When a client comes to see me about starting a business, we always talk about the essential contracts their business needs.
Initially, they can be reluctance to spend money on them and often ask “Can’t I just download them from the net?”
I fully understand that money is tight and clients are keen to keep costs to a minimum wherever possible, but this is an area where cutting corners usually proves to be a false economy. Legally binding contracts are the foundations of your business and as I’ll explain, having solid foundations in place is one of the best investments you can make for the future.
Developing products, investing in equipment, spending on advertising and the many other things your business needs may seem more important than the “boring legal stuff”, but trust me, they aren’t.
Unless you get the legal’s right, everything else you spend your money on will be a waste of time.
So, why do you need contracts?
Verbal contracts are legally binding and clients often tell me they will only do business with someone they trust, so a handshake is all they need. This, I’m afraid, is a very naïve approach to take and means that they don’t fully appreciate the benefits of preparing written contracts.
Contracts serve several important purposes. They’re a record of what you and who ever you’re working with have agreed. They help you comply with the law and they help you avoid misunderstandings that could lead to costly disputes.
Contracts can also help protect you if the person you’re working with doesn’t comply with the law, tries to steal your ideas, poaches your staff or doesn’t hold up their end of the bargain.
To be able to do this, contracts need to be legally binding. If they’re not, you may not be able to rely on them to protect you when you need them most.
However, this doesn’t mean they need to be long and complicated. But they do have to comply with certain formalities. In basic terms, for a contract to be legally binding one party must offer to do something (e.g., supply services), the other party must accept that offer and there must be some consideration, i.e., an exchange of value – normally money.
If any of these elements are missing, you won’t have a valid contract.
Also, both parties must be clear on the terms they have agreed. With a handshake deal, I can almost guarantee the finer points of the agreement won’t have been considered or even discussed. This can lead to disputes, especially when the results aren’t as expected.
When two people sit down to negotiate the terms of a written agreement they reach a much greater clarity over what they are agreeing. Contrary to popular belief, this doesn’t indicate mistrust. It’s a vital exercise to ensure that you’re both in full agreement, to avoid misunderstandings and prevent disputes.
A common situation I come across is that one party thinks they have a legally binding contract and starts working on a project. They submit their invoice for the first instalment of work completed but their client doesn’t pay and denies agreeing to anything. A dispute then ensues which I am called in to resolve. Have you ever been in this situation? You can read more about this in the case study below.
I’ve explained why contracts are so important for your business, but what contracts does your business actually need?
The 5 contracts every business must have
The contracts that your business needs will depend very much on the type of business you’re running and the stage it’s at. For most businesses, the contracts discussed below will be all they need to cover 95% of situations.
Standard terms and conditions of business
If you go into a shop to buy something, you won’t have a written contract with the owner but you will have a legally binding contract with them.
So why do most lawyers advise you to have written standard terms and conditions of business?
When you go into a shop to buy something, the transaction is very simple. You know what you’re getting, how much it is, who you’re buying it from, you can pick it up, look at it and check the quality. This enables you to make an informed decision about what you’re buying.
You don’t have a written contract with the shop but you do have a verbal contract that is formed when you make your purchase.
It’s all nice and simple, or so it seems.
What you probably don’t think about is the notice behind the till about the shop’s returns policy that forms part of your contract. There’s also a vast amount of consumer legislation in place. This protects you and fills in the gaps that have been omitted from the verbal contract you entered into.
If you provide a service, it’s much more difficult for your clients to have complete clarity of what they are purchasing before you have actually provided the service. Written standard terms and conditions of business will provide this clarity. They can make it quite clear what service you’re providing, whether the result is guaranteed or just a target, your payment terms, and many other details that are specific to your business and the services you provide.
Standard terms and conditions of business can also save you time because you don’t need to prepare a new contract for every client or piece of work. The same terms will apply for each new piece of work you carry out (so long as your client has been properly made aware of them beforehand).
This also means you can authorise your staff to agree contracts subject to your standard terms, without them having to consult you, as the business owner, every time.
If you’re selling your products or services online, having standard terms and conditions is essential because you won’t have direct contact with your clients and they will help you comply with your legal obligations under the eCommerce regulations.
