Running a business involves building professional relationships with several parties such as suppliers, customers, equipment leasing companies, building owners, employees and more. Invariably, some part of the dealings with these parties needs to be formalized. While routine and non-critical issues may be agreed upon verbally and sealed with a handshake, it is essential to put down important matters on paper, in the form of a business agreement. A contract is a legally binding business agreement, and serves as a guide to the parties concerned, especially in times of dispute. Let’s take a look at what goes into one.

• The fundamental aspect of any business agreement is the mutual benefit that the business relationship is expected to bring to the contracting parties. Thus, the product or service to be provided by party A and the compensation that it will receive in return is at the heart of the business agreement. The obligations of all parties concerned must be stated unambiguously. For example, sellers’ responsibilities such as standards to be followed, quality checks to be instituted and delivery deadlines to be met must be spelt out. Likewise, a business agreement might list down the buyers’ obligations such as providing clear specifications, issuing timely instructions etc. It is important to note that most disputes arise out of a lack of consensus on whether business obligations have been met.

• Payment terms are another aspect of a business agreement that must be treated with care. The recipient must ensure that the contract covers relevant details such as the mode and frequency of payment, pre-requisites for making the payment, details of the remitting party and so on. In times of dispute, it’s certain that the paying party will look for loopholes in the business agreement which will enable them to withhold payment; therefore the recipient must ensure that the terms are watertight in this regard.

• A business agreement will also specify the repercussions in case of a breach of contract. The rights of the injured party, the liabilities of the defaulter and the legal jurisdiction that will apply – all of these must be included. Of particular importance is liability, and each contracting party will try to shift as much of it as possible to the other. There are certain legal ways to limit liability – exclusion of indirect damages and capping the amount that must be paid under any circumstances, are two examples.

Typically, a business agreement will favor the party that has drawn it up. Therefore, the other parties concerned must ensure that their interests are protected as well. It is important to have the contract vetted by an attorney who specializes in that area of law. Having done that, before signing on the dotted line in any business agreement, it is vitally important to go through it carefully and ensure that it has no vague provisions and all agreed terms have been incorporated. Companies like Nolo offer do-it-yourself legal solutions which can help entrepreneurs with no legal qualifications get a better understanding of how to interpret a business contract.