Every new business venture starts with business contracts. When you start a business, you need customer service agreements, lease agreements, or you are signing a vendor contract. You are introduced to business contracts almost immediately. Hence, my first bit of advice, to any budding business entrepreneur, is to invest time and some dough to find a good attorney. One that is familiar with contracts and your business. Trust me this could save you lots of grief, money, and potentially save your business!
A business contract is a legally binding agreement between two or more parties. The goal is to have agreements that set clear expectations. This means understanding and agreeing to the arrangements, obligations, and responsibilities spelled out in the agreement. So, let’s do a little dissecting of a business contract and introduce you to the main components of these agreements.
- WHO
- Parties in the agreement – define who is entering into the agreement (give legal name, title, company, contact info., etc)
- WHAT
- Intent or Terms of the agreements – spell out what the arrangements are in detail, including who performs what tasks, in what time frame, and the deliverables. In addition, who is compensated for what, when, and how? Who owns existing and future product or proprietary information created? Include exhibits if needed.
- WHEN
- Term – state the length of time the agreement is be enforced, whether a year, specific date range, or ongoing. Clearly spell out the renewal arrangement of the agreement. Does it auto-renew annually without notification of termination or does it terminate and need to be resigned/rewritten after the term has ended?
- Termination – this describes how one or all parties can exit the relationship. This clarifies the arrangements of exiting with minimal harm and disruption to the other party (if written well!) and by means of a prearranged method, such as 30 day notice or based on a breach of contract.
- WHERE
- Jurisdiction – this spells out the power that has the legal right and laws to reinforce this contract. So the parties signing the agreement agree to a location whose laws will be applied to govern the disputes or issues that might arise with the contract. Therefore, you should select a jurisdiction that is nearby and has beneficial laws for the type of contract being signed.
- HOW
- Breach – an act of breaking or failing to follow a contract. This section of the contract spells out how you remedy the failure of one or more parties to perform some part or all of the contractual agreement. Events like not paying in a timely manner would be considered a breach. In this section, the breach allows the breaching party to take action to remedy the breach to avoid harm to their interests. Meaning they have a period of time to remedy the breach and make right!
- Liability – this addresses how much you may owe or lose under a breach of the contract. What is your responsibility if you breach the agreement and what are the limitations of this liability so that you are also protected under an unintended breach (meaning you breach by mistake or not intentionally).
Last Question – but the most important
- WHY – I often referred to my contracts as “Prenuptial Agreements”. I did this because I would be in the throes of negotiating contracts at the beginning of a long-term relationship, such as entering into a customer contract or employee contract. This occurs when we were happy with each other and excited about our future together. Nobody likes contemplating a divorce, but the best time to talk about it is when you still like each other and not after you are throwing things across the room at each other.
So, the “Why” is because you need a contract to establish ground rules and explore all the “what if” scenarios, just in case things don’t work out as anticipated. So ask the tough questions NOW, not during the divorce or litigation! I found that if I had a good agreement and all the parties understood and agreed with it, then we never had to go back to it! And that, my friend, is the Goal!
Footnote: Types of business contracts:
- Nondisclosure / Confidentiality agreement
- Property or Lease agreement
- Relationship agreement
- Partnership
- Employee
- Independent Contractor
- Customer
- Vendor/Supplier
- Intellectual Property agreement
