In the world of business, contracts are the connective tissue of value creation. They define relationships and cement promises between businesses, customers, investors and employees.
Contracts are legally binding agreements which outline the conditions of a promise to help organisations manage expectations and avoid conflicts. As contracts are enforceable by law, they are a level of protection should conflict arise.
Most businesses seek legal advice when drafting, negotiating, and signing contracts whether that be an external law firm for smaller businesses, or an in-house legal team for growing or larger businesses.
Different forms of contracts
There are two forms of contracts which both hold validity in court, these are:
- Written agreement
Written agreements are the most common forms of contracts that businesses use.
As their name suggests, these are physical or digital documents that outline every detail of the agreement from the date the agreement is valid for and the parties concerned, all the way through to conditions of the agreement and remedies in the case of a breach in agreement.
These agreements are the most recommended form of contract as they can be easily referenced to prove the details of the agreement.
- Verbal contract
Verbal contracts are not commonly used in business, however, a ‘handshake agreement’ may be just as valid as a verbal agreement – though these are harder to be enforced by a court.
It is best practice for all important business agreements to be written agreements, not verbal agreements.
Different types of business contracts
Not only do contracts appear in various forms - written and verbal - but there are different types of contracts which cover the various types of business legal arrangements.
As the lifeblood of business, contracts are used by almost every department to connect and define agreements. Business agreements largely fall into three main types: General Business agreements, Employment agreements and Sales agreements.
General Business agreements
General Business agreements cater to a wide variety of business needs such as:
- Non-disclosure Agreement (NDA)
Non-disclosure agreements (or confidentiality agreements) are contracts which define the conditions of a relationship where sensitive information is shared with two or more parties which at least one party wishes to remain private between only the parties involved.
- Master Service Agreement (MSA)
Master Service agreements are contracts which detail a process for ongoing and future contracts with parties who have a long-term relationship. These contracts typically include terms from the original agreement to speed up the negotiation and execution phase of future agreements.
- Partnership Agreement
Partnership agreements describe and define the relationship and responsibilities between business partners. These agreements establish rules which will cover all contributions expected and how profits and losses will be divided between partners.
- Lease Agreement
Lease agreements outline the terms and conditions relating to the lease of property or equipment. These agreements are used to protect the lessor’s items as well as the lessee’s rights and typically include details such as the period of the lease and the condition of the items being leased.
- Competition and Promotion Terms and Conditions Agreement
Competition and Promotion Terms and Conditions are contracts between businesses running competitions and promotions and their entrants. These agreements are legal requirements for many promotions and outline all necessary details for entrants including: how to enter the promotion, prize details and how winners will be contacted.
- Photography Release
Photography Releases are agreements between a photographer (or other hired creative) and their client that grant the client the right to use the photographer’s photos. These agreements outline the purpose for which the client may use the photos, e.g. commercial release.
- Influencer Agreement
Influencer agreements are becoming more and more relevant for businesses as they expand their marketing efforts into the digital space. These agreements are similar to Contractor agreements as they define the conditions of the partnership between the social media influencer and the business or brand.
It is useful for an Influencer agreement to outline the expectations around the consent and approval process for ad creative, brand ownership, and any compensation (monetary or otherwise) for the exchange of the service by the Influencer for the business.
- Memorandum of Understanding (MOU)
Memorandums of Understanding are a type of contract used to define the expectations of a business relationship between two or more parties. The agreement is often used when two or more businesses are collaborating on a project and should outline all important details including but not limited to: time frame of project, how the project will be funded, and expected role each party will play in the project.
Employment agreements are a category of contract that directly relate to a business engaging with an individual to perform a service for them. There are three types of employment agreements:
- General Employment Agreement
General Employment agreements, sometimes referred to as Offer Letters, are contracts in which an employer outlines the duration of employment, expected duties, responsibilities and of the employee as well as salary and additional benefits and grounds for termination.
- Contractor Agreement
Contractor agreements are contracts which outline the relationship between an independent contractor and the business. These contracts provide clarity on scope, obligations and deadlines of a project by the independent contractor for the business. Contractor agreements also provide transparency into the relationship, confirming it is not one of employer-employee.
- Non-compete Agreement
Non-compete agreements protect a business from having their sensitive information and trade secrets from being exposed by former employees. These contracts tend to outline a set time frame after they cease working for the business where a former employee must not ‘compete’ with the business.
Sales agreements are one of the most important categories of business contracts. Without Sales agreements, businesses would be unprotected when selling their products and services. There are several types of Sales agreements including:
- Bill of Sale
A Bill of Sale is a contract that legally recognises the transfer of property (including products) from one party to another. This contract is used to define the details of the property being transferred, the price of the sale and any conditions for exchange or return of product if relevant.
- Enterprise Service Agreement
An Enterprise Service agreement is a contract similar to a Bill of Sale that defines the details of an agreement between a business and a customer where the business will provide a service to the customer. This contract will generally outline the terms, cost and conditions of the service, and act as an assurance the client will receive the service to an expected standard.
- Statement of Work (SOW)
A Statement of Work is a contract used by a business to define the details of the scope of work they will perform for a client. This type of contract is used to provide transparency and reinforce a shared understanding of the responsibilities, timelines and deliverables of the business for their client. Many businesses choose to have a Statement of Work in addition to their Contractor agreement when working with independent contractors to ensure everyone is aligned on project goals.
- Purchase Order
A Purchase Order is an agreement by a client to a business expressing the intention to purchase a certain number of products at a set price. These are particularly common in enterprise business relationships with large supply chains who require notice periods for sale of their items.
- Licensing Agreement
Licensing agreements are contracts which allow other parties (the licensee) to use the product or service invented by another (the licensor) in business in exchange for a royalty percentage of the profits from the sale.
- Renewal Order Form
A Renewal Order Form is a document which streamlines the renewal of a subscription service provided by a business to their current client. Renewal Order Forms are used by a business to bypass the often much longer process of creating a new Enterprise Service Agreement for the relationship when the period of a previous ESA is set to lapse.
- Request For Proposal
A Request for Proposal is a document used by business to attract bids from independent contractors to provide a service for the Requesting business’ project. While not a contract on its own, these documents are legally binding, and will form part of the final contract if the Requestor accepts the bid.
Managing different types of contracts
There are many different types of contracts that businesses work with every day. These contracts can be highly detailed and unique, e.g. a Partnership agreement or relatively standard e.g. an General Employment agreement.
CLMs can empower all business departments to take ownership for their contract through Legal-approved templates to ensure they don’t miss any relevant details throughout the contracting process. Platforms like Plexus Gateway also enable contract owners to manage their contract at all stages in its life cycle within the one platform allowing a smoother experience for all stakeholders – including counterparties.