The Basics: What is a Business to Business Contract?
"A contract is a promise or set of promises that can be enforced in court." A business to business contract is distinguished from a business to consumer contract, where one party is a consumer who is not acting in the course of business. Generally, the business to business contract is contractual in nature and not a transfer of goods. An example of that transfer would be an asset purchase contract or an agreement for the acquisition or sale of shares of stock.
Typical business to business contracts include supply agreements or supplier contracts, license agreements, technology development agreements, distribution agreements and service agreements . An example of this would be a license agreement where the company sells to a foreign company the right to manufacture and/or sell the company’s product. There is an entire universe of mutual negotiations and contracts between businesses, including oral contracts in the form of a purchase order or proposal that may not be considered business to business contracts.
To structure the contract properly, one must first understand such arrangements. This may require use of foreign jurisdiction counsel if the agreement has a foreign component, or if one party is a foreign company. For example, if a Chinese company seeks to invest in or with a United States company, the contract will typically be a business to business contract. Again, it would depend on the specific facts of the situation.
Core Elements of B2B Contracts
Each contract encompasses basic elements to be enforceable. For our purposes, we’ll focus on the essential elements of a business to business (B2B) contract. These elements include; offer, acceptance, consideration, capacity, and legality.
To have an enforceable contract, there must be an offer. An offer is a proposal to enter into an agreement. All the essential terms must be included for the parties to abide by once the contract becomes effective. This means the parties need to have a meeting of the minds as to what they are agreeing to contract for, and for it to be concise enough so that if the parties were to breach the contract, a court would be able to determine the damages. The offer must be communicated to the party to whom it is being offered, and must not be illusory or vague.
An offer is only valid if it has been accepted. The acceptance must be an unqualified, unambiguous, and a complete acceptance of the offer. A counter-offer is not an acceptance. Parties can agree to all or some of the terms to an offer. Once parties reach an agreement as to the offer the negotiations are ended. Even agreements to sign a more formal writing, or that a contract will be later prepared, are not an acceptance. Simply signing the document, however, may create an enforceable contract if the essential elements exist.
The next essential element to an enforceable contract is "consideration." Consideration is the exchange each party to the contract is making within the agreement. Each party in a contract has to pay or give something to the other party that they each otherwise wouldn’t receive. This gets tricky when greater value is being paid or given to one party than the other party is receiving. As long as each party leaves the contract with something voluntarily paid or given, then each party has received "consideration." When a contract is already performed, such as an agreement to pay a debt that’s already been incurred, voluntarily paying the debt is not a legally binding contract because the party is not receiving something new that they didn’t owe before the contract was formed. A promise to give a gift is also not a legally binding contract because the party is not receiving something in exchange for the promise.
In order for there to be a valid enforceable contract, the parties to the contract must have the "capacity" to make a contract. This means that the parties to the contract must be competent to contract, and cannot be underage or missing mental capacity to make a contract. There are very limited scenarios where there are exceptions, such as a guardian of incapacity or a minor’s parent can make a contract on their behalf.
The element of "legality" is a no-brainer; the contract must be for a legal purpose. Courts will not enforce illegal contracts; even if parties agree to them.
If you cover these basics when creating a B2B contract, you should be on the right track to having a legally enforceable contract.
Common Types of Business to Business Contracts
In the world of business-to-business contract law, there are a multitude of contract types employed depending on the nature of the transaction. Since many B2B contracts have a modest length of performance, then they usually do not contain future obligations, unless a vendor provides a service to many clients or customers. Otherwise, the keys to successful contract drafting are a clear writing style, proper identification of the parties, and all conditions precedent (if any) and precedent agreements must also be signed. This will help establish what obligations need to be fulfilled by which party and when.
The most common contracts are sales contracts and service agreements. A seller of goods usually will draft a contract through its order form and/or invoice. The contract should set forth a purchase order number that is unique to the transaction. The seller should incorporate their terms and conditions of sale either on the face of the order form/invoice itself or as an attachment or enclosure. Sales contracts usually provide a product description, quantity and price.
Service contracts can vary widely. Usually, hourly rates or set monthly fees for services are stated. Service contracts can also be grouped as "professional service contracts", where certain professionals provide particular services, such as accountancy, engineering or architectural. Architects and engineers are also subject to a separate regulatory scheme by the states whereby they can perform work for public and private clients pursuant to a contract and carry liability insurance.
Other contracts in the B2B context include distribution agreements where goods are sold to the distributor, who then adds value to the goods and resells them. For example, a golf club manufacturer may sell golf clubs to a local pro shop, which may then resell the clubs.
A partnership agreement is another type of B2B contract, where two businesses may join forces to achieve a common goal or project. The new business’s name should be distinct from the ordinary course of their typical business and contain the new business’s name. For example, two regional banks may join together to form a new national bank; both banks’ name would then be identified in the new bank’s name. Both banks would then negotiate their customary terms to close or complete the merger/formation of the new bank.
Every contract type requires that the parties fulfill their respective obligations in order to execute the terms of the agreement. A business that fails to perform as expected risks losing either their supplier or their customers. The key is to preserve and grow the relationship so that existing and new contracts can be successfully negotiated and executed.
Best Practices for Creating a B2B Contract
The drafting of a business to business (B2B) contract is essential to the formation of a legally enforceable agreement upon which the parties can rely. The failure to abide by this process leaves the eventual resolution of any contract dispute entirely to the discretion of a court.
When drafting a B2B contract, first establish the "who" and the "what." If the contract is between more than two parties, or involves independent contractors or subcontractors, then the "who" aspect of the document takes on a degree of complexity. Still, the roles of each party should be clearly delineated, even if they are subject to changes that are accepted by all parties. This is because the legal obligations of each party in terms of rights and responsibilities can only be accurately determined and outlined when each party makes its role clear.
