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Whether you are an independent freelancer or run a startup with a few employees, there’s one thing you may definitely have to protect your business and yourself at some point: an enforceable contract.
Many first-time business owners (and some experienced ones too) view the contract as a hassle and a waste of time. Some may even think that a written contract is tantamount to “anticipating trouble.”
However, properly prepared contracts do not create problems – they solve them. And although many entrepreneurs consider that their customers would react negatively to it, contracts are common in most industries because written contracts are essential to good working relationships with suppliers, vendors, partners and customers or clients.
Let’s take a look at how they assist your business succeed and protect the interests of each parties.
1. They remove doubts and provide certainty.
A well-drafted contract will define the expectations of each party. It helps each parties focus on the business relationship somewhat than anticipating problems or trying to resolve open questions.
To understand this, think about your biggest client or client, preferably one who frequently engages with your company. How many different facets of the transaction with this person or company are you able to discover?
Let’s say you sell paper and that customer is a law firm. What size paper do they need? How much of this do you should provide each month? What price must they pay and when?
A paper transaction is a fairly easy example. Most business transactions are more complex and, as a result, present many more opportunities for uncertainty. Written contracts help eliminate the uncertainty associated with such complex transactions and help each parties develop simpler and reliable plans.
2. Contracts specify obligations and remedies.
Similarly, uncertainty can cost you a lot of time, effort and money if you or your client are in any way unsure about your responsibilities. Quantities, unit prices, delivery costs and who pays them are just a few examples of some of the terms that ought to be put in writing.
In addition, it is essential to define remedies in the event of a breach of the contract by one of the parties. In some jurisdictions, even if you win a breach of contract case, you can’t get well the costs of that case (for example, attorney’s fees) unless you specify them in a written agreement.
3. Provide procedures for sensitive disputes.
What happens if a dispute arises between you and your client?
You do not have to go to court directly. Certainly, litigation is prudent (maybe even vital) in some situations. However, a lawsuit is not a very effective technique to resolve business disputes. (*5*) disputes may be very expensive and may take a very long time to finally resolve, because of appeals procedures.
The contract may provide for an alternative technique of resolving the dispute, comparable to mediation or arbitration. Many business litigants find these methods preferable to filing a lawsuit. However, unless you each conform to use these methods first, the other party is normally under no obligation to participate. (Some states require parties to certain cases to make use of alternative dispute resolution before they’ll file a lawsuit.)
4. Contracts help end relationships cleanly.
Without the means and provisions to cancel or terminate a contract, ending a business relationship can create obstacles that can not be resolved through clear communication.
When a buyer of your goods or services suddenly cancels a transaction, it may possibly cause many problems. Chief among these issues is the interruption to projected money flows. A termination clause can aid you by requiring the buyer to present you a specific amount of notice (normally a month). This notification gives you time to search out additional buyers or customers to switch your lost revenue.
5. They deal with the unexpected.
A clause commonly included in business contracts is called a “force majeure” clause or a “force majeure” provision. This clause or a part of the contract generally sets out the obligations and rights of the parties in the event of an unforeseeable event, comparable to a natural disaster or other circumstances beyond their control, which unreasonably impair the performance of the contract.
Suppose you are required to deliver 20 cases of imported tea, but during a storm the shipping container is thrown overboard. Thanks to a force majeure clause, you will not be considered in breach of the contract even if you have not technically performed your obligations.
If you are latest to contracts, it’s best to rent a lawyer with transactional experience in your industry to draft a contract for your company. You can present this agreement to future partners and clients, although they might request changes to the document. Care ought to be taken when reviewing and accepting requested changes as contract law may be quite complex and the results may depend on even minor changes in wording.