Types of Contracts in Business

In general, a contract is a voluntary agreement that documents an exchange of legal obligations between two or more people or entities who agree to it. For a valid contract to exist, there must be an offer to form a contract, an acceptance of the offer, and some form of consideration exchanged, i.e., provision of something of value by one party to the other for their performance.

Contracts can be written or oral, but the law in most states requires that certain contracts be in written form if they are to be enforceable in a court of law. However, even if the subject of an oral contract is one that is not required to be in writing, it is probably best practice to put important contracts in writing.

Relying on an oral agreement might prove to be problematic. If one of the parties breaches and the other party tries to enforce the contract in court, there might be disagreement about what the terms of the contract are and even whether there is, in fact, a contract.

In any event, the subject of contracts that must be written are as follows:

• Transfers of interests in real estate, e.g., home sales;
• Agreements by one person to pay the debt of another, e.g., a loan guarantee;
• Contracts that take longer than one year to complete;
• Real estate leases that are to last for more than 1 year;
• Contracts that involve more than a certain amount of money;
• Contracts that will last longer than the life of the party performing the contract; and
• A transfer of property at the death of the party performing the contract.

Contracts in any of these categories that are oral in form are not automatically considered “void.” But a court may well not enforce them, so either party might be free to repudiate the contract. If a contract is of real importance, the person who wants to enter into the contract may want to hire a lawyer for negotiating and drafting the agreement.

Contracts can also be express or implied as follows:

• Express Contracts: An express contract is a contract that is explicitly stated either orally or in writing by the parties. An express contract recites the provisions of the agreement that the parties make and all of its terms in their entirety and with specificity;
• Implied Contracts: An implied contract is a contract based on the conduct of the parties involved and the circumstances surrounding their conduct. An example of an implied contract would be when a dentist performs a routine check-up on a patient. The circumstances imply that the dentist will do their best to treat the patient and that the patient will pay the fee charged for the treatment.

Sometimes, contract provisions are implied by courts when one party seeks to enforce a contract. For example, courts imply that most contracts contain covenants of good faith and fair dealing. Courts may find that a party breaches this covenant when they act in ways that clearly undermine the benefit that a contract is supposed to provide to the other party.

For example, courts have ruled that an insurance company that denies coverage for a legitimate claim for a covered loss submitted by its insurance is liable for breaching the implied covenant of good faith and fair dealing.

1. What Are Sales Contracts?
2. What Are Lease Agreements?
3. What Are Licensing Agreements?
4. Employment Agreements
5. Non-Disclosure Agreements (NDAs)
6. What Are Government Contracts?
7. What Is an Option Contract?
8. Do I Need the Help of a Lawyer?

What Are Sales Contracts?

A sales contract is an agreement between the parties regarding the terms of the sale of ownership of an asset. A sales contract may be for the sale of goods or an interest in real property. Some sales contracts, especially those involving real estate, must be in writing and comply with other minimum requirements, depending on state law.

Additionally, sales agreements may come in a variety of forms. These include the following:

• Purchase Order (PO): A purchase order is issued by a business that wants to buy goods from a supplier or other. The PO lists the:
  • Date of the order;
  • Information regarding shipping of the goods;
  • Discount terms, if any;
  • The names of the buyer and seller;
  • A description of the goods being purchased;
  • The item number, if there is one;
  • Price; and
  • Quantity that the buyer wishes to purchase.
    • There is usually a place on the PO where the seller can sign and indicate agreement to the terms of the PO. If the seller does this, then the PO becomes a contract;

    When the parties are involved in the sale of a business, the sale will be accompanied by an acquisition agreement. Usually, the acquisition agreement is in the form of an entity purchase agreement or an asset purchase agreement.

    What Are Lease Agreements?

    A lease is an agreement between the owner of real property and a person or entity who wants to use the property for a period of time. Lease agreements entered into for the use of real property create a landlord-tenant relationship between the lessor, the landlord, and the lessee, the tenant.

    The terms included in a residential lease agreement may differ quite a bit from those included in a commercial lease agreement. Generally, a commercial lease contains many more terms and is subject to more negotiation than a residential lease. Alternatively, state laws usually require that a landlord maintain minimum standards of habitability in a residential property. The condition of commercial property is subject to negotiation.

    Parties can also enter into an agreement for the lease of equipment. This allows businesses to lease equipment they need that is too expensive for them to purchase outright.

    What Are Licensing Agreements?

    A licensing agreement, or licensing contract, is an agreement where an owner of intellectual property, such as a copyright or patent, grants another party the right to use the intellectual property. The agreement generally contains terms that address the following issues:

    • Payment and royalties;
    • The scope of use that the licensee may make, e.g., with respect to geography, exclusivity, and a period of time;
    • Other terms of the use the licensee may make of the property.

    Employment Agreements

    Employment agreements, or employment contracts, are those that specify the terms of employment. This type of agreement can be oral or written, although it is easier to enforce if the agreement is written.

    An employment agreement may contain the following terms:

    • Term of employment, the nature of the job responsibilities, the time period of the employment and the like;
    • Compensation, including wages, salary, or equity;
    • Benefits;
    • Non-Compete Clause.

    Non-Disclosure Agreements (NDAs)

    Non-disclosure agreements (NDAs) are increasingly common. A non-disclosure agreement, also called a “confidentiality agreement,” is often entered by an employer and employee. The NDA prohibits the parties from disclosing certain information, such as trade secrets or other important information that a business believes is key to its prowess and something it does not want to be disclosed to a competitor.

    What Are Government Contracts?

    In general, there are three types of federal government contracts. They are used by the federal government to obtain services, goods, or property from private parties, non-profits, or state and local governments. The federal government has a well-developed and special system for requesting bids and proposals and awarding contracts.

    Additionally, qualifying small businesses, as well as women and minority-owned businesses, have special opportunities to bid on government contracts. Generally, the federal government prefers to award its contracts to small businesses. More information can be obtained from the federal Small Business Administration.

    What Is an Option Contract?

    An option contract is an agreement between parties that one party has the right to purchase certain rights at a future date for a set amount of money. An option contract may accompany a lease agreement and offer the lessee the option to purchase property at some future date.

    An option agreement is often a way to keep an offer for a contract open for an extended period of time with the same pricing. Or, it may accompany a contract, giving a party to the contract the option to renew it.

    Do I Need the Help of a Lawyer?

    If you are in a dispute about a contract or if you need a contract, you want to consult an experienced contract lawyer. LegalMatch.com can connect you to a lawyer who is an expert in contracts. Your lawyer can negotiate a resolution of a contract dispute or represent you in court if that should become necessary.

    Or, if you are looking for a contract that fits your particular purposes and unique situation, your lawyer can draft a contract that best serves your purposes and will protect your interests.

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