Types of Contracts in Business
Sometimes the type of contract you are looking for in business is not the type of contract you need.
Just this last week I had a client come to me with a template contract they had downloaded, and a business proposal they wanted to pursue. The problem was, the type of contract they had downloaded was a partnership agreement, and it really wasn’t suitable for what they wanted to achieve.
You see, a partnership agreement creates all sorts of interesting obligations on the people involved and is really only suitable for a long-term collaborative business and not for the development of a side hustle or project. Traditionally legal, accounting and medical practices were set up as partnerships. In a partnership, you can become personally liable to pay for the obligations of the business, even if you didn’t know they had been created. In a professional partnership, if someone takes off with client money, the other partners can be made to replace those funds, even though they did nothing wrong. Not the type of contract you want for a short-term collaboration.
For a side hustle, or collaboration to develop a digital product like an App, or a live product like a training program, or a physical product like an artificial hand, you are looking to create a joint venture. So, the type of contract your after will be different from a partnership agreement and can keep the obligations of the parties separate.
There are all sorts of different types of contracts, and downloadable template might cover what you need, but it also might not. We like to work with our clients to identify the solution they are looking for and then craft a document to fit, rather than assuming your business is just like everyone else’s.
Here are some of the variables in different types of contracts:
Written, verbal or partly written and partly verbal contracts
Contracts don’t necessarily need to be in writing to be binding. You might have created a binding contract simply through a video conference, an exchange of messages on a platform like Slack, or a combination of emails and phone calls.
The beauty of having a written contract is keeping a record of what you agreed in the first place, so that if any questions arise a year down the track, you can check back and see how you covered off that scenario.
There are definitely some contracts that do need to be in writing to be binding. A type of contract you might have come across in business is a personal guarantee. Personal guarantees do need to be in writing, and properly signed to be enforceable.
Standard form contracts
Love them or hate them, standard form contracts are designed to help make business easier for everyone, not harder. At least, they should be designed to make business easier.
As a business owner, its time consuming and unproductive to create unique contracts every time you deliver the same product or service. Standard terms give you a level of comfort so that you are clear on your obligations, and your expectations of your customer, every time you complete a similar transaction.
For customers, if standard terms are easy to understand, they know what to expect each time they deal with you. Just keep in mind that a standard form contract can still be open to negotiations. You need not lose a customer just because they don’t like your standard terms. You can be flexible, and we can help you with that.
You might not pay too much attention to all the ‘I agree’ check boxes you find online, but perhaps you should. Each time you check one of those boxes, you are entering into a contract, whether you read the terms or not.
There have been court decisions where people have protested that they should not be bound by terms attached to check box because they didn’t read them. The courts have, to date, been in favour of pointing out that you had the chance to read them, and if you didn’t take that chance at the time, that is your responsibility and your problem.
Click-wrap contracts are simply standard form contracts that you agree to electronically, although they are generally not negotiable. The more action you have to take to give agreement, such as not being able to agree until you have scrolled through all of the terms, can support an argument that they should be binding.
Doing business online is a convenience for everyone, and the volume of transactions that can be processed that way, and the variety of products and services you can access online, means it’s not unreasonable for a business to suggest you agree to their contract terms, or go elsewhere.
Website Terms and Conditions
Terms and conditions on a website may or may not be binding, depending on the circumstances. If you hide them away where they are hard to find (and I have seen a retail website do this) then they are unlikely to be binding. Courts are particularly interested in whether a consumer or purchaser has had the opportunity to read them first.
The severity of any provision in your terms and conditions will make a difference too. For example, if a website owner is attempting to say that just by browsing the information on the website without any further action, you are liable to pay $100, then that is not going to be enforceable because you haven’t had a chance to become aware of that term without first accessing the website.
Remember too, that trying to impose new terms and conditions retrospectively is not going to work either. If something happens and you change your website terms, the updated terms will only be binding on users after the update, and not before. This is one reason to keep “last updated” dates on your website terms, and a record of historical documents.
Purpose of a Contract
The purpose of your contract is likely to influence how it is structured.
If you want something from someone, the contract will be structure to achieve that, and if someone wants something from you, the contract will be structured differently.
We had prepared a contract for a client’s business to meet their needs. They received feedback from a business consultant (not a lawyer) that they could save money and simply copy the consultant’s contract and it would be fine.
The client was good enough to send us the consultant’s contract with his feedback.
Our client wanted to employ contractors so that they could expand the area where they delivered services. Things like the protection of their intellectual property and the quality of service delivery were really important to them. We wrote the contract to fit.
The consultant’s contract was written to favour the way he delivered services to people and protected his interests, including limiting his responsibility for the services he delivered.
That was the opposite of our client’s needs.
They needed their contractors to be responsible for the services delivered, and to fix problems promptly if they arose. If they had copied the consultant’s contract, they would not have been able to demand the level of quality they needed from their contractors.
Not all Contracts are Legal
It is worth keeping in mind that not all contracts are legal. A contract that amounts to human slavery is not going to be enforceable. A bet between mates in the pub is unlikely to form a binding contract. Contracts between businesses might include terms that heavily favour the stronger party, and those terms might be open to challenge as ‘unfair contract terms’ at law.