Contracts are not a substitute for trust, they are the basis for trust.
Whether you’re a solo freelancer or leading a startup with several employees, there’s one thing you’ll definitely need to protect your business and yourself at some point: an enforceable contract.
Many beginning business owners (and more than a few experienced ones, too) view the contract as a hassle and a waste of time. Some might even think that a written agreement is the equivalent of “anticipating trouble.”
When properly drafted though, contracts do not create problems — they solve them. And while many entrepreneurs believe their clients would react negatively to it, contracts are commonly encountered in most industries because written agreements are essential for a good working relationship with providers, vendors, partners and clients or customers.
Let’s look at how they help your business succeed and protect the interests of both parties.
1. They remove doubt and provide certainty.
A well-drafted contract will specify each party’s expectations. It helps both parties focus on their business relationship instead of anticipating problems or trying to sort out open-ended questions.
To understand this, think about your biggest client or customer, preferably one that does regular business with your company. How many different aspects of your transactions with this person or business could you identify?
Let’s say you sell paper, and this client is a law firm. What size paper do they need? How much of it per month are you required to deliver? What price are they obligated to pay, and when?
The paper transaction is a pretty simple one example. Most business deals are more complicated, and as a result, present many more opportunities for uncertainty. Written contracts help remove the uncertainty inherent in these complex transactions and help both parties make more effective and reliable plans.
2. Contracts outline obligations and remedies.
In a related vein, uncertainty can cost you quite a bit of time, effort and money if you or your client are unclear about your obligations in any way. Quantities, prices per unit, delivery costs and who pays them are just a few examples of some terms you should take care to spell out in writing.
In addition, it’s important to outline remedies in case one party breaches the agreement. In some jurisdictions, even if you win a case for breach of contract, you can’t recoup the costs of that case (for example, attorney’s fees) unless you specify them in a written contract.
3. They provide procedures for thorny disputes.
What happens if there is a disagreement between you and your client?
You don’t have to proceed directly to court. Certainly, litigation is prudent (possibly even required) in some situations. However, a lawsuit isn’t a very effective way of resolving business disputes. Business litigation can be very expensive and take a long time to reach a final conclusion, thanks to appellate procedures.
A contract can specify an alternative means of resolving your dispute, such as mediation or arbitration. Many parties in business disputes find these methods preferable to filing a lawsuit. However, unless you both agree to pursue these methods first, there’s usually no obligation for the other party to participate. (Some states do require parties to some cases to pursue alternative dispute resolution methods before being able to file a lawsuit.)
4. Contracts help you end relationships cleanly.
Without some means and provisions for canceling or terminating a contract, the end of a business relationship can create obstacles that can’t be resolved through clear communication.
When the buyer for your goods or services suddenly cancels the deal, it can cause many problems. Chief among those problems is the interruption in anticipated cash flow. A termination clause can help you by requiring the buyer to give you advance notice of some amount of time (a month is common). That notice gives you time to find additional buyers or clients to replace the lost revenue.
5. They address the unforeseen.
A commonly included clause in business contracts is called “force majeure” or the “act of God” provision. This clause or section of a contract essentially sets out the parties’ obligations and rights in the event of an unforeseeable event, such as a natural disaster, or any other circumstances beyond their control that make it unreasonably difficult to perform under the contract.
Let’s say you’re obligated to provide 20 crates of imported tea, but the shipping container gets blown overboard during a storm. With a force majeure clause, you won’t be deemed in breach of the contract, even though technically you failed to perform your obligations.
If you’re new to contracts, it’s best to hire an attorney with transactional experience in your industry to create a contract for your company. You can present this contract to future partners and clients, although they may request changes to the document. Be careful in reviewing and accepting those requested changes, as contract law can be quite complex and outcomes may depend on even slight changes in wording.