Business is all about relationships. Day in and day out, a business owner is coming to agreement with customers, employees and partners about how they will do business together. Although it may seem unnecessary, especially when conducting business with friends or family members, taking the time to document the agreement in writing is a sound strategy to reduce risk to the business and to save business relationships from becoming contentious.
Meeting of the Minds
First and foremost, a strong contract will be written in language that all parties understand so that there is less chance that one party interprets any of the sections in a way that the other party does not. In Arizona, according to long-standing case law, one of the required elements of an enforceable contract is mutual assent to the terms of the deal, or a “meeting of the minds.” An agreement may not be enforceable if there is no objective evidence – such as written notes, email communications, or a written contract, of course – to show that parties had the same intentions when they came to that agreement or that they truly understood the agreements between them in the same way.
A verbal agreement is much more likely to fall into this trap than a written contract. Just think about the times that you and a friend or family member agreed on something, only to realize later that you were actually thinking about different things.
- Have you ever agreed to meet at a restaurant, but each of you went to different locations?
- Have you ever lent money, thinking it was a loan while they thought it was a gift?
In these instances, there was no “meeting of the minds” and likely no objective evidence to prove both parties had the same intention. In business, this kind of ambiguity can have significant implications – both in cost and time. Documenting your business agreements in writing, in plain language understood by all, will greatly reduce the chances of this occurring.
A strong contract will include the essential business terms of the arrangement as well as any promises or representations one party is making to the other. This can include the items or services that one party delivers to the other, the price and payment terms of those items or services, and when it will all take place. If there is any warranty or guarantee, that should also be specified, along with the remedies in case one party does not live up to those promises.
Additional Provisions to Consider
Further, a strong contract will include legal protections that work in your favor. Consider including the following provisions to improve the level of protection the contract offers your business:
- definitions for “industry terms” used in the contract to reduce ambiguity should the parties not understand those terms in the same way;
- requirements for carrying applicable types of insurance to account for potential loss or damage of property or liability should someone get hurt;
- actions that might constitute a breach of the agreement and the remedies to which the non-breaching party is entitled;
- limitations of liability and indemnification provisions to shift liability to the appropriate party, should someone who is harmed try to recover financially from the party that’s not responsible;
- a required dispute resolution process, to use negotiation between the parties, mediation or arbitration to settle conflict as an alternative to filing a lawsuit; and
- governance provisions, including but not limited to waivers, assignments, notices, amendments, and governing law.
Keep in mind the above is not an exhaustive list; an enforceable contract will contain many additional critical provisions that are specific to your business and to the deal at hand.
In order to save on cost, some business owners may be tempted to use a template contract, perhaps found on the internet, for little or no cost. Such a contract has the potential to create more problems than it solves because it was not written for you. It’s very likely that provisions relevant to your deal, such as critical protections and liability limitations applicable to your business and how it operates, will be missing. Additionally, template contracts may contain sections that are not enforceable according to the law of the state governing the contract, resulting in a completely invalid or unenforceable document.
The Contract’s Primary Function
A well-reasoned contract serves as the guiding document for the relationship. Should a dispute arise, clear contract terms that dictate the steps to be taken to resolve the dispute are critical. When there is ambiguity, both sides may believe they are right and finding a middle ground may be impossible. People who previously were good business partners may say or do things, or circumstances may occur, that completely ruin the relationship. For example,
- What happens to a life-long friendship where one business owner wants to retire but believes the amount of money offered by her partner for the buyout is vastly undervalued?
- Do two businesses end up in litigation if a customer loses a significant sale due to the delayed delivery of product where severe weather conditions were the cause?
The terms of a solid contract can be used to work through the dispute and save the relationship.
Every business relationship is unique and the contractual needs vary greatly from one to another. Having the agreements between the parties decided in advance and memorialized in a strong contract will lay the groundwork for a long and mutually beneficial relationship and may save a valued relationship that has run into some complications.
If your business does not have current documentation related to your business relationships – whether with your customers and clients, your employees and contractors, or your partners and investors, schedule some time to talk with me.
NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.
By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
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