Contracts are for Big and Small Businesses

Contracts are for Big and Small Businesses

If you were to come to me about a business dispute you were having with another party, one of the first questions I will ask you is, “Do you have a contract?” The question is not an academic one for dissection by first-year law students. It is a vitally important question to know the answer to as that will likely determine how the dispute will play out. This is because a contract contains the rules the parties are going to play by. If there is no contract, those rules must be made up after the fact through the adversarial process known as litigation.

Contracts are necessary for a host of different scenarios in the life of a small business. A good rule of thumb is to consider needing a contract for just about any relationship in which another party is providing you a service or good. Similarly, you should have a contract for when you provide a good or service to a third party. The goal is to have contracts in place to govern your relationships with other parties so as to ensure that everyone knows what their obligations are and follows through on those obligations.

Lawyers get a bad rap for their reverence of contracts. Lucky for you, a lawyer who is particularly reverential about a contract, like me, is a great person to associate with because they will help you confect – as in make – a strong, enforceable contract that can save you time and money in the long run. A good contract lawyer can also help you vet contracts that are presented to you for execution, which is just as important.

Types of contracts: The typical small business will need a few different contracts, depending upon the nature of the business. At a bare minimum, the business will likely need a services agreement for when the business is providing services to a third party. Other contracts can include purchase agreements for equipment or land, licensing agreements for intellectual property and franchises, employment contracts, non-disclosure agreements, non-competition agreements, and partnership agreements.

What all of these contracts have in common is that they will regulate the relationship between two parties who are engaged in some sort of transaction or business. A partnership agreement is made between two partners in a joint venture. A non-disclosure agreement, also known as a confidentiality agreement, is used to prevent another party from releasing confidential information. These are just a few examples.

Why you need them: As I said earlier, contracts are the best way to set out the terms of the relationship between two parties and the rules as to how they are going to interact with each other. Another valuable benefit is that contracts – when well negotiated and drafted – leave very little room for arguing after the fact and can act as protection against attempts to change the rules later. For example, something as simple as the price if not explicitly stated in the contract can become fodder for litigation when the parties run into a dispute.

The process of negotiating the contract is also time well spent if the parties use it to actually make decisions about how things will work. Courts love to talk about the “meeting of the minds” in contracts and this is where that phrase actually means something. The minds need to meet and they need to agree on the terms ahead of time so that those terms can then be memorialized in the contract for everyone to see and follow. Leaving the details for later will come back to bite everyone because later can sometimes mean in court. If there are thorny issues, do not put them to be decided later. Use the contract negotiation process, when both parties probably have the most bargaining power they will have, to figure them out.

What should be in the contract. Contract law 101 teaches that at a bare minimum, an enforceable contract should have an offer, the acceptance of that offer forming mutual assent, and consideration – or some sort of value being exchanged. A good contract should cover a lot more ground because details will be the devil if they are left out. Here are some other topics that need to be addressed:

• What you will do or what you expect the other party to do (aka the services)
• What product you are purchasing or selling
• The cost
• When and how the cost will be paid and by whom
• How long the contract will last
• How the contract will end
• Indemnification
• Insurance
• Representations and warranties
• How disputes should be resolved

Of course, one of the most important elements of a contract is that it be in writing. This may seem elementary or obvious, but oral contracts are a thing and they are usually worth the paper they are printed on which in this case is air. Not only does putting everything on paper in black and white help to make it permanent, but getting everyone who is responsible for the contract to sign it is definitely required.

This raises an important collateral issue. It is vitally important to negotiate and sign the contract with the correct party. In small businesses, it is not usually that difficult to identify who has the authority to enter into the contract on behalf of the business. With larger businesses, however, it can get murky. With businesses that have shareholders or boards, often times these bodies are needed to sign off on certain contracts. If they don’t vote on the contract and their vote is required, no matter how many times it is signed, it will not be valid.

I have given you a lot of information on contracts and I would not blame you if you thought that you will be just fine using a standard contract off the internet along with what you’ve learned. The problem with this scenario is that you will still need a lawyer – on the back end when there is a dispute and everyone is arguing. This is because not having a lawyer draft the contract in the first place means that details were left out and the terms may not be in your favor. I can help you get out of this contract, but I would much rather have helped you draft it in the first place.