For freelancers and entrepreneurs in the U.S., it’s important to understand how commercial contracts and negotiations work, but with all of the demands of running a business, unless you went to law school already, you might find it challenging to set aside time to study up on the subject. This post is intended to give you a quick overview of the basics, so you know what to watch for and how to get started drafting and negotiating commercial contracts. Make sure to talk to a qualified lawyer as you get going. They can help you put together contract templates or modify existing templates to suit the specific needs of your business. With that said, let’s jump in!
In the U.S., a contract is generally defined as an agreement between two or more parties that creates enforceable obligations. As we explained in our blog post “Bilateral v. Unilateral Contracts,” contracts can be written or verbal, but in order to be enforceable, they generally must include three elements:
- an offer made by one party;
- acceptance of that offer by another party; and
- the exchange of something of value (called “consideration”).
The idea of “consideration” is based on the concept of a contract being a “bargained-for-exchange” where both parties intend to enter into the contract and obtain something of value from the other party. Consideration does not need to be monetary; for example, promising to take an action or refrain from taking an action can qualify as consideration and can support a valid, enforceable contract.
Looking past these more abstract concepts, how does a freelancer in the U.S. go about drafting a services contract? What needs to be included?
Key Elements of Commercial Services Contracts
Assuming the contracting parties are not operating in highly-regulated industries and there is no strict set of requirements for their contracts, many commercial services contracts in the U.S. are based on the same skeletal structure. Most services contracts include the following key sections:
- A description of the products or services to be provided by each party along with any other obligations of each party;
- The cost or fees of the products or services to be paid by the parties;
- The term (or duration) of the contract and termination rights of the parties;
- Ownership rights of the parties to the work product created under the contract;
- Confidentiality obligations of the parties;
- Representations and warranties of the parties (provisions in which the parties make certain representations about their businesses, products, or services); and
- General miscellaneous provisions like governing law, assignment, and amendment provisions.
In many cases, sections on limiting liability between the parties, indemnification, force majeure, and disclaimers of other representations are also included. It is also important to note that there are many different types of contracts and not all contracts follow this structure. Confidentiality agreements (also called non-disclosure agreements) have a different structure. That said, this general structure can be adapted to suit a variety of relationships. For example, this services contract structure could also be used for partnerships between companies.
Once the basic framework is set, the parties customize and negotiate the contract. It can be useful to develop a handful of contract templates written the way you want them to be written, favoring your business and emphasizing the points you feel are most important to your business. You might not always be successful in getting the other party to sign your contract, but maintaining a few contract templates is a great place to start and can be useful even when using the other party’s contract template.
Contract v. Proposal v. Invoice
Many freelancers and small business owners use proposals and invoices with their clients. How do contracts differ from those documents? A proposal is a plan or roadmap showing how the freelancer will provide the products or services to the client. It’s usually shared with the client after the initial conversation in order to provide more specific information about the engagement. An invoice is a document issued to a client to inform the client as to what is owed for the products or services and to serve as a record for the sale.
Sometimes, freelancers or business owners might include contract terms on the proposal or the invoice. Those terms can be binding on the parties and create a valid contract if both parties clearly sign the document (and assuming there is an offer, acceptance, and an exchange of consideration). However, the better practice is to have a separate document for the contract so that there is ample space to include all of the necessary contract terms and there is no confusion as to whether the proposal or the invoice is the governing document. It can be easier to use the proposal or invoice and just tack on the contract terms, but that can lead to problems if the other party isn’t expecting the contract terms to appear in the document or if terms are left out to save space. It’s much safer to write the contract as a separate document that the parties negotiate.
Sending and Signed the Contract
Once the contract is drafted, how should it be sent to the other party? Contracts can be shared in virtually any format or medium. An exchange of emails can even form a valid, enforceable contract in the U.S. As long as the communication includes a valid offer, acceptance of the offer, and the exchange of consideration, the contract would most likely be enforceable.
Typically, parties send Microsoft Word or .PDF versions of the contract with the other party to review. Negotiations can take place in person, over email, or by phone or video conference. Sometimes, the parties will make changes to the contract and add comments in the contract itself and send that “marked up” version back to the other party as a response. The “track changes” function in Microsoft Word can be used to show a party’s desired changes to and comments on the contract. There is also software to show changes made to a contract and add comments, but this software is mainly used by law firms and contract negotiation professionals.
Signing the contract can be done by hand or electronic signature. In some cases, a stamp or seal could also be used. Certain contracts like those used by financial lenders and real estate landlords often require signatures by hand. In many cases, electronic signature is acceptable, and the electronic signature platforms (like DocuSign, AdobeSign, Hello Sign, etc.) work for purposes of signing electronically.
There’s plenty more information on commercial contracts out there, but the tips in this guide can get you started as you enter into more and more complex commercial transactions with clients and partners. Make sure to check out our Fast Track Guide and our contract templates in the Path app for more information and helpful documents!