Using Contracts to Protect Your Business

Using Contracts to Protect Your Business

New clients, customers and business deals are exciting. Documenting those deals with a contract? Not so much.

But contracts are one of the best ways you can protect your business and make sure you get paid for the work you do. Contracts can be traditional, formal documents, or they can be informal letter agreements or standard terms and conditions.

The most important rule is to put the terms of your transaction in writing. When you rely on an oral “handshake deal,” you’ve got no way to prove your agreement and you may end up getting much less than you bargained for.

Here’s a common sense guide to using contracts.

Using Formal Contracts

Formal written contracts usually begin by stating the names of the parties and the effective date of the contract, and they then go on to specify - sometimes in great detail - what the parties have agreed to and what their rights and obligations are under the contract. While a formal contract can be just a couple of pages long, it can also be very lengthy and complex.

Formal contracts are useful because they provide a complete roadmap of the parties’ relationship. They are designed to anticipate situations that might happen and minimize misunderstandings.

If you are leasing space or taking out a loan, your landlord or financial institution will present you with a formal contract. You may also receive formal contracts from people you do business with. It is important to review these documents carefully - contracts are often written in a way that is most favorable to the party who wrote the contract. While you may not have much bargaining power with the bank, you may be able to negotiate more favorable terms with landlords and people you do business with.

Formal contracts are important for large and ongoing transactions. The more money and time involved, the more vulnerable your business is if the other party doesn’t perform as expected.

Letter Agreements: Less Formal, but Still a Contract

Formal contracts are good for protecting you and your business, but they don’t always seem practical. Depending on your business, it may feel awkward to present every new customer with a ten-page written contract.

Yet it’s risky to rely on an oral agreement. With nothing in writing, you will have a hard time enforcing a contract if the other party doesn’t hold up his or her end of the deal.

A letter agreement can be a happy medium. It looks like a letter instead of a contract, but it contains all the important contract terms. It can start off with a friendly tone and then say it is confirming whatever you have agreed to. You can use ordinary language in your letter agreement - a contract doesn’t need elaborate legalese to be enforceable. You should sign your letter agreement and ask the other party to sign in a space you provide at the end of the letter. You can send a letter agreement by mail or you can email it.

A letter agreement can be just a short statement of the basics that you agreed to, or it can be as long as a formal contract. And it can incorporate a set of terms and conditions.

Using Terms and Conditions for Routine Transactions

Many small businesses conduct the same type of transaction repeatedly. If you’re a plumbing company, you fix pipes. If you’re a software developer, you sell software. Although each client or customer is different, your transactions have common characteristics, and you apply the same business policies to all of them.

A set of terms and conditions allows you to apply your policies to each customer without preparing a formal contract for each one. Terms and conditions can be printed on the backs of invoices or estimate forms, they can be included in your website, or they can be attached to short contracts or letter agreements. Terms and conditions might include such things as payment policies, return policies, warranties, and the basic boilerplate language that appears at the end of most formal contracts. You can say that by signing the estimate, work order, software license, letter agreement or other document, your customer agrees to your attached standard terms and conditions.

When to Seek Legal Help

A basic contract can seem straightforward, but it’s seldom a good idea to write an important contract yourself. Lawyers are trained to know what to include in a contract, and a lawyer may anticipate things that most business owners wouldn’t think of. Seek a lawyer’s advice if:

  • You are starting a new business. A lawyer can identify contracts you will need and can provide you with routine contracts and/or terms and conditions.
  • You are negotiating a large transaction, including a lease, a loan, a major purchase, a merger or large or ongoing contract. A lawyer can negotiate the agreement, advise you on terms that are fair and reasonable, draft the contract and/or review and explain a contract that someone else has prepared.

Your business has grown or changed, or you have not consulted with a lawyer in more than a year. By checking in with your lawyer periodically, you can ensure that your contracts continue to protect you as your business evolves.