Contracts: Why Your Should Use Them?
People often ask attorneys about contracts. Back in the beginning of business, a man’s word was his bond and many negotiations were settled with handshakes or an offer to have cocktails. Many generations of people believe that contracts are impersonal and unnecessary. Once, I had a client tell me that contracts are not “romantic.” My response was simple: “No, contracts are not romantic, but neither is litigation.”
Without contracts, your business arrangement is uncertain. Some believe that this is the benefit to operating without contracts. Without a contract, how can you be held to any standard of conduct? Well, the truth is that while there are no “certain terms” that a contract would dictate, if the other side isn’t protected, you likely aren’t protected either.
People also don’t want to use contracts because they are starting a business with a friend or engaged in a business arrangement with a friend. The best of friends can make the most litigious of litigants. Further, any business has the potential for conflict. If your business grows and you are expecting that if something were to go wrong, you could infer an oral contract and recover, then I hope you’re not in the state of Florida. Florida has an extremely low threshold for recovery for oral contracts. This means that if your claim is worth more than what Florida has dictated is the amount you could recover for an oral contract, then you may be out of luck.
The final reason why people operate without contracts is the notion that they are too expensive to have an attorney prepare. This is often when people will use google to find legal terms and place them in a document that he/she believes will cover him/her in the event that the business relationship breaks down. The problem with google and the internet in general is that you may be putting in terms that you do not fully understand or including terms which would not be appropriate in the forum in which you plan to use them, or worst of all, using terms that are not really legal terms at all. For instance, a business contract in Texas will look very different than a business contract in Florida. A Texas-based contract may be wholly unenforceable in Florida. In this situation, your business is not only unprotected by the contract, but you may be held to terms that were never intended simply because you used them in your “contract.”
The best course of action for a business is to properly file one’s paperwork to create the type of business that one plans to operate, such as a corporation or an LLC. When one files these, it is important to then have an Operating Agreement that will dictate the business agreement and appropriate terms that dictate how the business should be run. Most law firms will offer flat rates to prepare a business and set it up, including drafting an Operating Agreement that meets the individual needs of the business.
Next, one should have contracts for each aspect of his/her business. A caterer should have individual contracts for each of his/her employees with varying degrees of details for each individual. The dish washer’s contract should not look the same as the chef’s contract. Then the business will have contracts for sales purposes, marketing purposes, vendor contracts and any other applicable type of contract. Each individual piece of the business should involve its own unique contract. Many of the contracts will have their own individual terms and may have some general terms as well. All of these contracts should be kept organized and filed in a place where the business records are kept, as well as a backup of each of them in an electronic form.
This may all seem like too much, but in the long run, it’s better to be safe than sorry. When it comes to children, parents research daycares and schools, keep proper records of all pediatrician records and birth certificates, etc. Your business is like your child. If one wants to keep it safe, the best way to do so is to stay organized and use contracts.
The fear of the expense may be what holds people back the most. The expense up front will save you in the long run. Not paying for that contract at the beginning could cost your more than $30,000 in attorney’s fees in litigation, not to mention the enormous amount of stress and pressure that is often the result of litigation. Many law firms will offer flat rates to review a contract or even to draft one on your behalf. If you have a complex business plan and a growing business, it may be best to hire a law firm as your in-house counsel. This arrangement can often quash the fears and pressure of up front costs by turning them in to monthly payments.
In sum, any business, big or small should use contracts. If you are worried about your business, please contact us for your free consultation.