15 Types of Business Contracts and Using AI to Improve Them

Introduction

Most of us have a drawer that houses a variety of random tools. We frequently use these tools around the house, and it’s nice to have them within easy access. But if you’re like most of us, that tool drawer is probably not organized, and you may be surprised by what you find in there after a few years of accumulation.

An organization’s contracts can be like those random tools in the drawer. They typically need many types of business contracts – and they need an efficient way to draft and manage them.

A lack of standardized contract procedures or understanding the types of contracts in your organization can result in inconsistent terms, missed deadlines, and overlooked obligations, hampering operational efficiency.

Understanding the contracts your organization needs, what they’re for, and creating templates for them – essentially, managing that tool drawer for contracts – can help you streamline your contract processes.

In this article, we’ll explore some of the most common types of contracts used by organizations and their uses. Then, we’ll examine how to templatize them and use AI to streamline the process.

Why We Need Different Types of Contracts

Most organizations rely on a variety of contracts to keep business running smoothly.

Sales contracts delineate terms for product or service exchanges, safeguarding both parties’ interests.
Employment contracts establish the employer-employee relationship, specifying roles, responsibilities, and compensation.
Lease agreements govern property usage, providing a framework for landlord-tenant interactions.
Partnership agreements define the terms of collaboration between businesses, ensuring clarity on shared goals and responsibilities.

Each type of contractual agreement is a crucial tool for risk mitigation, legal compliance, and relationship management. By having a spectrum of contracts tailored to their specific needs, a business safeguards its interests and fosters transparent and efficient dealings with clients, employees, and partners.

Top Types of Business Contracts You Should Know

Like the tools in our tool drawer, different contracts serve different purposes, and every organization relies on a unique set of contracts to fulfill them.

The most frequently used business agreements include:

A fixed-price contract sets a predetermined, unchanging price for goods or services, providing clarity and stability for both parties.
In a cost-plus contract, the buyer pays the seller’s actual costs plus an agreed-upon profit margin.
Time and materials contracts involve billing the client for actual hours worked and materials used, accommodating projects with evolving scopes.
Unit price contracts assign a fixed price per unit of work or goods, providing flexibility for varying quantities.
A unilateral contract involves a promise in exchange for a specific act. One party makes a commitment, and the other accepts by performing the requested action.
A bilateral contract involves promises both parties exchange and is frequently used in mergers and acquisitions. Each party is obligated to fulfill their promises, creating a mutual agreement.
A simple contract is a legally binding agreement formed by mutual consent without elaborate formalities.
An express contract has explicitly stated terms, either verbally or in writing. It minimizes the risk of misunderstandings between the parties involved.
An unconscionable contract is excessively one-sided and oppressive, exploiting the weaker party. Courts may deem such contracts unenforceable due to their unfair terms.
Partnership agreements (a.k.a. Master Service Agreements or MSAs) outline the terms and conditions governing the relationship between business partners. They cover profit-sharing, decision-making, responsibilities, and dispute resolution, providing a framework for successful collaboration.
Indemnity agreements protect one party from financial loss by shifting liability to another in case of specified events.
Non-disclosure Agreements (NDAs) safeguard confidential information by legally prohibiting its disclosure to third parties.
A bill of sale is a legal document confirming the transfer of ownership of goods or property from a seller to a buyer. It includes details of the transaction and serves as proof of purchase.
Employee agreements, including employment contracts, outline the terms of employment, such as roles, responsibilities, compensation, and other relevant terms.
Licensing agreements grant permission to use intellectual property (such as patents, trademarks, or copyrighted material) under specified conditions. They outline the terms of use and compensation for the licensor.

Determining the Right Type of Contract

Selecting the right type of contract requires assessing your unique needs, risk tolerance, and business relationships.

There are a few steps to follow to do this:

First, analyze the scope of the project or transaction. Projects with well-defined scopes may benefit from fixed-price contracts with predictability and cost control. But, those with evolving requirements might be better for more flexible contracts (e.g., time and materials contracts).

Second, determine your risk factors. For example, a cost-plus contract may be appropriate if costs are uncertain because it transfers some risk to the buyer. Unilateral contracts may suit scenarios where one party seeks a specific action without committing to reciprocal obligations. Bilateral contracts work better for mutual commitments between parties.

Third, consider legal and regulatory requirements; some industries may require specific contract types for compliance. For example, partnership agreements delineate roles, responsibilities, and profit-sharing mechanisms for ongoing collaborations. In technology or intellectual property scenarios, licensing agreements protect proprietary assets.

Fourth, factor in your organization’s objectives and the specific requirements of each engagement to guide your contract choice.

Finally, regularly review and adjust your choices based on contract performance to ensure alignment with your organization’s evolving needs and market conditions.

Using Templates to Fulfill Transaction and Contract Types

Building a contract template library is one way to organize and streamline creating different types of contracts within your organization. Here are a few best practices to maximize your templates’ effectiveness:

Identify common elements across different transactions, such as parties involved, payment terms, deliverables, and timelines.
Consider which types of transactions align with your contract goals. Say you need to hire a marketing writer. But – depending on the specifics of the role – you may need a contract template that covers time and materials, a fixed price per project, or an employment agreement.
Evaluate your templates’ flexibility. You may require more than one template for a single transaction. For instance, you can use an NDA for employment or partnership agreements. Or, you may need multiple templates for one contract.
Use clear and concise language in the template to ensure it’s easily understandable by all parties involved. Include placeholders or variables for information that may vary, such as names, dates, or specific terms, to streamline customization.
Break down complex agreements into modular sections, allowing users to include or omit segments based on the specific nature of the transaction.
Consider legal and regulatory requirements to ensure compliance. Regularly update the template to reflect law changes or lessons learned from previous transactions.
Implement a review process involving stakeholders to validate the template’s efficacy and relevance across different scenarios.
Continuously refine templates based on evolving business needs and market conditions.
Provide training on template usage for consistent application and to mitigate the risk of errors.

Using AI to Support Your Contract Strategy

Integrating AI into the organization’s contract strategy can help you easily create a robust library for a unique, comprehensive set of legal agreements. By ensuring all departments and employees work from a standardized structure, clauses, and language, AI fosters consistency and reduces the risk of errors in contract creation.

AI’s role extends beyond template creation; it leverages an organization’s post-negotiation corpus of contracts to continually inform and refine them. Through advanced natural language processing and machine learning, AI efficiently extracts relevant data from all contracts, discerning patterns and nuances to enhance templates’ adaptability and relevance.

The reciprocal cycle of legal contracts – where they continually feed off and support each other even post-signature – is seamlessly orchestrated by AI. It transforms the static concept of a contract into a dynamic learning opportunity, ensuring that the organization’s templates evolve in tandem with changing business needs, legal requirements, and industry standards.

This streamlines the contract lifecycle and improves an organization’s ability to navigate contractual scenarios swiftly and precisely.

Managing Different Types of Business Contracts

Organizing and managing your “tool drawer” of contracts is key to maximizing the efficiency and effectiveness of your contract creation process. In a nutshell, it’s knowing which contracts your organization needs and templatizing the ones you frequently use.

Contract AI can transform your contract creation and management processes. Sirion’s comprehensive, AI-powered contract lifecycle management platform can make it easy. Contact us for a live demonstration, and we’ll show you how!