Why Do I Need A Contract?
Handshake business deals are a thing of the past. A business contract can be boring and confusing. Legally, you don’t need to have written agreements, but in today’s ever more complex business environment you should never do business without them.
A well-written contract lays out the rules and expectations of any interaction between your business and another party, much like the rules of a board game. It should be a basic best business practice to enter into written agreements with parties you do business with – including customers, suppliers, contractors, partners, shareholders, co-members of an LLC, and investors. When the rules are clearly set out and understood by everyone, the likelihood of disagreements is greatly reduced.
Assuming that you don’t need a contract for a small project is a very common mistake. I have personally seen where a written agreement could have avoided monetary losses that ended up being more money than the company made on the transaction. Even a short, basic contract can protect all parties involved and will make it more likely that the project will be successfully completed.
9 Ways A Business Contract Will Fuel Success:
1. Make A Great First Impression
By putting a legal framework in place, you show clients that you care about them and your business. A contract gives you and the client peace of mind because you know all of the expectations from each other are spelled out. This allows your client to trust in your business.
A proper contract can be an extension of your company brand. Sending out a contract symbolizes that you are committing to your client, employee, or partner. It can show you care about the relationship that you have together.
From drafting to negotiations, the entire contract process gives each business an idea of how the other operates. The negotiation process can show whether there is a deal to document. Oral agreements rarely cover many issues that may arise, only to find significant areas of disagreement between them after the work has already begun or, worse, already completed. Negotiations over a written contract likely would have discovered these issues early on. Even the simple act of executing the agreement can show your company practices state-of-the-art processes. Traditional signatures take days or weeks, or months. This process can be done in minutes or hours, thanks to electronic signatures. It’s easy to see how even the contract negotiation process can help you make a great first impression.
2. Record Your Original Intentions
Frequently, the contract that governs the work can be around longer than people’s memories, their emails, or even themselves. Sometimes this is a great sign that you have had a long and mutually beneficial relationship. But remember, things change. Relationships sour. Conditions deteriorate. People move on. A contract will help you avoid confusion and inform your new employees of the commitments of both parties.
Should a client have a problem, they can refer to the contract, and it will give them all the information they need to try and resolve it. It will explain returns, refund and repair policies, warranties, intellectual property, and complaints. By providing this information in a document that can be referred to, the agreement acts as another avenue of customer service.
If a contract is going to do all these things, it must be detailed. The rights and duties of each party should be defined clearly, with little room for interpretation. Issues like performance standards, time to complete, payment terms, termination rights, compliance matters, and rights upon default should be documented.
3. Foster Collaboration
At their very core, contracts are relationships. First, two parties agree to work together and forge a connection that can last years if fostered well and beneficial on both sides. A contract is the visual representation of that relationship.
The very nature of a contract is collaborative. Before a contract is sent to the other party, it can build up your team’s collaboration. Departments can work together to determine all of the things needed to make the transaction beneficial to the company as a whole.
After the contract is sent out, the collaboration continues at the start of your business relationship. The very definition of a contract requires two competent parties to have a meeting of the minds. Healthy negotiations prevent confusion and conflict down the line and set the stage for a strong partnership in the future. Contracts also provide for both sides to manage expectations. A contract will define the parameters of the relationship and make sure that both parties have a clear understanding of what you have promised to each other.
A contract helps to build trust and give peace of mind. After a contract is signed, both sides can feel confident in the partnership because of a solid communication base.
4. Provide Clarity
You can reach an agreement through meetings, phone calls, and emails. Many verbal contracts fail because parties change, memories fade, and one person’s version of events is often different from another’s. Trying to cobble together what was agreed upon can be cumbersome. Other people can even make conflicting promises within your organization. A well-written agreement will ensure that you and your client clearly understand how the transaction will progress.
A good contract will outline your future interactions’ operational, financial, and dispute resolution processes. A contract will help your clients to understand your business. It will communicate what your client expects from you. By documenting this information into a single source of truth, you create certainty – all parties know how to act, what is expected from them, and most importantly, where to find the answers.
5. Predict Cash Flow
Cash rules everything around your business. How much and how fast it comes in or goes out can make or break a business. A contract can help both sides with their future budgets by locking in rates while addressing a process for potential discounts or future rate changes. You can even include provisions in your contract for what should happen if the project faces delays and takes longer than both parties expected.
A contract can communicate to clients when they can expect an invoice and when they need to pay their bills. I have seen situations where a company’s obligations to pay its vendors are not aligned with the timing of their receipt of payment. This can cause a squeeze on your business that can lead to much bigger problems. Should they decide not to cooperate, the legally enforceable contract will support any legal action you take to recover the debt.
