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By Sanjeev Kumar
Founding Attorney

In business, contracts are going to be a necessity at one point or another, and likely at multiple different points in the business operations. Because of this, you should prepare yourself with some foundational knowledge about contracts, what they should include, and the stages of confirmation. Here, we will go over some of the basic stages in the contract formation process.

The Stages of Contract Formation

A contract is, in its most basic sense, a legally binding agreement between two or more parties. A contract is formed to protect and streamline the exchange of a variety of things that can include goods, money, services, or simply promises to be kept between the parties. When you consider this, you can clearly see how contracts will play an integral role in your business, regardless of your industry. Taking proper care during the contract formation stages can help ensure your best interests are going to be effectively protected through the duration of the contract.

The first step in contract formation is when the parties recognize that they should enter into a working arrangement that would be mutually beneficial. Once this has been recognized, contract drafting should begin with a specific focus on employing terminology and clauses that are standard for the industry relating to the contract. Oftentimes, the contract development phase can be sped up by including template clauses that are standard in many types of business contracts. Be wary of anything one size fits all, however, as your business and your situation may merit a more nuanced approach.

The draft contract then will become a jumping off point for contract negotiations. The reality is that contract negotiations can take a significant amount of time. There may be multiple rounds of back and forth during negotiations. There are, however, a few things that you can do to help make the negotiation process be more productive and run smoother. For instance, going into a negotiation with a list of your “deal breakers” can make the entire process easier. Find out what you are not willing to negotiate on and what terms of the contract you are willing to have more flexibility over.

During the negotiation phase, be sure to detail discussions that occur as these notes can be valuable later on. You should also consider making sure that all parties to the contract understand what the contract will require of them. Furthermore, the contract negotiation period can be a great time to discuss and contract management software or other tools that the parties may be required to use during the contract relationship.

Once the contract negotiation phase has been weathered, the parties will sign the contract. In the event of a business or other entity entering into the contract, an authorized representative will be required to sign off on the contract. After everyone has signed on the dotted line, execution of the contract terms will happen. Hopefully, the benefits of the work you put in during the contract formation and negotiation stages will now be realized and make the execution of the contract more seamless.

After the contract’s execution, the contract will either need to be closed out or renewed. Once a contract has run its course, it may be terminated. It may also be renewed. You and the other parties to the contract, however, must determine whether the contract will be renewed under the exact same conditions or whether it will be renewed with changes being made.

Texas Business Law Attorney

The trusted business law team at the Kumar Law Firm knows that contracts are vital to protecting and fostering the best interests of a business. We are here to help put legal agreements in place that protect you and your business interests.

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.