it is common to include an inspection clause. The inspection clause will typically allow the purchaser an opportunity to inspect the goods upon delivery or pickup to ensure that the goods meet the requirements of the contract. Generally, the inspection clause will state that the purchaser may return or refuse to accept delivery of all, or any portion, of the goods that do not meet the requirements of the contract. Goods that do not meet the requirements of the contract are typically referred to as non-conforming. If a purchaser does not accept the non-conforming goods, they are often required to provide written notice to the seller informing the seller of the reason for rejecting the goods. Some contracts will state that the seller has a certain number of days to provide conforming goods after the purchaser has rejected non-conforming goods. The seller may be able to provide conforming goods by making new goods available to the purchaser. In other cases, the seller may be able to repair the non-conforming goods so that the goods meet the requirements of the contract. 

Term

The term provision of a Business Contract template states how long the contract is valid for before the contract is terminated. Often the term provision will state that the contract lasts for a certain period of time, and at the end of that time the contract is terminated. The term provision may also state that either party may terminate the contract prior to the end of the term by providing a certain number of days’ notice to the other party or parties. Sometimes the term provision will not allow one party to unilaterally terminate the contract early and will instead only allow an early termination of the contract if the parties mutually agree to terminate the contract early. 

Ownership of Social Media Contacts

Ownership of social media contacts is a newer provision that is increasingly becoming common in contracts. The ownership of social media contacts provision states which party will own social media contacts that are acquired through accounts used or created as part of the contract. Since social media contacts can be valuable for marketing purposes, it is important to clearly identify which party will own the contacts that are created during the term of the contract. 

Work Product Ownership

A work product ownership clause states who will own the ideas, copyrights, patents, products, and other information that is created in connection with the contract. This provision helps to prevent disputes between the parties regarding ownership of the work product. The work product ownership clause may also require the parties to execute additional documents, such as assignments, to ensure that the owner of the work product has sufficient legal documentation to prove their ownership of the work product. 

Indemnification

In an indemnification clause, one party to a contract (the indemnifying party) agrees to compensate another party to the contract (the indemnified party) for certain expenses and costs that are identified in the contract, which typically arise because of claims from a third-party. An indemnification clause allows the parties to agree how risk is allocated between the parties prior to there being any claims.

An indemnification clause can be mutual, meaning that each party agrees to compensate the other party for losses caused by a breach of the contract by the indemnifying party. An indemnification clause can also be one-way, in which only one party to the contract is indemnified.

Default

A default occurs when one party involved in the Business Contract does not meet their obligations under the contract. A default can occur when a party fails to make a required payment or when a party fails to deliver goods or services as stated in the contract.

A default clause often explicitly states what constitutes a default. Failure to pay on time or to provide the goods or services contemplated in the contract on time will typically result in the breaching party being in default. A default clause may also define a default to include the insolvency or bankruptcy of a party or may consider any levy or seizure of a party’s property to cause a default of the contract.

Depending on the language of the default provision, a default may void the contract or give one party the right to terminate (or end)  the contract.

Remedies on Default

The remedies on default clause states which remedies are available to the nonbreaching party when a party is in default. When there is a breach of a contract, remedies are the actions that the nonbreaching party may take in an attempt to limit their damages or to put themselves in the position they would have been in if the breaching party had fulfilled their obligations.

One common remedy that is available to the nonbreaching party is the right to terminate (or end) the contract. Typically, the nonbreaching party will be required to provide notice of the default to the breaching party. The notice usually needs to state why the breaching party is in default. Some contracts will give the breaching party a certain number of days to fix the default. If the breaching party fails to fix the default within the amount of time stated in the contract, then the nonbreaching party may have the right to terminate the contract. There may also be language in the remedies on default provision stating that the contract is automatically terminated if the breaching party fails to timely cure the default.

It is important to remember that the remedies on default provision generally provides remedies that are in addition to remedies that may be available to the nonbreaching party as a matter of law. 

Force Majeure

A force majeure provision is used to remove each party’s liability for catastrophes that are unforeseeable, unavoidable, and which prevent one or more parties from fulfilling their obligations in the Business Contract. A force majeure clause typically covers natural disasters, such as tornadoes, hurricanes, and earthquakes. A force majeure clause also typically covers human created issues, such as war, riots, and pandemics. The intent of a force majeure clause is to suspend a party’s requirement to fulfill the contract when an event outside of either party’s reasonable control prevents a party from fulfilling its contractual obligations. Often the force majeure clause will be drafted so that the party must perform its obligations within a reasonable amount of time after the event that caused the suspension has ended.

However, for some contracts, a force majeure event may make it permanently impossible for a party to fulfill their obligations in the contract. For example, if there is a contract for the purchase of a one-of-a-kind piece of artwork, and the artwork is destroyed during a tornado, then the party selling the artwork would be permanently unable to perform their obligation. If that occurs, the force majeure provision will typically provide that neither party is required to perform their obligations in the contract. 

