by M. Elizabeth Sassano, MSN, JD
of Roeca Haas Hager LLP
Despite the fact that we are surrounded by contracts in our daily lives (e.g., car leases, mortgage documents, insurance policies, etc.), many small business owners fail to recognize the importance of a well-crafted contract in their business operations. Perhaps it's the dizzying fine print and legalese of the aforementioned trio that makes people want to flee the room as soon as the "C" word is mentioned. Or perhaps it is simply a desire to demonstrate a more customer-friendly, laid-back approach that leads them to conduct business by means of oral promises, handshake deals, and memos jotted on cocktail napkins. Whatever the reason, the failure to commit one's agreement to a carefully crafted contract can lead to disaster.
Why Do I Need a Contract?
A good contract is like insurance. You don't need it until trouble arises, but when it does, you'll be glad it's there. It's a fact of business life that parties to an agreement rarely thinks about - and virtually never look at -- the signed contract as long as the relationship is proceeding smoothly. When a disagreement arises, however, they immediately head for the contract. A well-written contract that memorializes the agreement of both parties can short-circuit the misunderstandings that can ruin client relationships and professional reputations. It provides concrete evidence to counteract the "I said/they said" accusations that are so often born of faulty recollection.
A contract manages expectations by clearly outlining the rights and duties of each of the contracting parties. Both sides know from the outset exactly what is expected of them. A good contract identifies not only the product or service to be provided, but also how, when, and where it will be provided -- and for how much. It also addresses relevant ancillary issues which may include items such as delivery, warranty, and/or maintenance.
Contract terms should be stated with as much specificity as possible. In discussing price, for example, a good contract will specify, in addition to the cost of the goods or services, how and when payment is to be made, and the consequences of non-payment. A contract should also identify what you expect from the other party. Terms addressing client cooperation, preparation, and non-solicitation of employees are commonly included in both sales and personal service agreements.
Proposal vs. Contract
Often vendors who recognize the importance of a written document try to avoid the contract conundrum by substituting a proposal for a contract. This is a well-intentioned, but short-sighted approach. A proposal is, in essence, a promotional document. Its purpose is to induce the client to select a particular vendor or service provider. A good proposal not only demonstrates what the company can do for the client, but also shows how and why the company outshines the competition. To this end, proposals often include extensive background and marketing information. Moreover, in order to demonstrate the vendor's flexibility and willingness to work with clients, proposals often include multiple service and/or pricing options. Provisions such as these weaken the structural integrity of a business contract.
Contracts must be clear and unambiguous. Extraneous information and imprecise terms should never be included. Similarly, sales hype or "puffery" has no place in a contract. Phrases like "state of the art," "finest quality," and "best possible service" are fine in a proposal where the company is describing what it strives to provide its clients. In a contract, however, these phrases become legally binding promises which can subject the company to breach of contract claims if they are not met.
Finally, proposals are inadequate as business contracts because they generally do not contain the boilerplate provisions (governing law, notice, force majeure, etc.) that are an integral part of all well-crafted contracts.
Generic form contracts can be purchased in most business supply stores and through on-line resources. Although tempting in both convenience and price, they are not recommended. As with clothing, one size rarely fits all - or even most. In order for a contract to be an effective business tool, it must be tailored to meet the needs of the business owner and to reflect the transaction that is the subject of the agreement.
Think of a contract as an omelet. There are certain items - the eggs - that will always be present. Even here, however, there is room for variation. How many eggs should I use? Whole eggs or whites only? Next, there is a kitchen full of possible add-ins. Depending upon the circumstances, some may be more appropriate than others. It is hard to imagine that the addition of chocolate syrup would ever be a good idea. On the other hand, a little ham and cheese could make a perfectly delicious treat—unless you are serving an orthodox Rabbi.
Such is the case with contract provisions. What may be right for one business or situation may be totally inappropriate for another. Much depends on the nature of the business, the type of transaction, the product or service being offered, and, even, the other party to the transaction. It is critical that the final document promote the specific goals and objectives of the transaction while protecting you and your business from the risks associated with it. It is unlikely that a generic form can accomplish this task.
While off-the shelf form contracts rarely work, a customized template can be an extremely effective tool in your business arsenal. One of the benefits of creating a customized business contract is that the document can be crafted to serve as a template for all similar transactions. Re-using the same basic document will save time and money while promoting consistency in your business activities. Although the specifics of each transaction -- price, deliverable, date, etc - will vary, these items can be specified in an appendix which is attached to the template. Such an approach gives a simple, consistent, and legally sound framework for structuring similar transactions.
There is a tendency among non-lawyers to think of contracts as nightmarish documents filled with incomprehensible language. Business owners fear that clients will be "turned off" or intimidated by such documents. This fear is unfounded. A contract does not have to comprise reams of fine print and Latinate prose order to accomplish its purpose. A carefully-crafted contract, written clearly in plain English, can be just as effective - and in many cases even more so - as one over-burdened with legalese.
Far from being offended, savvy clients will be favorably impressed by a business owner who presents a professionally drafted contract to memorialize their agreement. They immediately recognize that they are dealing with someone who is attentive to detail and takes her business seriously. They also realize that this attitude is likely to be reflected in the company's products and services. On the other hand, an owner who presents an off-the-shelf form or an amateurish cut-and-paste document may be viewed as someone who will cut corners and provide slip-shod service.
An Investment in Your Business
A business contract should be drafted by a qualified attorney. Look for someone who has experience in contract drafting and negotiation. Make certain that your lawyer has taken the time to fully understand the nature of your business, the scope of the transaction, and your strategic objectives before he or she begins work on the document. While it is true that retaining counsel to draft a contract for you will add to your overhead, this is money well spent. A solidly crafted contract can help you focus your business goals, preserve your client relationships, and protect your company's assets. In short, the money you spend in developing a customized business contract may be one of your best investments.
M. Elizabeth Sassano is a partner with the firm of Roeca Haas Hager LLP (www.r2hlaw.com) where she specializes in providing outside general counsel services, including contract preparation and review, to business clients. She may be contacted at [email protected]. This article is intended for general informational purposes and is not to be considered legal advice.