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A customer contract is a critical document to enter into when you supply goods or services to customers. A formal, written contract is a vital form of legal protection for your business, protecting you from various risks that arise when trading. This article will explore what can go wrong without a written contract.
Why Do You Need a Contract?
A contract is one of the most important legal documents for your business. It is a legal agreement that documents the legal terms agreed between commercial parties.
A written contract can help protect your business if things go wrong and can also help to prevent disputes. For example, your contract can include express terms giving you various legal remedies if the customer breaches their obligations (such as the right to end the contract).
What Can Go Wrong Without a Contract?
You can expose your business to high risk and several potential problems without a written contract. Although it is possible to enter into an unwritten verbal contract, this approach is risky. Verbal contracts can create various problems, such as a lack of evidence and certainty regarding the parties’ agreement. As such, entering into a written contract with customers is always more secure.
Here are some examples of what could go wrong without a written contract.
Mismatched Expectations
A written contract allows you to clearly document your agreement with your customer. Your contracts will record key terms around your products or services, including:
- what you have promised to deliver;
- when will you deliver it; and
- how much the customer will pay you, and when.
Without entering a contract, you will lack certainty about each party’s obligations. For instance, a customer might forget the agreement, resulting in misunderstandings and mismatched expectations over time (particularly for long-term contracts). Likewise, a customer could argue that you have failed to deliver the products or services on time. If there is no evidence of what terms were agreed, this could lead to arguments with customers and, in the worst case, disputes.
Disputes can often arise where there is a lack of clarity on what was agreed. With a contract documented in writing, customers can have more precise recollections of the agreement. Indeed, with a written contract, you can direct customers to the exact terms of the agreement.
Greater Exposure to Risk
A contract primarily aims to protect your business from legal risk. It can include key clauses to protect your business in several ways, including the following:
- grace periods – grace periods allow you to fix breaches of your obligations without further penalties occurring. For example, if you cannot deliver a specific obligation on time, you can include a clause giving you a period to remedy that breach;
- limitation of liability clauses – your contract can limit your liability to the customer for breaching the agreement. Without a limitation of liability clause, you will have unlimited liability which can be highly costly for your business;
- dispute resolution procedure – this clause will set out a clear process to resolve disputes quickly. Without this clause, you risk a customer taking your business to court when there may be less onerous and expensive options available; and
- interest charges – including this clause can prompt your customer to settle their invoices on time to avoid the risk of interest penalties.
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Difficulty Enforcing Legal Rights
Using a written contract will make it easier for you to enforce your legal rights if things go wrong. In the case of a dispute, you will need evidence of the terms of your agreement. For example, if a customer fails to pay invoices on time and owes you money, you must have clear evidence around the agreed payment terms.
Without a written contract, it will be your word against the customers. Further, finding evidence in your favour may be challenging, particularly if you did not document any terms in writing or there were no witnesses. Therefore, a clear written contract will offer you a greater chance to enforce your rights.
This guide outlines how to resolve commercial disputes.
Key Takeaways
A written contract is a crucial document to protect your business. When you are a trading business selling products or services, a well-drafted customer contract should be a top business priority.
Trading without a written agreement can expose your business to high levels of risk. For example, a lack of written terms can lead to confusion and mismatched expectations around each party’s obligations. You will also face additional legal risks (such as unlimited liability), and it will be much more difficult to enforce your rights if a customer fails to comply with their obligations. As such, you should always enter into a written contract with a customer before agreeing to deliver products or services.
If you need help preparing a contract to protect your business from risk, our experienced contract lawyers can assist 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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