When it Rains it Pours: Why Contracts are Life Savers for Small Businesses 

By Dominique O'Connor

Picture this…

You’re a hard-working Nebraska startup that was recently acquired by Tesla (way to go)! What’s a savvy entrepreneur like you going to do? Celebrate of course! You email a few of your close friends and family to toast your success at an outside garden party. Being as well-connected as you are (way to network!), your friend Karen offers to cater the event. Karen made amazing food for your mum’s birthday last year, so you’re all about it. Plus, she gave you the friends and family discount (way to hustle!). You arrange for Karen to craft a delectable menu for fifty people, using only the freshest and most exclusive ingredients (because, after all it’s Tesla). The big day rolls around and…

Thunder. Lightning. Rain.

No garden party.

Who pays for the food? What about the tables, chairs, and décor that Megan arranged, but you didn’t ask for? If you don’t pay up, does Megan have to pay the cater waiters she hired to assist her?

Much of the litigation that we deal with at McNamara Law Firm arises from contracts that go bad. Often, it’s not for lack of business acumen. Rather, the parties involved readily fail to fully understand what they are agreeing to. In general, parties expect that the deals they make will go smoothly. Yet, for the average small business person, it can be tough to anticipate the complexities of an agreement, the liabilities, and potential pitfalls they may bring.

Creating a thorough written sales agreement that anticipates and addresses these types of issues can keep businesses out of costly disputes.

Now let’s revisit our savvy entrepreneur and Karen the Caterer:

Scenario A - Savvy didn’t execute an agreement with Karen. Due to the pricey catering costs (yellow-fin tuna does NOT come cheap people), Karen is demanding full payment. In addition, because of an off-hand comment Savvy made, Karen believes Savvy should pay for the additional services she performed, including arranging for seating and support staff. Savvy’s Tesla check won’t come in for months, and the businesses’ accounts payable are through the roof. Savvy definitely cannot afford to pay for the additional costs Karen incurred. Savvy must either take out a personal loan or face the costs of litigation to settle the dispute.

Scenario B - Savvy sends a written email to Karen asking her to cater. In return, Savvy states that he will pay for all catering costs, and includes that the email should serve as their written contract. Everything is the same as in Scenario A, except now Karen is demanding that she be paid by the end of the week. Is Savvy bound by this date? Are the rental chairs and cater-waiters included in the “catering costs?” Savvy thought he was being diligent by creating a written “contract,” but was he?

 

Scenario C - Savvy hires a small, up-and-coming law firm to draft a contract. The contract states that Karen, as an independent contractor, will provide catering services on May 10th, from 5pm-12 midnight for Savvy. The contract specifically details the term “catering services” to include shopping for, preparing, delivering, set-up, and serving all menu items therein.” The contract also provides that Karen may not change the menu or make a purchase without obtaining Savvy’s approval. Karen is to be paid the day of the catering for the cost of the services, but not above $550. In the event the party is cancelled, Savvy will only pay $300, the cost of purchasing the food.

These are just a few scenarios that illustrate the complexities and issues that may arise in daily transactions. Creating a contract not only protects the interests of everyone involved, they also: 

Leave a great impression - When you close a deal with a written contract tailored specifically to your business, customers believe that you’re going to handle their project in a professional manner.  

Gets everyone on the same page - A written agreement allows for all parties to have a more complete understanding of the details relating to the services being provided.  When people know what to expect, projects go smoothly.

So whether you’re an upcoming tech start up like Savvy, an ambitious caterer like Karen, a vibrant Etsy entrepreneur, or an established small business, your business can benefit from a contract that is specifically tailored to your needs. Don’t be like Savvy and get caught in the rain!

For more information, contact us at McNamara law firm.

An earlier version of this article was originally posted in the Fall 2015