What is an Effective Contract?
• 22 Dec 21
Contracts are used as a legally binding tool when securing important business relationships. This includes actions such as closing a deal, building a new professional relationship or expanding the reach of an existing partnership. Other than acting as a means of formalising business interactions, a well-drafted contract has the power to help a business in many other ways. The following article takes a look at what makes an effective contract and why the drafting of contracts should always be considered when entering a new business venture.
What is a contract?
A contract is an obligatory legal agreement used to document the business terms and conditions as agreed upon between two or more parties. Although a contract does not have to be in writing to be considered legally binding, it is considered the ‘safer’ option to have a paper trail. Once a contract has been concluded, it is expected that all areas of the agreement will be abided by and fulfilled by the parties. The document will clearly state the consequences of any contract contravention.
It is possible for a contract to be amended if and when necessary, only if the amendments have been agreed upon by all parties. The contract usually exists for a specified period of time (six or twelve months, for example), and can be reviewed and renewed should the co-signers so wish.
For a contract to be binding you need (a) an offer capable of acceptance (b) acceptance of that offer and (c) the giving of come “consideration” ( something of value) by the offeree back to the offeror.
The purpose of a contract
Contracts form the backbone of a company’s operations, set out the rights and obligations assigned to each contracting party, and lend enforceability to these rights and obligations. A contract that sets out the rights and obligations of parties clearly leaves no room for ambiguity and reduces the risk of disputes.
While contracts are usually signed within a professional business context, individual entities also benefit from the legal protection a contract has to offer. Whether selling a car, property or for the supply of services, a written contract is always a great option within any commercial relationship.
Common Types of Contracts
The following is a list of contracts that start-ups are likely to come across:
Employment Contracts
Governs the relationship between employer and employee.
Confidentiality Agreements
Governs the transfer of confidential information between two entities.
Commercial Leases
Governs the relationship between lessee and landlord.
Goods & Services Agreements
Governs the relationship between customer and supplier of goods / services
Distribution Agreements
Governs the relationship between a manufacturer or vendor and a distributor (a start-up is often likely to be a distributor)
Termination contract
Governs the terms upon which the contract may be immediately terminated
Why are contracts important?
Consider the above list of common types of contracts. All of these agreements have the potential to end up as a liability for all parties involved. For this reason, signing a contract is an imperative step when entering into any agreement, business or personal. Here are a few more reasons as to why a contract is so important:
Promises are legally enforceable
This means that any promises made within the contractual document can be legally enforced in a court of law. The very intention of a contract is to make all enclosed terms legally binding and therefore legally enforceable. It is important for all parties to understand this before signing the contract. A contract will include clauses aimed at protecting all parties from any liability if a co-signer should violate any of the contract terms.
Ensures Payment
Another very important feature of a contract is to clearly outline the payment process. This includes specific information, such as:
- The amount due to be paid
- How often payment must be made
- Payment method (cash, card, wire transfer)
- Terms and conditions applicable to late payments
This section of a contract acts as a precautionary measure against fraudsters who have no intention of making payment.
Guarantees Confidentiality
For many businesses, confidentiality is key. Too many business-owners have failed to secure a signed contract that legally requires second or third-parties to keep sensitive information confidential. A contract is the best way to ensure any and all trade secrets are kept within the confines of the business structure. Whether by way of non-disclosure agreements or confidentiality clauses, co-signers will be legally and contractually obligated to keep the information private.
Formalise Relationships
Since the first agreement between two or more parties will usually be verbal, a contract is merely the formalisation of such an agreement. The finer details will be discussed and laid out for all parties to agree upon before becoming finalised through signing. For this mutually beneficial relationship, a contract will act as a draft for all business operations, obligations, roles, responsibilities, rules and regulations. Fast-growing businesses must understand that securing a legal footing with all new partners must remain top priority.
To be sure that contracts are working well for you and your business, always refer to some of the benefits a contract should be providing for your organisation.
What Next?
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.
