A contract is a binding agreement between two parties. It can be a written document or a verbal agreement. As a small business owner, creating contracts is beneficial, as they enable you to outline the expectations of both parties. That way, the agreement is mutually beneficial and understood by all involved in the sale of goods.
We’ve put together an in-depth overview of the steps you need to take to create a contract for your small business, as well as the legal documents you’ll need to enforce any business contract. Don’t forget, if you incorporate with Ownr you can access our library of legal templates to make this step even easier.
Why are client contracts important?
A client contract refers to the written or oral agreement between the company and the client. Client contracts are important for several reasons, including:
- They offer legal protection to both parties: Having objectives, terms, and conditions in writing better increases the likelihood of those obligations being fulfilled.
- They secure financial transactions: A contract outlines the terms and conditions of payment, including how long the client can take to invoice, the amount owed to you, or you owe, as well as any other details.
- They outline the scope of the work agreement: Contracts between two parties usually include details of the proposed project, as well as a timeline of completion.
When must a contract be in writing?
Contracts can be verbal agreements, but more often than not, they are in writing, as most verbal contracts are implied. The reasons for putting a contract in writing include:
One party may forget, or is unsure of, the original agreement: This could result in failure to fulfil the obligations of that contract.
- People may be dishonest: This could result in you not being paid the amount you agreed upon for your services, or you working with clients who damage the reputation of your business.
There are several kinds of business contracts which fall under the statute of frauds requirements. The statute of frauds simply refers to different contracts that must be in writing by law in Canada. Some of these include:
- A contract for the sale of goods, valued at $500 or more
- A contract related to marriage (for example, a prenuptial, or a divorce)
- A contract that guarantees the debt of another (for example, a rental agreement between a renter and a landlord)
Contracts vs. agreements
Contracts and agreements sound similar, and in some ways, they are. However, they have several legal differences between them.
Contracts
Contracts are a formal arrangement. They are enforceable through legal action, such as a lawsuit, if their terms and conditions are not met by one or more parties.
Agreements
An agreement is often an informal arrangement (usually unwritten) between two or more parties. Unlike a contract, parties involved in an agreement are not bound by clauses or other legal terms, and simply rely on the honour system to uphold their end of the bargain.
Essentials of business contracts
Business contracts contain several essential components that can be broken down into six elements:
1. Offer
The contract must clearly define a specific offer. For example, if the contract is job-related, it should specify a start date, the rate of pay, the terms and conditions under the agreement, an overview of the role, and the responsibilities outlined and expected to be completed by the employee.
2. Acceptance
The other party must accept the offer. In some cases, a counter-offer may be offered, in which case, the contract must be revised to reflect any changes.
3. Consideration
Something of value must be identified within the contract that will be exchanged between both parties. For example, the provision of goods and services on behalf of your business in exchange for financial gain.
4. Mutual consent
Both parties must mutually agree to the terms and conditions outlined in the contract. No signatures may be forced, and parties should not be coerced into signing unless they whole-heartedly agree with the proposed deal.
5. Competence
Both parties must be of sound mind and understand the details of the proposed business arrangement. Generally, this means that neither party may sign the contract if they are under the influence of drugs or alcohol, are a minor (the age of majority is 18 or 19 in Canada, depending on which province or territory you live in), and not have an intellectual disability.
6. Legal purpose
The contract must only exist for a legal purpose. For example, as a small business owner, your client contract ensures that the parties you service pay you for your services in a timely manner. If they fail to do so, they can be legally held accountable for breaching the contract.
How to write a client contract
Writing a client contract can be done in 10 easy steps. The most important thing to remember is to use clear and concise language that all parties understand. This will help to avoid any misinterpretation or misunderstanding of the contract.
1. Include contact information of both parties
Have you ever received a fine, only to have it not held up in court because of a spelling mistake, or because the ticket’s enforcer wrote the wrong information? A contract works similarly. In order for contracts to be legally binding and held up in court, all the contact information for all parties involved must be correct.
Include the legal business name, primary contact, physical address, billing address, and contact details of all parties involved in the contract. It’s also a good idea to use your client’s name, or their business name, throughout the contract, rather referring to them as a “third party.” While it’s not against the law to do so, it leaves room for loopholes, and makes the contract less defined.