If you don’t have standard terms and conditions for you business, or they have not been updated in a while, you could be putting your business at unnecessary risk. To find out more, please read our related blog by clicking on the link below.
Related content: Blog – Why use standard terms and conditions of business?
Shareholders / partnership agreements
If you jointly own your business with other people, you should have a contract in place clearly reflecting the agreement that has been reached between you about how your business will be owned and controlled. If you have set up a limited company, you will need a shareholders agreement. If you are running the business as a partnership (including an LLP), you will need a partnership agreement.
If you’re working with family members or close friends, having these contracts in place is even more important to avoid any misunderstandings that could come between you and ruin your personal relationship.
When starting the business, each of the founders may be making different contributions. One may be contributing cash, the other expertise. One may own intellectual property rights, the other may provide equipment. One may be working part time in the business, the other may be full time.
It’s also very easy to assume that everyone is involved in the business for the same reason, but the reality can be very different.
The shareholders or partnership agreement will confirm the contributions of each of the business owners and set out how the business is to be run. However, in my experience, the true value of a shareholders or partnership agreement comes in its negotiation. By having all of the parties sit down and talk through the issues, everyone knows exactly where they stand from the start and this helps avoid disputes later.
To find out more about shareholders and partnership agreements, please read our related blog by clicking on the link below.
Related content: Blog – Do I need a shareholders or partnership agreement?
NDA’s / Confidentiality agreements
Sometimes you will want to discuss your ideas with someone else, perhaps a potential business partner, a client or a new supplier and you need to make sure they don’t steal them for themselves.
You can protect your ideas by first entering into a confidentiality agreement (sometimes know as a non-disclosure agreement or NDA). An NDA creates a legally binding obligation to keep what ever is disclosed confidential and gives you the right to claim compensation if that confidentiality is breached.
Sometimes it makes good commercial sense to enter into a confidentiality agreement but sometimes it’s essential. For example, if you have invented a new piece of technology and think that you may be able to obtain a patent for it, it’s vital to keep it confidential. If you discuss how your technology works without entering into a confidentiality agreement, you may be prevented from registering a patent later.
To find out more about confidentiality agreements, please read our related blog by clicking on the link below.
Employment, consultant and freelancer agreements
When you’re ready to take on your first employees, you should speak to a solicitor as there are many laws and regulations to comply with. Having proper contracts of employment and all the necessary policies in place to accompany them is the best way to ensure you comply with your legal obligations as an employer.
If you have any problems with your staff and you need, for example, to take disciplinary action against them, having proper contracts and policies in place will help you deal with the situation fairly and avoid the employee bringing a claim against you.
Sometimes you will need someone to work for you on a short-term basis or on a particular project but you don’t want to employ them. You could, therefore, take on a freelancer, consultant or a sub-contractor.
In many ways, the contracts with consultants, freelancers and sub-contractors are similar to employment contracts. For example, you will say how much you are going to pay them, what their duties are and you may even specify what hours they work. But, there are significant differences too. For example, there’s no need to give them holiday pay and you might not owe them the same obligations if they are off sick.
A word of warning! If you take on a subcontractor and they are creating any form of intellectual property for you. For example if they are doing any design work or writing code, you must have a written contract in place. If you don’t, you wont own the intellectual property they create – even if you have agreed you will. This is because intellectual property rights can only be transferred by way of a written contract signed by the creator.
When you’re ready to take on your first employees or consultants, or if you have problems with existing employees, please give us a call on a no obligation basis to see how we can help.
These days, almost all businesses have a website and this creates a number of legal issues you need to consider.
For example, you will want to protect the contents of your website from unauthorised copying. If you’re providing information and advice, you will want to limit your potential liability if someone acts on it. If you’re collecting any personal information, e.g., names and email addresses, you will need to comply with the Data Protection Act 1998.
Many people think these are just standard documents and give them little thought. They think they can just copy these from another website and this will be good enough. However, this is a dangerous game to play. To find out why, please click on the link below.
What are the risks to your business if you don’t have legally binding contracts in place?
If you don’t have legally binding contracts in place, the consequences could be disastrous.
You could lose everything.
Say for example, you don’t have a written contract with a freelancer who has designed all of your branding. Quite simply, you won’t own it! Your brand may be your single most valuable asset, and it won’t be yours because the law says that intellectual property rights can only be transferred by way of a written contract that has been signed by the transferor (the designer).