The "what" involves determining the nature and extent of the agreement. Is it for the sale of goods, the provision of services, or both? Is it open-ended, measuring performance in terms of time, volume, or other factors? Does the contract set out quality standards or criteria for termination? Such questions must be answered before making a draft of the agreement legally binding through signature.
Establishing the "who" and the "what" also entails the inclusion of other important provisions. Defining roles enables the parties to develop detailed expectations of how the "who" works with or engages in the "what." For example, for a contractor, the following definitions should be included:
Many commercial B2B contracts also involve the exchange of proprietary information. Such information should be treated with care and expressly protected from unauthorized disclosure. The parties may be able to agree to mutual nondisclosure provisions or agree on a complete ban on the disclosure of all proprietary or confidential information. The language used in these covenants is important because what seems unimportant now might become essential if such information is disclosed at a later time.
Finally, although no contract can completely eliminate heir to judicial determination, it is wise to include dispute resolution mechanisms in B2B contracts. For instance, while it might not be possible for the parties to agree to arbitration, additional language can go a long way toward reducing the costs of a B2B agreement. These include provisions regarding jurisdiction (for legal disputes) and governing law (which state’s set of laws will apply.)
Common Issues in Business to Business Contracts
The world of business contracts is not without its hurdles. Common challenges with B2B agreements include: Negotiation Hurdles: Negotiating with other businesses can sometimes feel more adversarial than the negotiation of a contract with an individual. Parties are more likely to push for terms that favor their own business and finances, and it can be difficult to find common ground. Misunderstandings: When multiple parties are involved in a B2B contract, misconceptions can appear out of nowhere. Different teams from different companies do not always have the same access to information, and when working on a long-distance basis, these issues are compounded . Therefore, it is essential that all words in an agreement be interpreted and understood the same way by both parties to avoid unpleasant surprises down the road. Enforcement Issues: Pursuing another company in court is a significant challenge, even after entering a contract that clearly states your understanding of the agreement’s terms. Many companies are reluctant to enter into a legal battle with their partners, particularly if they share suppliers and clients. This can become a major hurdle when dealing with (or even simply considering) contract disputes. The first step toward overcoming these challenges is to understand the core issues that business owners and managers face when it comes to B2B contracts. The second step is to develop solutions that will help the party prevail.
Legal Considerations and Required Provisions
Business to Business (B2B) contracts carry with them a myriad of legal considerations. The first consideration is whether the chosen governing law statutes have jurisdiction. Many contracts for the purchase and sale of goods fall under the Uniform Commercial Code ("UCC"). The UCC has superseded the common law of contracts for contracts dealing in goods and may be applicable even if not explicitly stated. Other contracts (for example, subcontracts) typically fall under agency and contract law. Legal counsel with expertise in both: (i) the substantive area of the law; and (ii) the governing law jurisdiction(s) must be consulted early on in drafting.
Adherence to guidelines for contract terminations is important for the survival of the contract both during the term and following completion. While a simple termination for convenience may be permitted by the jurisdiction in which the contract is governed, it may not be enforceable in the jurisdiction in which the company is headquartered. For example, different states and countries. Contemplating and including termination provisions that are clear and unambiguous to both parties helps to avoid disputes at a later date. Having a dispute resolution procedure in place within the contract (such as mediation) helps to ensure that the terms and provisions of the contract are adhered to.
Breach of contract is a proven litigation minefield. If a party does breach the contract and the non-breach party fails to mitigate its damages, it may be barred from recovery for those damages not mitigated. Legal counsel may appear to be expensive to include in the initial drafting of a contract. To save a company litigation costs, a lawyer with the requisite experience and expertise must be included on the front end of drafting the contract. That contract will now substantially reduce the costs to draft and review each time a new contract is required.
Future Trends of B2B Contracts
As the business world continuously evolves, so too does the way in which companies transact with one another. With the advent of new technologies, business to business contracts, also known as B2B contracts, have witnessed significant changes, enhancing the efficiency and security with which parties can engage with one another. One of the most significant trends impacting the future of B2B contracts is the growing use of digital contracts. Digital contracts have many advantages over traditional paper contracts, such as the ability to easily store, share, and search for contracts, as well as the ability to more easily monitor contract execution. They can also be signed electronically, which greatly speeds up negotiations and contract execution.
Another trend is the utilization of smart contracts. While at first glance the idea of a ‘smart’ contract seems like an oxymoron, once explained it is easy to see why the use of such concepts is on the rise. Smart contracts are self-executing contracts supposed that the terms of the agreement are directly written into the code. The lack of human intervention means that the speed with which contracts can be executed is rapidly accelerated . Increased use of both digital and smart contracts reflect an increased reliance on technology over traditional human-led processes.
The digital and smart contract trends are just the beginning of a greater general movement towards the digitization of legal documents, largely facilitated by the rise of blockchain technology. Due to its decentralized, distributed, and immutable nature, blockchain technology has great potential to impact the future of all business related contracts and agreements. It is possible that in the near future, the need for humans to negotiate, draft, and execute contracts will be eliminated as incapable by computer and technology, freeing up significant human resources within the legal sector to provide more effective and immediate value to clients in new ways.
In the fast-paced business environment, companies must constantly evaluate existing processes, such as how they enter into contractual agreements with one another. As technology continues to improve and contracts evolve, parties should stay aware of existing and emerging technological innovations that may impact their business related contracts, with hopes to ultimately improve their efficiencies and effectiveness.
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