Why SME’s need contracts

Just like a person avoids drafting a will (because it’s a concession to mortality), some business owners avoid concluding contracts (with employees, suppliers, freelancers, etc.) because they think this is negative and anticipates problems.

Properly drafted contracts do not create problems -- they solve them. Written agreements are essential for a good working relationships with providers, vendors, partners and clients or customers.

Why do contracts make sense?

1. They provide certainty.

A well-drafted contract clearly sets out each party’s expectations. It helps both parties focus on their business relationship and removes any uncertainty about their respective rights and duties.

2. Contracts outline obligations and remedies.

Parties need to know what their obligations to each other are and what the consequences of failing to perform (breach) may be.  E.g. the contract may state that if one party sues the other and wins, the loser pays all the costs.

3. They provide alternative remedies.

The contract should provide for alternative dispute mechanisms, such as an obligation to first meet to attempt to resolve thorny issues, and that failing, to mediate the dispute or go to arbitration. Usually this avoids lengthy and expensive litigation and may even restore the trust relationship between the disputants.

4. Contracts help you end the business relationship.

The contract sets out when and how either party can terminate the contract (e.g. after a material breach, a specific time period, etc). This creates certainty.

5. Contracts anticipate the unforeseen.

A commonly included clause in business contracts is the “force majeure” or the “act of God” provision. This clause in a contract sets out the parties’ obligations and rights in the event of an unforeseeable event, such as a natural disaster, or any other circumstances beyond their control that makes it unreasonably difficult to perform under the contract.