As a business owner you probably enter into more contracts and agreements than you might realise.
Every time you engage a new customer, a client, a service provider, or buy from a supplier, you’ll have entered into a legally binding agreement.
In this article we’ll run through what you need to know about contracts and why you should make sure they’re always put in writing.
What types of legal business contracts are there?
Contracts can be formal or informal. In many cases, they don’t need to be in the form of a signed legal document, or in writing.
They can be verbal or contained in an exchange of emails, texts or other communication.
Under English law, there are some types of agreements, such as employment contracts, guarantees and contracts for the sale of land, that need to be in writing.
Why does my business need written contracts?
The main reason for a written business contract is to specify the parties’ understanding of what they have agreed and what each party is legally obliged to do. This is especially relevant if there is a subsequent dispute about what has been agreed, for example payment terms or the scope of work that might be expected.
If one party breaks the agreement, a legal claim could be easier to bring with a written contract. If an agreement isn’t in writing, parties may argue they each understood the terms differently and it could become very difficult to prove otherwise. If the parties to a contract end up in an official legal dispute through the courts, not only can this be time consuming but it can also quickly become expensive for both parties.
A well-written contract should help avoid arguments about what’s been agreed. It could also provide a legal framework for what remedy may be applicable in case of a breach.
What kinds of contracts does my business need?
The kinds of contracts you need will depend on your business. If you sell products or services and regularly enter into agreements with business customers and suppliers, you should have regular terms and conditions that you’ll want to apply to each transaction or project. You can then add the specific details of the job, such as the goods and services to be provided, dates, price and any additional points that you’ve agreed for that piece of business.
At PaperRock we have lots of business contract templates to choose from. Our business contracts section is a great place to start.
What information does a written business contract need to include?
Naturally, what goes into your contracts will depend on what industry you’re in.
Here are some of the key elements or clauses to include with a quick explanation of each.
- Parties. You will need to identify the parties to the agreement.
- Subject-matter. Include details of the goods or services being sold or provided, including deliverables and delivery dates.
- Price. Specify the price and whether it is fixed or variable, perhaps by reference to time spent on a project.
- Payment terms. When will the seller be entitled to invoice for the goods sold or services supplied and how long with the buyer have to pay invoices
- Specific undertakings. Specify what each party must do for the contract to operate. For example, if you’re selling goods: who will arrange for delivery, will the buyer have the right to inspect and reject the products, and when will ownership in the goods pass to the buyer? If you’re providing services: what is the scope of the services, what constitutes the deliverables of those services, and what do you need the client to do so you can provide the services?
- Duration. If the contract is not fulfilled by performance (such as the sale of a product), your agreement should state how long it will last and how might be brought to an end.
- Termination. Early termination of a contract may happen for a variety of reasons, such as breach by one party or insolvency. Consider which circumstances might apply and include these in the contract.
- Variations. Changes to a contract (variations) should be agreed in writing.
- Representations and warranties. These are legal promises which, if incorrect, could result in a legal claim. For example, if you are selling goods, you will be required to give warranties about their suitability and performance. If you are providing services, you will be required to give warranties about their standard of performance.
- Liability. Specify an overall limit on your liability for loss or damage caused by your breach of contract to ensure your liability under the contract is capped. If you don’t do this, you could potentially have unlimited liability for what might be a relatively small piece of work.
- Governing law and disputes. Consider which law will govern the contract and where potential disputes will be handled. This is particularly important for contracts with an international dimension.
