When people enter into a business relationship, contracts are rarely the first thing on anyone’s mind. Rather, the partners are thinking about all the positive elements of the arrangement. Perhaps it is the complementary skills two founders bring to their startup. Or the synergies between a well-known brand and a private label supplier in a joint venture. Or a project’s mutual benefits for a freelancer and her client.
Indeed, many business arrangements are established without contracts in place, and once the relationship begins, a written agreement may seem unnecessary. The business partners communicate often. Deliverables meet expectations. Payments are made on time.
Things go well… until they don’t.
Contracts are an unpleasant topic – because worst-case scenarios are unpleasant to think about. But conflicts in business relationships do happen. When they do, a contract is a valuable legal tool. It allows you to document and enforce the terms of a relationship with an entity or individual within or outside of your organization.
By agreeing to the terms of the relationship and contingency plans on paper, partners can reach resolutions as quickly, painlessly, and cost-effectively as possible.
Contracts are particularly important when two or more people or entities enter into an arrangement in which the parties share ownership, liabilities or financial gain. If you lack a written agreement, you and your business partner are likely to experience issues such as the following:
1. Confusion Over Roles and Boundaries
Which party is responsible for what? Will the parties be contributing – and benefiting – equally? Too many businesses in joint ventures and similar arrangements start considering these sorts of basic questions only after a plan has been set into motion. A written agreement should address any uncertainties at the outset by outlining roles, expectations, and duties among the participants – everything from percentage ownership to voting and control to exist strategy.
2. Relationships Ending Too Soon – Or Going on Indefinitely
Start and end dates are pivotal for any business relationship. Without a clear understanding of the length of the relationship, a party to the contract may not know if and when their responsibilities are complete. It is important to have a timeline and possible triggering events if a party does not want to stick around for the long haul. Knowing a specified termination date of the arrangement can also help set clear expectations as to what a party can or cannot do once the relationship ends. (For example, maybe the agreement has a non-compete provision that prevents one party from working in the industry for a period of time after the termination date). Having a set contract term not only holds everyone accountable for their promises, but allows each party to keep the relationship in scope and plan around their eventual exit.
3. Lost Products, Property, and Profits
One crucial aspect of any agreement is ownership. A good contract spells out precisely what elements of the venture belong to which party: products, branding, real estate, equipment, intellectual property, and so on. Without a contract, either party can only rely on their faith in their business partner – or try to negotiate each and every matter separately, as it arises. A written agreement can also protect both parties’ existing relationships with employees, contractors, vendors, and customers.
Each of these issues is troublesome unto itself, but also pose an even greater risk of a complex and costly legal dispute. Lawsuits and claims occur more often when the parties in conflict neglected to sign a contract.
When you have a written agreement, you have a map to move forward when something goes wrong. A termination clause, for instance, can provide both parties with a clean break if one party is not able to sustain their responsibilities, while a mediation clause can help shield your business from costly litigation.
As inconvenient as contracts may seem, business partners should ask themselves: “Would we rather sign an agreement now or risk facing each other in court later?”
When you’ve determined the answer, call your legal advisor. An experienced attorney can help you draft a contract quickly and cost-effectively, eliminating uncertainty so you can focus on the relationship ahead.
If you have any questions about contracts, joint ventures, or any other business legal matter, please contact me.
ABOUT ALLISON W. ROSENZWEIG
Allison W. Rosenzweig concentrates her practice in business and transactional matters for a wide range of clients, including startups, closely held businesses, and national entities. Allison’s experience includes mergers and acquisitions, equity financing, early stage investing, entity formation and governance, business divorce, the drafting and review of shareholder and operating agreements, supply and distribution agreements, entertainment agreements, licensing agreements, employment and consulting agreements, and a wide variety of other general corporate and commercial agreements.
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