Contract law was a full-year course when I went to law school. While I found it fascinating, I understand that most people would rather spend all day washing dog saliva out of empty food toys. But, as a business owner, it’s important that you have a basic understanding of what a contract is, what it does, and when it is important. Here are some basics.
What is a contract?
At its essence, a contract is a promise to do something in exchange for payment or something else of value. For example, you agree to provide dog training services and your client agrees to pay you $1,000. So long as both of you understand what you are agreeing to, that’s basically all it takes to form a contract. (Can you tell I’m being lawyerly here, using modifiers like “essentially” and “basically”? Remember, there are nuances; I’m simplifying here so I don’t put you to sleep.)
Any agreement between two people can be a contract, and for most kinds of contracts there does not have to be anything writing.* This makes sense, if you think about it – if you provide the dog training services worth $1,000, and then the client doesn’t pay you, that would not be fair, and our (capitalist) society couldn’t operate if that were permitted. In theory, you could file suit against the client and if you convince the judge that the client agreed to pay you $1,000 for the services, and you did the services, and they didn’t pay, the court could rule in your favor and order the client to pay.
Are you saying I shouldn’t put anything in writing?
No. Ask any lawyer, and they are going to tell you to “get it in writing.” That’s because when lawyers get involved, there has usually been some dispute or disagreement about what was agreed to. When all goes well, no one cares if there was a written contract. It’s when there’s a problem that we want to look back at what was written and said.
Remember, in our example above where you are suing your client for $1,000 you have to convince the judge that the client agreed to pay that amount for the specific services and that you did what you promised. If there is nothing in writing, you can tell the judge what happened, but so can your opponent. The stories are going to be different, and the judge has to decide who to believe or not.
To avoid disputes, it’s important to put the terms of your agreement in writing. But the fact that it’s in writing isn’t the thing that makes it a contract. It just makes it easier to prove what terms the parties agreed to.
You still haven’t told us what needs to be in it to make it a contract!
Again, the agreement itself – the promises you and your client make to each other — is the contract, the writing is merely evidence showing what the terms are. The writing can be as simple as a letter, an email, or an invoice. It’s even better if there is a response from the client, even if it simply says “sounds good.”
If a dispute comes up, you want to be able to show what the agreement was (“I provide these specific services, you pay this much, at this time”), and that the client agreed. The fact that you provided information to them, and they proceeded with your services, indicates that they agreed to your terms.
As a business, there is a lot of information to provide to your clients, for a lot of different purposes. Overall, give people enough information so they understand what they need to do and what will happen on your end. From a legal point of view, think about what kinds of disputes might arise between you and your clients, and what evidence you would want to be able to point to if a dispute does arise. Getting paid is the big one. What, exactly are you promising to do for your clients? When? For how long? Under what circumstances should you not have to continue? How much will they pay you? How will they pay and when? Under what, if any circumstances, should they not have to pay? Those are the questions that should be answered by your contract.
Because contracts become important when there is a dispute, lawyers put some other provisions in that are relevant to litigation. Those are beyond the scope of this article. And Waivers are a special breed of contract. For my discussion of Waivers see my blog post here.
* A few kinds of contracts do need to be in writing to be enforceable, including contracts having to do with land, like leases or deeds.
DISCLAIMER: This article does not constitute professional tax advice or legal advice. Consult with a tax adviser or legal professional if you have specific questions about contracts or any other aspect of business law.