Without any second thoughts, legal Contracts and Agreements are of the utmost importance when it comes to building and running a business, irrespective of its size. In the past, there were only a few written business contracts, and most of the business deals were done verbally or with a handshake. However, in the present highly competitive business environment, a critical proportion of the contracts are documented in written form as they have become exceedingly detailed nowadays, and every effort is put in to make all the eventualities and possibilities clear, concise, and specific.
Difference between Agreements and Contracts
Most of the individuals across the globe use the terms agreements and contracts interchangeably; however, it is essential to know and understand the fact that the two aren’t precisely the same thing. A business agreement is a mutual understanding between parties concerning their relative responsibilities and rights. On the other hand, a contract is an agreement between parties creating obligations that are further enforceable.
Essential Elements of Business Contracts
For a business contract to be valid, there are six essential elements. The first three elements (considered here together) correspond to the agreement itself, and the remaining three elements correspond to the parties making the contract.
- Proposed Offer, Acceptance, and Mutual Consent – Every business contract needs to include a specific or proposed offer along with its acceptance. The parties involved must have mutual consent to their free will. Also, none of the parties involved can ever be forced to sign a contract, and they must agree to the same terms and conditions. The intent of the parties involved to create a binding agreement is implied in the conditions mentioned, and if any party isn’t serious, there’s no contract.
- Consideration – The parties involved in the business contract must exchange something of value between themselves. The thing of value can be some service or money; however, both parties need to give something – otherwise, it is a gift and not a contract.
- Competence – The parties involved need to be of sound mind for comprehending the seriousness of the situation they are a part of, and understanding what is required. As per the definition, neither party involved can be a minor nor mentally deficient instead, and must both be sober, that is, not under the influence of drugs or alcohol at the time of signing the contract. If in case a party isn’t competent, the contract doesn’t hold valid, and the non-competent party can disavow the contract.
- Legal Purpose – The business contract must serve a legal purpose. It can never be for something illegal, such as drugs. Remember, if you are missing out on the essential ingredients of a contract, it can’t be enforced by a court.
Why do Contracts form a Crucial Consideration for a Company?
At their very core, contracts are like relationships, with many purposes. For starters, they are the prime source of revenue for organizations and business firms. Let’s now make ourselves familiar with a few reasons explaining why contracts form a crucial consideration for a company.
- Contracts Serve as a Record of Commitments – Contracts hold the parties involved in their original agreement. For instance, one party agrees to provide the other party with some software for a specified period, and the other party agrees to pay the first party for the specified period itself. Hence, the contract is that trail, which holds both the parties involved accountable for the terms they set in the beginning.
- Contracts Prevent Conflicts – With a negotiation process, the contracts help in ensuring that the parties involved get the best possible deals. Good negotiation deals always lead towards successful results, which further prevent conflicts and set the foundation for a stronger relationship.
- Contracts Serve as a Communication and Collaboration Tool – Ever since their creation, contracts serve to be collaborative and relational. With the help of contracts, teams can work together for determining their needs, opening up inter-department collaboration, and building healthy relationships. For fostering high-quality collaboration, negotiation in contracts can prove to be exceedingly beneficial. Once a specific contract is signed, both parties involved can feel confident enough in the outcome as a result of solid communication.
- Contracts Help in Generating Revenue – By processing contracts efficiently and under the right terms, companies and organizations can generate a lot of revenue. Generating revenue from contracts isn’t only about the contract itself, but the process that surrounds it. It is imperative to pay attention to the tools that a company uses for contracts. Sticking to emails, PDFs, or repository of documents on the desktop won’t offer any good as one has to be efficient and centralized in one single source of truth, for instance – a contract lifecycle management platform.
- Contracts Extend a Company’s Brand Entity and Values – Although it may not be the first thing that comes to your mind when you talk about contracts; however, they are undoubtedly an extension of a company’s brand and values. Setting out a contract indicates the fact that a company cares about having a detailed record of a relationship with utmost dedication and commitment. Everything ranging from the wording to the negotiation gives the parties involved an idea concerning how the other party functions.