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A contract should be a critical priority for any business owner entering into business-to-business transactions. Contracts can protect your business from risk and limit your liability in the event of a dispute. However, sometimes, business owners do not have the time or resources to enter into lengthy contracts in practice. This article will explore whether a short-form business-to-business can help your business.
What is a Short-Form Contract?
A contract is a commercial document that records and evidences the terms under which parties conduct business. If you are a supplier of goods or services, having a contract in place is essential to protect your business from risk.
For example, you would expect a lengthy contract for the following projects:
- a business sale transaction where a company is being sold to an external business; or
- an outsourcing agreement where a business will outsource a whole function to a third party, for example, business-critical information technology services.
Such projects will give rise to various legal risks and warrant a comprehensive legal agreement to document the specific terms between the customer and supplier.
In contrast, preparing a simpler, short-form contract is also an option. This is typically a shorter contract that either omits or shortens legal clauses that you would ordinarily include in a long-form commercial agreement.
When Might a Business Use a Short-Form Contract?
It is up to a business to consider and judge if it is appropriate to use a short-form contract.
Whether you use a short-form agreement will depend on various factors, including:
- the number of terms agreed which the contract needs to cover;
- the context of the relevant project or transaction;
- who the parties are;
- what level of risk is involved; and
- how much time and budget you can allocate to negotiating the contract.
Ultimately, it will be a matter of risk and how much you are willing to accept. Generally, a short-form contract will be most suitable for low-risk projects.
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Risks When Using a Short-form Contract
There are various ways in which a short-form contract could help your business. Nevertheless, it is also essential to understand some potential shortcomings of this approach.
A short-form contract may offer less legal protection than a long-form agreement. A short-form contract is more likely to focus on key issues and will not cover all potential risks and eventualities of what could go wrong during a commercial relationship. For example, a short-form agreement may lack specific clauses that would otherwise protect your business had they been included.
Importantly, you should approach short-form agreements with care. When using a short-form agreement, carefully consider its terms and ensure it includes at least key provisions to protect your business from the main risks it faces when trading. For example, consider adding a limitation of liability clause, which reduces your liability to the customer if you breach your obligations.
As well as legal terms, ensure that your short-form agreement contains the key contract details and the commercial terms you have agreed to.
How Can a Short-Form Contract Help Your Business?
1. Giving You Comfort When Trading
A written contract is vital for business protection. Although a short-form agreement may not give you full ‘belt and braces’ protection in all scenarios, it can offer you critical protection for your particular project.
For example, your short-form agreement could focus on the main areas of risk that are vital to your project, such as:
- clauses setting out when a customer needs to pay you and allowing you to charge interest for late payments;
- clauses limiting your liability. Without a limitation of liability clause in your contract, your liability to your customer for breaching the contract will be unlimited. This is arguably the most critical clause in a commercial agreement; and
- termination rights, allowing you to end the contract if the customer is at fault.
As such, a short-form contract can provide legal protection if it contains well-drafted and robust clauses that protect you from the risks of what could go wrong.
2. Reducing Negotiation Time and Helping Secure New Business
In business, there is often a rush to get new deals over the line. Where there is a tight deadline for a customer to start their project with you, contracts with heavy legalese may mean your customers need to involve other stakeholders and legal teams.
From a customer’s perspective, a short-form contract may be easier to review. For example, if the relevant services are low value and straightforward, the customer may be happier with a short-form contract reflecting the key terms you have agreed upon. As such, negotiating a short-form agreement could speed up getting deals across the line.
If a customer is particularly impatient, a lengthy contract may discourage them from doing business with you.
Busy customers sometimes prefer simplicity. Therefore, presenting a short-form contract may help you reach an agreement quicker by reducing the negotiation time.
3. Saving Costs
Budget is often a key business concern, particularly budget for legal spending. If your business is a startup or small business, you may not have enough money or resources to invest in a lengthy commercial contract at your stage.
If your budget for professional fees is limited, a short-form contract could help you. You can work with a lawyer to prepare a short-form contract your business can afford, giving you some key legal protection.
A short-form contract could also save you legal costs later down the line. For example, a contract containing simpler or fewer terms may require less negotiation than a comprehensive, long-form agreement. In contrast, lengthy contracts can result in long and protracted negotiations, which can increase legal spending.
Note that you should still prioritise your contractual documentation if your business has a limited budget. Whilst a contract may sound like a cost your business could do without, it could save you a lot of money in the long term. Without a contract, you are more likely to face legal disputes, leading to additional costs than if you were to invest in a well-drafted contract in the first instance.
Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.
Key Takeaways
Every business should invest in a contract to protect itself from risk. A comprehensive and lengthy legal agreement will offer you the most protection from a legal perspective. However, putting this in place is sometimes not possible or efficient, and a short-form agreement may be more appropriate. A short-form contract will often be quicker to negotiate and cost you less money, but its use comes with risk. Therefore, you should carefully consider the level of risk involved in your project before using a short-form contract.
If you need assistance drafting your contracts, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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