by Taryn Blignaut
This article sets out the importance of having a written agreement to regulate your transactions as a small business. We also cover some of the benefits of putting in place a customised legal template for your business.
Record-keeping
The most obvious reason why you need a written contract is that you need proof of your agreement. If a verbal agreement is all that you have, how do you prove what was agreed and prevent the other party from simply denying an important term of agreement or the entirety of the agreement when it suits them to do so. How do you prevent ‘scope creep’ for example? If a dispute arises between the parties, it is almost impossible to resolve this if there is no written contract to regulate what was agreed in the first place. You also need to be able to refer back to your contract in order to remind yourself of contractual terms agreed, especially when your business starts to grow and you have several client relationships to manage.
Clarity and Mutual Understanding
A well-drafted contract outlines the terms and conditions agreed upon by both parties, leaving no room for ambiguity. In order to draft such an agreement, the parties are forced to consider everything upfront, set exact expectations, obligations, payment terms, service levels and deadlines. This ensures that there is a ‘meeting of minds’ before any services or goods are provided. Clarity ensures that there is far less room for disputes arising in future, and if disputes do arise, there is a clear method of dispute resolution set out in the contract itself. It also requires some effort to bed down the terms of agreement and ensures that both parties are serious and keen to foster a positive working relationship of mutual respect. Contracts create professionalism and give clients and potential investors comfort that you take your business seriously.
Ensuring Payment
One of the primary concerns for any small business is ensuring prompt payment for services rendered or products delivered. A written contract specifies payment terms, including the amount, due date, and method of payment. It can also outline penalties for late payments, such as interest charges, penalties, retention of intellectual property or downing of tools pending payment. The contract can include additional clauses to ensure that legal process to recover payment is made easier, such as a ‘liquidated claim’ clause and a clause agreeing to mediation, arbitration and magistrate’s court jurisdiction for the resolution of disputes at a much more affordable cost than high court litigation.
Limitation on Liability
If you do not limit liability in terms of a written contract, the common law applies as the default position. Depending on the types of services or goods that a small business is supplying, there may be a high risk of liability under the common law. For example, it may be that your business opens itself up to liability for indirect losses such as a loss of profits caused by your negligence. Not only does this open up a business to unknown financial risk, it will necessitate costly litigation to determine the amount of liability. If a written contract is put in place, the parties can agree to liability limits such as liability caps, liability for direct loss only or liability limited by insurance.
Legal Protection
Unfortunately, disputes do arise. For small businesses, which may not have the resources to engage in prolonged legal battles, having a written contract can be a lifesaver. It can protect your business from liabilities and provide for more affordable dispute resolution mechanisms such as mediation, arbitration and summary judgment (where the amount owed can’t be disputed). Without certain clauses in an agreement, your only recourse may be high court litigation which is bound to cost hundreds of thousands of rands and take years, meaning it makes no financial sense for smaller debts and creates a lengthy and stressful process to recover large debts, putting your business at risk.
Customise your contracts
The problem with small business owners making use of legal templates is that they don’t know what they don’t know. Key clauses required to protect a particular business may be missing and they won’t know this until legal issues arise. Legislative references in legal templates are often based on offshore law (usually the United States which does not have laws similar to South Africa).
Legal Ninjas is a strong advocate for customising your contract to suit your specific business requirements and to mitigate specific risks. For instance, you may need to include a non-circumvention clause if you want to ensure that you are not bypassed once you introduce a client to a third party service provider. There might be intellectual property that you need to protect. If you sell products, you may want to include disclaimers or limitations on warranties to reduce potential liability. Customizing contracts ensures that every aspect of your business is covered and risks are reduced. Having a customised contract ensures consistency across various client relationships, ensuring that your business is scalable.
Conclusion
In conclusion, written contracts are essential tools for small businesses. They provide clarity, legal protection, and ensure that you get paid for the work you do or the goods you provide. By using contracts, you can build trust with your clients, demonstrate professionalism, and protect your business from potential risks. Whether you are just starting out or looking to grow your business, incorporating written contracts into your operations is a smart and necessary step towards success. Don’t underestimate the power of a well-written contract – it is one of the most valuable assets your small business can have to ensure scalability and sustainability.
Taryn Blignaut is the founder of Legal Ninjas, an online legal consultancy which provides high quality, affordable legal services to SME’s by matching experienced, remote-working attorneys with clients that can’t afford traditional legal fees.
Taryn herself is a commercial attorney from Cape Town with 15 years in post-qualification experience, having worked in-house for global, listed asset managers Ninety One and Coronation Fund Managers. She is passionate about helping small businesses flourish.