Importance of Contracts for a Small Business Owner

 The importance of a contract for a small business owner

In any ordinary course of business, contracts are what keeps the business together. A contract is formal agreement between parties agreeing to certain terms. A contract can present itself in many forms ranging from employment offers, purchase orders, settlements, etc.

Why do I have to use contracts?

You may ask yourself “why do I need a formal contract? Why not just an agreement between two friends?” In a perfect world, an oral agreement would be sufficient. However, what if one of the parties goes back on their word and claims that’s not what was originally negotiated. Therefore, having a contract on paper can protect you.

Let’s take an easy example, let’s say Bob wants to buy five shipping containers from Gary at 5$ each and to be delivered in 3 days. Let’s Pretend the Bob and Gary are lifelong buddies and they don’t form a written contract and they just orally agree and shake on it. So now let’s fast-forward a week and the shipping containers still haven’t arrived for Bob, the buyer. Bob is going to be mad because he lost business because the product was never delivered as it was agreed upon by Gary. Now Bob calls Gary and says, “hey buddy I thought we had an agreement you were going to send me the shipping containers in 3 days.” Gary says, “we didn’t say 3 days we said 30 days, so I’ll send it to you within 30 days.” They only had a handshake and no formal contract with the terms written down, therefore it would be very difficult for Bob to sue Gary for breach of contract.

Breach of Contract

The benefit of having a contract is if there’s ever a dispute you can just look at the contract and see what the terms are. The party that has violated the contract can be liable for breach of contract. Breach of contract is a simple claim where the person who feels the other person violated the terms of the contract, can sue the other party. In the example above had Bob and Gary signed a contract with delivery in 3 days, Bob could sue Gary for breach of contract.

That is why we recommend all small businesses no matter how small the purchase is to get it in writing so that you could protect yourself and your business. I have dealt with previous people in the past who the moment I say let’s sign a contract they either get scared or suddenly they don’t want to go through on the contract. They may respond with “oh why don’t we just agree upon it without a contract.” This should raise a flag to you because a contract is there to protect both parties. In law school they called it a meeting of the minds which essentially means two parties are coming together to meet, agree on something and sign on it. If someone does not want to be bound by a contract they may not be someone you want to do business with and you should proceed with caution.

Contact a Small Business Attorney to help you with your current situation. We can walk you through and make sure you are doing what is best for your company.