A Business Contract Primer
A basic understanding of contracts is essential for all small business owners.

By Thomas C. Brown

Contracts are the basic building blocks of business relationships. In their simplest form, contracts arise when one party promises to do something (or in some cases refrain from doing something) for another party in exchange for the other party’s promise or action to provide some goods or services in return.

This exchange of promises or actions is called consideration. It is the element that makes an arrangement between the parties enforceable. The promise or action may take place either contemporaneously (e.g., payment of money) or at sometime in the future. To be binding, each contract must clearly state the type and amount of consideration to be provided by each party.

Most contracts do not have to be in writing to be enforceable. (Two notable exceptions are real estate contracts or contracts that will not be performed for at least a year.) Even so, all contracts must clearly identify the parties to the arrangement, the obligations to be performed by each party, the consideration to be given/received by each party and the time frame for the performance of the mutual obligations. As all of these elements are essential to create a binding contract, they are obviously more difficult to prove if there is no written agreement. Therefore, it is strongly recommended that all contracts be in writing.

If the business entering into the agreement is a sole proprietorship (i.e., an individual) the contracting party is the sole proprietor. However, if the contracting business is a limited liability company or corporation, the contract must so identify the proper form of business and be executed accordingly. Failure to properly set forth the parties to the agreement may well cause the contract to fail and be unenforceable.

The following briefly describes some of the types of contracts a small business owner may encounter.

Promissory Notes and Business Financing Documents
The legal documents for financing of business loans generally involve three key documents. First, there is the actual promissory note by which the borrower promises to repay the debt. Second, is the security agreement by which the borrower identifies specific property as collateral for repayment of the loan. Third, is the financing statement that is used under the Uniform Commercial Code to provide notice to other potential lenders of the lien on the property used as collateral.

Employment Contracts
It may be beneficial to have key employees sign employment contracts to prevent the disclosure of trade secrets and to protect your client base from competition. Trade secrets or confidential information may include information regarding your customers, supplies or materials, finances, research, inventions or manufacturing processes, or any technical business information. A non-compete agreement can be included in an employment contract to prohibit employees from leaving your business to go into direct competition with your business, to work for a competitor or to solicit your customer base.

Sales
In both Missouri and Kansas, sales of land must be conducted by written contract. Without a written promise between the buyer and the seller, the deal is not enforceable. A bill of sale for personal property provides a receipt for both parties that the sale has been consummated and the delivery of the item has taken place. The bill of sale may include standard or bargained for guaranties or warranties of the item which the purchaser may rely on in the event of default or defect in the product.

Leases
You may want to lease tools or equipment to conduct your business. Rental agreements will vary greatly in their terms based on the type of property involved and the value of the property.

Business form contracts exist for many types of standard transactions. While they appear to be simple fill-in-the-black documents, read them cautiously. They can be altered with handwritten additions or deletions initialed by both parties.

Be certain of your obligations in every agreement you enter into. Once the document has been signed, it will probably be very costly to alter or relieve your obligations.

Thomas C. Brown is an attorney with Brown & Nachman, L.L.C. He can be reached at (816) 474-4114.

Clauses to Look for in Contracts

Remember, some clauses will be applicable only to certain types of transactions.

•    Complete names and addresses of the parties. Always draft business contracts using your business name and title.

•    The date the contract is signed and the date it becomes effective, if the two dates differ.

•    Several recital clauses at the beginning that describe why the two parties are entering into the transaction.

•    What each party promises to do to fulfill the agreement.

•    Time limits within which each party must fulfill their obligation under the agreement.

•    The length of time the contract will be effective.

•    The price—or how it will be determined. What interest will be due for installment payments or penalties for late performance.

•    When the price, interest or penalties will be due for payment.

•    Guaranties—does one party guaranty any promise to the other.

•    Conditions—under what conditions can either party terminate the agreement.

•    Liquidated Damages—the parties established a fixed amount to be paid in the instance that either party fails to fully perform its contractual obligations.

•    Assignments—whether or not either party can transfer their interest in the contract to another person or entity.

•    Conflict resolution, including mandatory arbitration or mediation of any disputes between the parties in place of or as a prerequisite to judicial action.

•    Attorneys fees and costs may be allocated to the prevailing party, but only if agreed upon in advance.