Contracts and Agreements: Understanding and Drafting Contracts with Suppliers, Landlords, and Other Business Partners
By Alan Miklofsky, Updated 10/11/24
Contracts and agreements are the backbone of any successful business. Whether you’re working with suppliers, negotiating a lease with a landlord, or entering into partnerships, having clear and well-drafted contracts is essential for protecting your interests and ensuring smooth business operations. Understanding the key components of contracts, knowing when to seek professional help, and paying attention to critical details can make the difference between a profitable partnership and a costly legal battle. In this article, we will explore the essentials of business contracts and how to navigate agreements with suppliers, landlords, and business partners.
Why Contracts Matter
A contract is a legally binding agreement between two or more parties that outlines the terms and obligations of each party involved. Contracts help:
Protect your business interests: By clearly defining expectations and responsibilities, contracts minimize disputes.
Establish legal protections: Contracts create enforceable legal rights that you can rely on if something goes wrong.
Ensure smooth operations: Well-written contracts help ensure that all parties know their obligations, timelines, and the consequences of non-compliance.
Whether you’re purchasing inventory, leasing space, or collaborating with a business partner, having the right agreements in place can help prevent misunderstandings and protect your business.
Key Elements of a Contract
No matter who you are dealing with—suppliers, landlords, or partners—most contracts share some common elements. Knowing these basics will help you better understand and draft agreements that serve your business well.
Offer and Acceptance: A valid contract requires a clear offer from one party and an acceptance of that offer by the other. Both parties must agree to the same terms.
Consideration: This refers to the exchange of something of value (money, goods, services, etc.) between the parties. Consideration is what each party is getting out of the deal.
Mutual Consent: Both parties must willingly and knowingly enter into the agreement without coercion or misrepresentation.
Legal Purpose: The contract’s terms must be for a lawful activity. Contracts for illegal purposes are not enforceable.
Capacity: All parties involved must have the legal capacity to enter into a contract, meaning they are of sound mind and legal age.
Contracts with Suppliers
When working with suppliers, a clear and comprehensive contract can ensure timely delivery of goods, protect your business from supply chain disruptions, and provide remedies if the supplier fails to meet obligations.
Key Considerations:
Product Specifications: Clearly outline what products or services are being supplied, including quality, quantity, and delivery expectations.
Pricing and Payment Terms: Specify the price, payment schedule, and any penalties for late payment. It’s also wise to include clauses regarding price changes over time.
Delivery Terms: Detail the timeline for delivery, who is responsible for shipping costs, and what happens if deliveries are delayed.
Warranties and Returns: Include terms on product warranties, defective goods, and return policies. Define your rights if the products do not meet the agreed standards.
Dispute Resolution: Outline how any disputes will be resolved, whether through mediation, arbitration, or litigation, and which jurisdiction will apply.
By carefully drafting supplier agreements, you protect your business from delays, disputes, and cost overruns while ensuring that you get the materials or products you need on time and within budget.
Lease Agreements with Landlords
Leasing commercial space is a major commitment for any business, and the terms of your lease can significantly impact your bottom line. Landlords often have standardized lease agreements, but that doesn’t mean you can’t negotiate terms that are more favorable to your business.
Key Considerations:
Rent and Escalation Clauses: Understand the base rent and how it may increase over time. Look for rent escalation clauses that could raise costs, such as those tied to inflation or property taxes.
Lease Term and Renewal Options: Negotiate a lease term that suits your business plans, and ensure there are options to renew at predetermined rates. Be aware of penalties for breaking the lease early.
Use of Premises: The lease should clearly define what the space can be used for and whether you’re allowed to make modifications or sublease the space if needed.
Maintenance and Repairs: Specify who is responsible for repairs and maintenance. Clarify whether you or the landlord will cover costs like HVAC, plumbing, or electrical repairs.
Exit Strategy: Ensure there are terms that allow you to exit the lease under certain conditions (e.g., failure to meet sales projections or changes in your business model).
Lease agreements are often long-term commitments, so it’s crucial to negotiate the terms that best protect your business and give you flexibility.
Contracts with Business Partners
If you’re entering a partnership or collaborating with other businesses, having a detailed contract in place can help prevent disputes and clarify expectations.
Key Considerations:
Roles and Responsibilities: Clearly define each party’s role in the partnership and their respective duties. This ensures that everyone knows what is expected of them.
Profit and Loss Sharing: Spell out how profits and losses will be divided between the parties, and establish a process for reinvesting profits or covering debts.
Decision-Making Authority: Outline how decisions will be made, especially for major business activities like taking on new projects, hiring employees, or making financial investments.
Exit Clauses: Include provisions for how the partnership can be dissolved if necessary. This may involve buyout clauses, the transfer of ownership, or the distribution of assets.
Non-Compete and Confidentiality: Protect your business by including non-compete clauses that prevent your partner from starting a similar business and confidentiality clauses that protect sensitive business information.
These agreements are vital for maintaining a good working relationship and ensuring that everyone’s interests are aligned as the business grows and evolves.
Drafting and Reviewing Contracts
While some contracts may seem straightforward, it’s always a good idea to consult with an attorney before signing any major agreements. A lawyer can help you:
Identify potential risks or problematic clauses.
Ensure the contract is enforceable and compliant with local laws.
Tailor standard contracts to better meet your specific business needs.
In some cases, using a template contract may be appropriate, but for more complex or high-stakes agreements, a custom-drafted contract is usually worth the investment.
Final Thoughts
Contracts and agreements are essential for any business owner. They set clear expectations, reduce risks, and protect your interests in your dealings with suppliers, landlords, and business partners. By taking the time to carefully draft and review contracts, you can avoid many of the common pitfalls that lead to costly legal disputes and ensure your business runs smoothly.
Remember, contracts are not set in stone—negotiate terms that reflect your business’s needs and work to protect your long-term success.