2. Outline project terms and scope
Make sure the details of your business arrangement are as specific as possible in the contract. Outline things like the start and end date of the service or project, the estimated timeframe needed to complete the arrangement, the details of payment, etc. This ensures that both parties have clear expectations and there is no room for misunderstanding.
3. Create payment terms
Your client contract needs to have clearly defined payment terms. There are several things to consider, including:
- Rates: Will the work be paid hourly, or as a flat fee per project? If the project is paid per hour, ensure you set a minimum and maximum amount of hours per workday to ensure you receive fair compensation, despite potential changes in the project’s pipeline.
- Billing schedule: Outline whether you intend to bill as soon as you enter into an agreement, or upon completion of the project. Also, define whether you will be paid weekly or biweekly, if you are working by the hour, or monthly.
4. Set a schedule
Setting a schedule is important because it allows you to keep track of any deadlines associated with the scope of work or project. It also allows you to stay on top of client deliverables. For example, if your client has to provide you with materials in order for you to complete the project, setting a schedule will ensure you receive everything on time, so that there are no delays in the project’s timeline.
5. Decide what to do if a contract is terminated
Sometimes, business arrangements don’t always go as planned, and contracts must be terminated. If the client terminates the contract on short notice, you’ll want to ensure that your business is protected. The most important asset to protect is the payment for your services. If you plan on invoicing throughout the project, adding a stipulation which states that any completed work is non-refundable is a smart idea, as it will ensure that you don’t waste time providing services that would not be paid for, should the client change their mind. Some small business owners also introduce what’s known as a “kill fee,” which refers to a mandatory charge of a percentage of the project’s final expected cost. This amount is then paid out, should the client end the contract prior to the project’s delivery.
6. Determine who owns final copyrights
Determining who owns the final copyrights is something that largely applies to small business owners who produce work for a client in the creative field, like film scripts, other print and digital works, or graphic design. Generally, you own the rights to anything you do until the client makes payment, upon which copyright is transferred to that party. Always thoroughly outline copyright in the contract, so both parties are aware of who owns what once the project is completed.
7. Clarify the working relationship
It’s important to clarify your relationship in regard to the scope of work you’re taking on. If you are working as a freelancer, or an independent agent on behalf of the company, you must note that in the contract to avoid being mistaken as an employee, and to protect yourself during tax season.
8. Choose your law and venue
If a dispute between parties arises and it must be taken to court, you’ll need to specify where and how to proceed. Choosing your own province and city means that you can stay local, and avoid hefty travel fees if you need to fly out of province, or between cities.
9. Consider a mediation and arbitration clause
Business contracts often include a mediation and/or arbitration clause. A mediation clause is enforced when one or more parties have failed to resolve a dispute through negotiation. If disputes arise that cannot be resolved, the mediation clause means that a neutral third-party will hear arguments from both sides and come to a solution. The arbitration clause is essentially the last resort before taking the dispute to a legal courtroom and is more private and less expensive than going to trial.
10. Make sure your contract is enforceable: Work with a lawyer
While there are thousands of free contract templates available online, ultimately this is the document that protects your business from damage if an agreement goes sour. While there are parts you can fill out by yourself, it’s always a good idea to work with a lawyer who understands the legal jargon and can pinpoint any loopholes that may put your business at risk. Having a lawyer present during the contract-making process will ensure that any and all key terms required to make the contract legally enforceable are not left out. Some businesses may have their clients sign a non-compete agreement, or a non-disclosure agreement (NDA), for example. These agreements enforce that a client cannot work with or receive services from a competitor. But provincial laws could overrule these types of agreements, rendering a non-compete useless. A licensed lawyer will know all the crucial details to make your contract enforceable and ensure your rights as a small business owner are protected.
Build your business legally
Creating a business contract may seem daunting, but it doesn’t have to be. Each business is unique, and for that reason, there are several contracts in place, including client contracts. Regardless of what industry your business falls under, understanding how to build contracts on behalf of your company will ensure your assets are protected, and will set you up for uninterrupted success.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.