Even if you agreed verbally with your designer that everything they create is yours, this won’t be valid!
If you tried to franchise your business you wouldn’t be able to give a valid licence of your brand.
If you tried to sell your business your brand couldn’t be one of the assets.
If someone copied your logo or brand name and you tried to sue them, they would have an easy defence against you by saying – “but it’s not yours so I’ve not infringed any of your rights!”
What happens if you don’t have a shareholders agreement in place?
I’ve seen too many best friends fall out when they want their business to go in different directions. If the shareholders have a dispute that can’t be resolved amicably, one will normally buy out the other. If you can’t afford to do this, or you can’t decide who will own what after the assets are split, the only option left is to wind up the company.
A shareholders agreement can prevent this.
How about a disgruntled customer?
They were expecting a certain ROI from the social media marketing campaign you ran for them. You thought it was a target but they thought the result was guaranteed. As a result, they try to sue you for lost profits. Standard terms and conditions could prevent this by clarifying what had been agreed and limiting your liability if targets were not met.
Even if these situations are not fatal to your business, I can guarantee that they will be far more costly in terms of time, money and stress to resolve after the event than if you invested in having legally binding contracts prepared in the first place.
If you would like to find out more about resolving disputes in your business, please click here.
What if your circumstances change?
Once you have a legally binding contract in place, it doesn’t necessarily mean it’s set in stone. Sometimes, you put a contract in place with the best intentions but something unexpected happens. As a result, you need to change it or bring it to an end early.
Most written contracts contain provisions explaining what to do if you want to make changes to the contract or terminate it early. It’s important that you follow this procedure because if you don’t, you could be the one who is sued for breach of contract, even if it’s the other party in the wrong!
Negotiating changes to a contract or terminating it early can be stressful, especially when something has gone wrong and the relationship has broken down. If you’re relying on a verbal contract and you’re no longer on speaking terms with the other party, this will be almost impossible (so this is another advantage of having written contracts in place).
For more advice on how to negotiate changes to a contract or to terminate it early, please click on the link below to read our related blog.
Related content: Blog – How to terminate a contract without being sued
Where’s the best place to get these contracts and ensure your business is properly protected?
OK, we’re now agreed how important it is to have legally binding contracts for your business, and you understand the damage that could be caused to your business by not having them.
Where’s the best place to get them?
Some people try to save money by copying contracts from someone else’s website. But this is usually a false economy. It’s a strategy that will inevitably lead to problems that will be far more costly to resolve in the end.
First, you have no guarantee that the contract was prepared by a professional. Important points could be missing or simply wrong.
Next, you don’t know if the contract is up to date. The law is a living beast that changes and evolves so it’s important to keep your contracts under review. If you copy a contract from someone else, you will have no idea if it’s up to date and still valid.
A contract reflects the relationship you have with the other party so take standard terms of business as an example. Your way of working may be completely different to the person whose contract you copied. This could mean you’re immediately in breach of contract, if your client owes you money you won’t be able to recover it and you could be liable to pay compensation to your client, even if you do all the work!
Is that a risk worth taking?
Today, online template libraries are becoming increasingly popular. I’ve had a look at some and they vary enormously in quality. Some are very good but others, well, let’s say I wouldn’t put the fate of my business in their hands!
If you use a reputable template library you will be in a better position than copying something for free. If you’re experienced in preparing contracts, then the templates are a great starting point but they will usually require a fair amount of work to ensure they are ready to be used in your business.
Think for a moment about the time you’re going to spend trying to personalise it to your business’s needs. Could this time be better spent elsewhere? And are you confident you know what you’re doing? Always remember that as a director of the company you have a duty to act in the company’s best interests.
Leaving contract preparation to the experts is usually your best option.
When you’re deciding what to do, don’t just think about the cost, think of the value you are purchasing.
When a client comes to me to talk about preparing a contract, the actual preparation of the agreement is only a small part of what I do. What someone is buying is the benefit of many years of my experience. The opportunity to talk through ideas, to find out what has worked (or not worked) in the past for other people in a similar situation.
If you would like to find out more about the contracts you need in your business, please give me a call or send me an email. I’ll be happy to talk to you on a no obligation basis.