Business Contract Basics

What You Should Consider in Key Business Contracts

Some things you don't need a formal contract for.  Other things you have contracts for, but they are provided by a vendor or supplier and there is not much room to negotiate terms.  But when you do have the opportunity to document a key business relationship- a vendor, a customer, a business partnership, for example- it is important to know what you need to include.    Whether you do it yourself or hire a lawyer to help you, when you write a business contract that you intend to be legally binding, there are some key elements that you should consider from your first discussions to the final legal document.

What is a Business Contract?

A business contract is nothing more or less than an agreement to exchange one thing for another- money for a service or product, investment of time or money in exchange for sharing the profits and losses of a new business venture.  The truth is you make contracts every day and don't even think about it.  When you hand your money, debit card or phone to the person at the coffee shop and walk down to the end to wait for your drink, you have, in probably less than 20 seconds, made a contract that in exchange for your money they will give you coffee.

In your business, there are countless types of contracts that are similarly straightforward- your routine purchases, subscriptions, etc.  And there are some types of contract that are not necessarily straightforward, but that you have very little control over.  Examples include your phone and internet services or the "clickwrap" agreements you must accept when buying software or software subscriptions.  ​
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There are other places, however, where it is important to pay attention to your business contracts, both to protect yourself legally but also to make sure they are accomplishing your business goals in the transaction. Having a business lawyer review your agreements can help make sure you are covered.

Contracts With Customers or Clients

​Surprisingly, though this is one of the most critical set of relationships in your business, many small business owners give little thought to how they are documenting their terms of engagement with customers.  Let's say your business involves retail transactions, like the coffee shop example, in which you are exchanging a product for the payment of money.  You are obviously not going to slow down that transaction by signing a contract every time you sell something. But if what you sell or provide is any more complex than that, you should consider documenting the terms in a contract or agreement.  It doesn't have to be complicated, or dozens of pages long, but you want to be sure you have covered the basics:

• How you get paid and what are your rights if you aren't paid
• What it is you are agreeing to provide or do
• What is the expected time frame for providing the product or service
• What is the customer supposed to do if they think you haven't done what you agreed to
• When and how can the relationship end
• Do you want an agreed way to resolve disputes (arbitration or mediation, or a specific court).

It is also important to think about how your contracts will appear to your prospective clients- too much legalese or fine print might protect you legally, but could turn off your prospective clients.  We can help you write a business contract in plain language that everyone can understand, but that still covers these basics.

Contracts With Vendors

If you have a vendor you can negotiate with (examples include people providing website, marketing, design, recruiting, or other customized services), you should cover the same bases as with customer contracts, but also:​

• How long is your commitment to them
• What are your expectations in terms of deliverables and rights to terminate or renegotiate if those expectations are not met
• If they are creating content or other materials for you, who has the right to control and use those materials after the contract is over.

Of course, some of these contracts are not really negotiable.  Many large companies have boilerplate terms and conditions that all of their customers have to sign, and are not really open to "redlining" those terms and conditions.  You probably don't need to call a lawyer every time you click on the "I agree" button to a software license, or sign up for phone or internet service.  If you are making a large or unusual investment, however, even if the terms and conditions are non negotiable and legally binding, you may want to get advice about the pros and cons of those terms from a lawyer before making that investment.

Business Partnership Contracts

Many small businesses are involved in numerous kinds of partnerships, ranging from a formal partnership between co-owners of a business to informal alliances in which two or more separate businesses team up to take advantage of a business opportunity and share profits and losses, whether they formally share ownership interests or not. 

What a lot of business owners fail to appreciate at the beginning is that both success and failure can test your relationships and put a strain on the business partnership you entered with high hopes and optimism.  If there is suddenly a lot of money involved, or if the business venture is struggling, you may find yourselves disagreeing about things you always thought you would work out later.  Many expensive and disruptive disputes have arisen due to lack of clarity about the scope of these relationships when the agreement is first reached. 

In addition to clarifying ownership interests and division of profits and losses, here are some things that should be clear and documented in all partnership agreements or operating agreements: 

• Who makes the day to day decisions, and if you have a 50/50 relationship what happens if there is an impasse
• How are major decisions made
• What happens if one of you wants out and the other(s) want to continue the venture
• ​Who owns the assets of the venture if it terminates (including customer relationships, goodwill, and intellectual property).​

How to Make a Business Contract

Whether it is a customer agreement, vendor contract, or any other types of contract, here are some steps you will need to take before you (or a lawyer you retain) write a business contract:

• Make a list of the key terms and share them with the other party.  This does not need to be formal or fancy- it can be handwritten on a piece of paper, sent as a list in an email, or even written on a napkin at a restaurant.  The important thing is that you agree on what you are agreeing to.  Key terms at this stage include what is being provided at what price and how long you expect the relationship to last.  Unless you feel you need help negotiating the substance of these key terms, you generally do not need a lawyer involved at this stage.
• Once you agree on key terms, confirm them in some kind of document.  You can use a term sheet (a simple bullet point list signed by all parties), or a Memorandum of Understanding.  A term sheet can be a simple bullet point list signed by all parties.  A Memorandum of Understanding a simply a slightly more detailed description of the agreement, usually with a date by which the final agreement will be signed.   "Signed by all parties" in Massachusetts can include email acknowledgment or consent.
• Draft the agreement: this is where it is most advisable to get a lawyer involved, to make sure that the words you use mean what you intend them to mean and would be read by a judge to mean what you intended them to mean, and to reduce or eliminate any ambiguities in the contract that could lead to disputes later on.
• Do not rely on internet templates:  Really, do not.  They may be perfectly good agreements (and many are written by lawyers), but if they are not written with your specific situation in mind, you may be including terms that you never even considered, let alone agreed to, and they may leave out things that are important to you.  They also may include things like alternative dispute resolution provisions that you should not include unless you fully understand them and unless they really reflect what you want.  ​​

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How slnlaw Can Help

Getting a business lawyer involved with your contracts does not mean you are doomed to drown in densely-worded, incomprehensible legal documents.  We understand that your contracts are not just legal documents but documents that can help set clear expectations- that means they need to be readable by regular people.  We can help make sure you have the essentials documented, so that you can do what you went into business to do without worrying about ambiguities in one of these key relationships.

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