Dispute Resolution

A dispute resolution clause defines how disputes between the parties are to be resolved. A dispute resolution provision may require the parties to participate in mediation or arbitration, instead of filing a lawsuit and  litigating their disputes in court. Often the dispute resolution provision will provide specific instructions on how disputes are to be handled, where the arbitration or mediation is to occur and how the parties are to split the arbitration or mediation expenses.

When disputes are to be handled by arbitration or mediation, the rules of arbitration or mediation are typically defined in the dispute resolution provision. American Arbitration Association is the largest provider of arbitration and mediation services, but there are others that provide similar services, such as JAMS (Judicial Arbitration and Mediation Services).

Confidentiality 

A confidentiality provision usually identifies what type of information is considered confidential information and defines how the parties are required to treat such confidential information. The parties are typically required to safeguard all confidential information. The confidentiality provision will often require the return or destruction of all confidential information at the end or termination of the contract.

Parties frequently exchange confidential information when fulfilling their obligations under a contract. Confidential information may include client information, trade secrets, business practices, data and formulas, research, financials, and any other information that is typically not available to the public.

A confidentiality provision is used to ensure that confidential information is treated properly and that such information remains confidential during the term of the contract and after the contract is terminated.

Notice

A notice provision informs each party to a contract how to send notices or other communications to the other parties of the contract. Typically, a notice provision will advise the parties what types of communication methods are acceptable (e.g., email, fax, postal mail, etc.) and where those communications should be sent. The notice provision may also state what information should be contained in a notice and may provide time limits for sending certain types of notices.

One of the benefits of a notice provision is that it ensures that notices and other communications are sent in a predictable manner that all parties have agreed to. This prevents a party from sending a notice in an obscure manner and later trying to assert that the other party had sufficient notice.

Assignment

An assignment clause of a Business Contract details when a party to the contract is allowed or not allowed to transfer their rights and obligations under the contract to a different party. The party that assigns or gives away their rights and obligations to a different party is called the assignor. The party that accepts these rights and obligations is called the assignee.

The assignment clause may state that assignments are not allowed. The assignment provision sometimes allows assignments but only with the written consent of the other party to the contract. 

Entire Contract

This clause states that the contract contains the entire agreement between the parties and that no other terms are part of the contract. Typically, this provision will also state that the contract supersedes any prior written or oral agreements between the parties. The purpose of this provision is to ensure that all the provisions that govern the agreement between the parties are contained in the contract. The entire contract provision prevents a party from saying that the terms of the contract should be ignored or supplemented because of some prior written or oral agreement between the parties. 

Amendment

An amendment clause states when the Business Contract may be amended or modified. The most common amendment clause provides that the contract may be amended in a writing that is signed by all the parties to the contract. It is important to have any amendments in writing, so the parties do not later disagree regarding the terms of the amendment. The amendment clause generally requires the consent and signature of all parties to the contract. A party would typically not want to sign a contract if the contract could be amended without their consent. 

Severability

A severability clause in a contract is used to allow the contract to remain valid even if one or more parts of the contract are found to be invalid, unconstitutional, or unenforceable. If one or more parts of a contract are invalid, the severability provision allows the remainder of the contract to survive.

Occasionally, a contract will contain a severability clause that states that certain provisions of the contract are so important that if they are found to be invalid, unconstitutional, or unenforceable, that the entire contract must also be treated as invalid, unconstitutional, or unenforceable.

Waiver of Contractual Right

A waiver of contractual right clause usually states that the failure of a party to enforce any provision of the Business Contract shall not be construed as a waiver of the party’s rights to enforce all provisions of the contract. A waiver occurs when a party to a contract gives up a right the party has pursuant to the contract. Although a party may not enforce their rights each time they are allowed to pursuant to the contract, the waiver of contractual right clause ensures that the party does not lose the privilege to enforce their rights.

For example, consider a contract in which a lessor has the right to charge a $25 late fee anytime a monthly payment is not made timely. If the lessee continually pays late, and the lessor never assesses a late fee, there may be an argument that the lessor has waived their right to charge a late fee. However, if the contract contains a waiver of contractual right clause, then the lessor retains the right to charge a late fee, even if the lessor has historically not exercised their right to assess a late fee.

Applicable Law

The applicable law of a contract is the law that governs (or applies to) the contract. In an applicable law provision, a specific state law is identified as the law that governs the contract. This avoids later disputes between the parties with regards to which state law should govern the contract. If there are disputes regarding the contract, then the law of the selected state will be used to interpret the contract and resolve the dispute. For contracts where the parties are located in the same state, the law of the state where the parties reside is typically selected as the applicable law. When the parties reside in different states, then there will typically be a negotiation between the parties to determine whether the applicable law will be a state where one of the parties is located or if the parties will agree to apply the laws of a different state.   

Signatories

A signatory is a person or entity that signs a contract. The signatories of a Business Contract are the parties that signed the contract. Signatures on a contract are used to bind the agreement between the parties that sign the contract. A signature is also used as proof of identity, which can later be used to confirm the identity of the person that signed the contract.