The 7 Main Types of Contracts in Business That You Need to Know About
Contracts are a crucial part of doing business. There are several different types of contracts that businesses use regularly. Understanding the key differences between the most common contracts will help any entrepreneur or business manager negotiate and create effective agreements. This guide covers the 7 main types of contracts in business and their key characteristics.
Defining a Business Contract
A contract is a voluntary agreement between two or more parties that is enforceable by law. Contracts can be verbal or written, but written contracts provide more legal protection. The key elements of a valid contract include:
- Offer and acceptance: One party makes an offer and the other party accepts it
- Consideration: Something of value is exchanged between the parties
- Capacity: The parties have the legal ability to enter into the contract
- Legality: The purpose of the contract is legal
1. Service Contracts
Service contracts outline the terms of work a service provider will complete for a client. Common examples include contracts with marketing agencies, web developers, lawyers, accountants, and consultants. Key elements include:
- Scope of work: Detailed description of services to be performed
- Timeline: Project schedule and key delivery milestones
- Payment terms: How much, when, and how the service provider will be paid
2. Employment Contracts
Employment contracts establish the rights and responsibilities between an employer and employee. Key provisions may cover:
- Compensation: Salary, bonuses, benefits, equity, etc.
- Job description and duties
- Length of employment
- Non-compete and confidentiality clauses
3. Sales Contracts
Sales contracts document the transfer of ownership of goods or products. They ensure the buyer takes legal possession and the seller gets paid. Key details include:
- Parties: Names and details of the buyer and seller
- Goods description: Quantity, quality, exact items being purchased
- Price and payment terms
- Delivery date and logistics
- Warranties and return policies
4. Partnership Agreements
Partnership agreements define the relationship and obligations between business partners. This covers aspects like:
- Ownership splits: Division of equity, assets, and profits
- Decision-making authority: Voting rights and management roles
- Partner contributions: Financial, intellectual property, expertise, etc.
- Buyout terms: What happens when a partner leaves or dies
5. Vendor Contracts
Vendor contracts govern relationships with suppliers that provide ongoing goods or services to a business. Key considerations include:
- Products/services: Technical specifications and quality standards
- Pricing terms: Volume discounts, payment options, price increases
- Ordering procedures: How purchase orders are handled
- Delivery terms: Shipping methods, lead times, return policies
6. Lease Agreements
Lease agreements allow a tenant to use a landlord’s property for a fixed term in exchange for rent payments. Common leases include:
- Real estate leases for offices, retail space, etc.
- Equipment rental agreements for machinery, vehicles, etc.
- License agreements to use intellectual property or technology
Key clauses cover the rent, length of the lease, and property maintenance.
7. Loan Agreements
Loan agreements provide financing from a lender to a borrower. They stipulate the:
- Loan amount: Principal borrowed
- Interest rate: Cost of borrowing money
- Repayment schedule: Monthly payments, balance due date
- Collateral: Asset pledged if borrower defaults
Understanding these major types of business contracts allows companies to expertly negotiate and craft agreements that reduce risk and maximize opportunities. Proper contracts clarify relationships, prevent misunderstandings, and provide legal recourse. They are worth the investment of time and care.
The Rising Demand for Business Contracts Worldwide
The use of formal business contracts has increased rapidly in recent years. According to data from IBM, the number of business contracts created globally has risen by over 40% since 2015. This reflects growing demand across industries and regions.
Much of the growth has been driven by small businesses and startups. As per a recent survey by Dell Technologies, 75% of small business owners reported relying more on formal contracts today compared to 3 years ago. Relying on handshake deals is becoming less common.
Digital transformation is also fueling the need for contracts. As reported by McKinsey, the adoption of new technologies like cloud computing has spurred 25% higher spending on IT vendor contracts. The use of eSignatures and contract lifecycle management software has also increased.
The Global Contract Management Software Market
The contract management software market has grown significantly alongside demand for contracts. Valued at $1.5 billion in 2018, this market is projected to reach $5.0 billion by 2026 according to ReportLinker. That represents 250% growth in less than a decade.
North America has historically been the largest region for contract software. But the Asia Pacific market is witnessing rapid expansion. A recent MarketsandMarkets report forecasted it will have the highest CAGR of 14% through 2027.
The types of companies adopting contract management systems are also diversifying. Where legal and sales departments once used this software most prevalently, it is now spreading to procurement, finance, and other business units according to Gartner.
Contract Law Firms in High Demand
With business contracts on the rise, demand for contract lawyers and law firms specializing in contract law is also growing. MPF Research shows contract attorney hiring in the U.S. has risen 22% since 2018.
The American Bar Association reports there are now over 100,000 specialized contract law attorneys across the country. The top contract law firms like Kirkland & Ellis LLP and Latham & Watkins LLP have grown substantially in recent years.
Globally, the contract law services market is projected to surpass $12 billion by 2028 according to Absolute Markets Insights. Favorable regulations and business environments are supporting growth worldwide.
References:
https://www.unidroit.org/wp-content/uploads/2021/06/Unidroit-Principles-2016-English-i.pdf
https://www.reportlinker.com/p05779323/Global-Contract-Management-Software-Industry.html
https://www.marketsandmarkets.com/Market-Reports/contract-management-market-237473324.html
https://www.gartner.com/en/documents/3991495/market-trends-contract-management-software
https://www.ibm.com/thought-leadership/contracts-business-asset
https://www.delltechnologies.com/en-us/perspectives/small-business-survey.htm
https://www.mpresearchco.com/legal-jobs-report-2022.aspx
https://www.americanbar.org/groups/litigation/committees/commercial-business/
https://www.absolutemarketsinsights.com/reports/Contract-Law-Services-Market-2019-2027-267