6. Protect Your Assets
Assets come in many forms. They are not only your physical assets but also your employees, intellectual property, trade secrets, and reputation. Protecting your business and its assets is extremely important.
A contract should include provisions for who is responsible when accidents happen. Who will pay when someone is injured, or property is damaged? Does everyone have enough insurance to meet their obligations if something catastrophic occurs?
Retaining talent in today’s ever more fluid labor markets has been more challenging than ever. You may need a contract to prevent your former employees from working for one of your competitors. With proper non-compete provisions in your contract, you can stop your former employee from working for a competitor for a specific time period or in a defined geographic location to protect your trade secrets and shield your business from harm. Many state laws restrict non-compete provisions, but they can still be enforceable if constructed carefully.
Do your customers or subcontractors keep hiring away your best employees? Worried about a subcontractor stealing away a customer with whom you have spent considerable time and money fostering a relationship? With adequate non-solicitation provisions in your contracts, you can stop them from stealing away the most valuable assets of your enterprise.
Intellectual property can often confuse clients because they believe they have full ownership once a service has been paid for. This is incorrect, so a contract will communicate how the intellectual property will be used. It’s a valuable part of your business, and you need to ensure that it cannot be stolen or misused.
Need to keep the details of your transaction confidential? Perhaps your customer will be exposed to some particular trade secrets. Or those rates that were developed with that specific customer in mind. Confidentiality and non-disclosure clauses can protect those trade secrets that the law doesn’t provide any protections for.
7. Stay In Compliance
Many people find the law complex and confusing. A contract will help make the law more accessible and allow you to navigate it correctly. Businesses fall foul of the law because they don’t understand it, so a contract drafted by a specialist will ensure that you always stay on the right side of the law. There are many contract templates available on the internet, but those will not reflect the particular aspects of your business and the laws in your area.
Compliance is often an afterthought until it isn’t. Unless employees have a legal background, they may not be thinking about compliance. Running afoul of laws and regulations is a sure-fire way to be hit with penalties and fines. Even worse, the government could shut your business down until you are back in compliance.
8. Avoid Costly Disputes
The prospect of making money on a new business venture is exciting. However, things change. Relationships sour. Conditions deteriorate. People move on. Disagreements happen. Mistakes happen. Promises break. Disputes are inevitable. No relationship is perfect. When you need to hire a lawyer to straighten things out, the first question will be, “Do you have a written contract?”
Written contracts make disputes easier to navigate. Agreements prevent conflicts and mitigate risk. Disputes can be costly. So costly sometimes that it only takes one kill a company. A contract helps minimize disputes or problems by anticipating potential issues and including procedures for resolving disputes.
When business disputes occur, partners need to work together to resolve them quickly. However, when stakeholders find themselves stalled by disagreement, I have found that bringing in a third-party mediator can move things to a conclusion without the cost or significant delays involved with filing a lawsuit. Another cost-effective means of settling disputes is arbitration. A contract can mandate that the parties use these less expensive and more expedient means of dispute resolution as an alternative to litigation.
Many questions need answers when resolving a dispute. Where will a dispute be resolved? What laws will apply? In such cases, it is much easier for arbitrators, small business attorneys, and judges to navigate the dispute if there is a written agreement. Legal fees can reach astronomic amounts when lawyers have to litigate each issue. In short, a solid written contract can save money and strengthen a business relationship by helping to reduce costs and even avoid litigation altogether.
9. Ensure Enforceability
Contract laws vary from state to state, and certain state laws may restrict specific terms and clauses from being included in your agreement. If part of your agreement falls afoul of the law, a judge may determine that the entire contract is invalid if the proper provisions are not included to protect against this.
Also, keep in mind that simply writing down an agreement is not the same as crafting an enforceable contract – let alone an enforceable contract that protects your business. That is why it’s essential to seek an experienced attorney’s advice when contemplating entering into any business agreement.
Without a written contract, a judge or jury will have difficulty determining which version of events to believe in a “your word against theirs” scenario. Not only is it advisable to get business contracts in writing, but some types of contracts, such as contracts for the sale of real property, real estate leases for more than one year, agreements to pay the debts of another, and the sale of goods under the Uniform Commercial Code with a price of $500 or more must be in writing to be enforceable.
Before you agree to a contract, you should always consult with a lawyer to make sure that your rights are protected. Many contracts include complicated legal language that is hard to understand, so having an attorney review and explain a contract will help you make sure that you will benefit from the agreement. The Guidry Group’s Contract Lifecycle Management services can help you protect your business and ensure your company’s success with a well-thought-out, adequately drafted agreement.