Why Even A Simple Contract Can Save Your Bacon
This guide is designed to introduce a company on the importance of having an enforceable agreement before proceeding with transactions with suppliers, vendors, or clients. In addition to providing our best practices for drafting contracts and what should be included in a contract, this post will help you navigate through the legalities of contracts and how they can protect your company from unnecessary liability.
A well-drafted contract can do wonders for your business—from preventing future disputes to protecting your intellectual property. Contracts are often overlooked in small business operations as companies rush to get products out the door without an agreement in place for performance obligations.
Maybe you're an online retailer who wants to use a service provider to create a new website. Maybe you're a photographer looking for a model to pose in your next shoot. Maybe you're an online marketplace selling furniture, and you want to take payments with Stripe or PayPal.
These are all examples of parties entering into contracts with one another, but it's not always as smooth as it should be thanks to the fact that there are no definitive templates for each kind of contract or agreement.
Each party will likely have different needs and expectations when it comes to how their business is going to operate. Without finding a middle ground, you could run into issues down the line when it comes to what you contracted for and what was actually delivered. Which is where contracts come in.
Preventing disputes is one of the main reasons for having a contract—but that's not all. Your contract might actually be protecting your intellectual property, outlining specific responsibilities of both parties, or laying out consequences in the event of a breach.
What Is A Contract?
A contract is an agreement between two or more parties that makes their intentions legally binding and enforceable by law. Contracts are often used in situations involving business-to-business transactions because they are legally binding and enforceable. However, they can also be used to define relationships between individuals when their intent is friendly.
It's important to note that any contract that requires a third party to enforce it (like a court or arbitrator) will likely be called a non-binding contract, as the issue being resolved never went before an impartial party. In most business situations, you will want to try and work toward an agreement without involving a third party.
What Should Be Included In Your Contract?
While every contract is different, there are some general things that every contract will have in common: [1] they'll be legally binding (i.e. if you don't do what you agreed to, the other party can file a lawsuit against you), [2] they'll usually include an "expiration date," and [3] they'll cover all of the details related to their specific situation.
In addition to these three elements, there are some other things that will vary on a case-by-case basis:
Intellectual Property – Some contracts will contain language that transfers intellectual property from one party to another (such as ownership of rights when creating content for someone else's blog), while others may only include a license for use.
– Some contracts will contain language that transfers intellectual property from one party to another (such as ownership of rights when creating content for someone else's blog), while others may only include a license for use. Compensation – Compensation normally shows up in the form of money but can also include things like parts and services.
– Compensation normally shows up in the form of money but can also include things like parts and services. Limitations – Certain situations won't warrant a contract, such as when there is no value being exchanged or when you are intending to create a relationship that will not have a contractual obligation.
– Certain situations won't warrant a contract, such as when there is no value being exchanged or when you are intending to create a relationship that will not have a contractual obligation. Durations – You'll have contracts with varying duration, from one-off sessions to multi-year agreements.
– You'll have contracts with varying duration, from one-off sessions to multi-year agreements. Modifications – Some contracts won't be set in stone but will be modified over time as needs change.
Some contracts won't be set in stone but will be modified over time as needs change. Performance Obligations – Performance obligations usually involve some type of service or product being delivered by one party based on a timeline or other expectations.
– Performance obligations usually involve some type of service or product being delivered by one party based on a timeline or other expectations. Confidential Information – Confidential information can refer to anything from trade secrets to non-public financial information.
Below is a short list of what should be included in every contract: [12]
Header/Title Page – This should include names of the parties (the "parties"), an "agreement date," and a "term." These terms will likely be found in the body of the contract, but they should all be included here as well. For example, if you are entering into an agreement for six months with an option to renew, you should have this somewhere in your contract.
– This should include names of the parties (the "parties"), an "agreement date," and a "term." These terms will likely be found in the body of the contract, but they should all be included here as well. For example, if you are entering into an agreement for six months with an option to renew, you should have this somewhere in your contract. Parties – This section will include information about all parties involved as well as their roles and responsibilities within the contract.
– This section will include information about all parties involved as well as their roles and responsibilities within the contract. Description – This is where you would outline what the parties are agreeing to do for one another.
– This is where you would outline what the parties are agreeing to do for one another. Definitions – There will probably be certain terms included that each party has a different definition of (such as "deliverable" or "acceptable quality"), and this section should clearly outline those definitions.
– There will probably be certain terms included that each party has a different definition of (such as "deliverable" or "acceptable quality"), and this section should clearly outline those definitions. Executory Obligations – This is where the parties will list any conditions or responsibilities required by one party before the other can begin to perform their obligations.
– This is where the parties will list any conditions or responsibilities required by one party before the other can begin to perform their obligations. Representations and Warranties – These are clauses that deal with promises or assurances made by a party, such as a guarantee.
– These are clauses that deal with promises or assurances made by a party, such as a guarantee. Covenants – A covenant is not only an assurance but also a restriction on how one party can act in certain situations (e.g., they cannot sell their business without first entering into reasonable terms with you). [9]
– A covenant is not only an assurance but also a restriction on how one party can act in certain situations (e.g.
Conclusion – This is where you would outline the payment terms, when the contract will be completed, what happens if a party defaults on their obligations, and any other important aspects of the contract.
– This is where you would outline the payment terms, when the contract will be completed, what happens if a party defaults on their obligations, and any other important aspects of the contract. Indemnification – Indemnification is a clause in your contract that requires one party to compensate another party for expenses incurred if they default on their obligations.
– Indemnification is a clause in your contract that requires one party to compensate another party for expenses incurred if they default on their obligations.