At What Stage Should Your Business Use Contracts?

You may wonder when to start using legal agreements as a small business or start-up. Whilst verbal agreements are possible, they can lead to significant risks, and therefore, written contracts are vital for business protection. This article will explore the stage at which your business should use contracts and some key agreements to consider at certain stages. 

Why Are Contracts Important? 

Contracts play a crucial role in protecting a business from risk. They can limit your liability in unforeseen breaches and give you legal recourse if the other party breaches the agreement. Even for informal transactions, a simple contract can be helpful to avoid misunderstandings and prevent disputes. 

Trading without contracts exposes your business to several risks, both financial and legal. Without an explicit, written agreement, disagreements can quickly arise about what was promised or delivered, leading to arguments about pricing, quality, deadlines, or various other issues. 

Contracts are also vital for enforcement purposes where things go differently than planned in a business relationship. Your ability to recover damages or enforce your legal rights often hinges on having documented proof of the agreement you had in place with a counterparty. 

Overall, trading without contracts creates uncertainty and risk for your business.

When Should Your Business Use Contracts? 

There is generally not a specific, single point at which all UK businesses need contracts. This will differ from business to business, depending on their activities. However, contracts become increasingly important as your business dealings become more complex. A contract is vital to help ensure all parties are on the same page about expectations and reduce the risk of misunderstandings.

Specific contracts, such as consumer terms and data processing agreements, are required by law.  Ensuring compliance with these requirements is crucial for operating within legal rules. Specific other contracts are highly advisable as best practice. 

Here are some stages where you should consider specific contracts for your business: 

When you are Starting Up

At this stage, you will need contracts to formalise key relationships and transactions. Necessary contracts at this stage include partnership agreements if you are starting a business with others, which outline the roles, responsibilities, and profit-sharing arrangements. Similarly, a shareholder agreement will govern the relationships if your company has multiple shareholders.

When You are Hiring Staff 

Contracts are essential when hiring employees or contractors. Employment contracts define job roles, responsibilities, pay, and termination conditions. Consultancy agreements specify the scope of work, payment terms, and project timelines when hiring freelancers or contractors. Additionally, extra non-disclosure agreements may be needed to protect your business’s confidential information in certain circumstances. 

When Trading with Customers

Clear contracts should govern customer and client relationships, which is critical for a trading business. Services agreements or terms and conditions should define the terms of your services, including their scope, duration, and payment. For product-based companies, product sales contracts should set out the terms of sale, delivery, and returns.

When You Work with Suppliers

Supplier contracts help ensure that your business receives the necessary goods and services it requires from suppliers under agreed-upon terms. Supplier agreements specify key terms for purchasing goods or services, including pricing, delivery schedules, and quality standards. This is important to ensure suppliers understand their responsibilities and expected standards and can be held accountable for breaching your agreement.

When You Enter Partnerships and Collaborations

Contracts are crucial when your business collaborates with other companies to formalise relationships. Partnership agreements detail the terms of the partnership, including contributions, responsibilities, and profit-sharing. Similarly, joint venture agreements outline each party’s roles, contributions, and profit-sharing arrangements for specific collaborative joint venture projects, ensuring that all aspects of the partnership are clearly defined. If you seek to licence your intellectual property rights to third parties to commercialise, you will also need licencing contracts to protect your valuable assets.

How Lawyers Can Help You Determine When You Need a Contract?

It is highly recommended that you work with a commercial lawyer if you need support regarding whether you need a contract. A lawyer can advise you on your business risks and the benefits of various contracts. Some contracts, such as data processing agreements, are required by law, which can be overwhelming to navigate without legal assistance. 

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A lawyer can guide you on which contracts are mandatory and which are best practices. Seeking legal drafting support can also ensure that your contracts are comprehensive, legally compliant (including with the UK GDPR), and tailored to your business needs.

Key Takeaways

Using contracts will help to protect your interests over time. Contracts are vital tools to protect businesses from risk. They are needed for different purposes, such as to govern employment and customer relationships and third-party partnerships, such as joint ventures. You can work with a commercial lawyer to help you determine which types of contracts your business needs and when. This will differ for each business; therefore, legal advice is essential. 

If you need help with contracts, LegalVision’s 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.

Frequently Asked Questions

1. Why are contracts important for my business? 

Contracts are critical legal documents that define the rights and obligations of the parties involved, protect your business from risk, and provide legal recourse in case of disputes.

2. At what stage should I use contracts in my business? 

This will depend on your business and its activities. You may need specific contracts when starting your business, hiring employees and contractors, engaging with customers and clients, working with suppliers and vendors, entering into partnerships and joint ventures, and licensing your intellectual property rights to third parties.