Why business owners need to use Contracts

 I can’t afford to have contracts drawn up. As a small business do I need to use contracts? If I use

contracts my customers may feel I don’t trust them. These are all reasons why a business owner may

choose not to use contracts.


As Benjamin Franklin once said “An ounce of prevention is worth a pound of cure.”  Contracts are the

ounce of prevention that can reduce costly disputes. You as a business person cannot afford to

gamble your business and bottom line on the hope that all involved understand your working

relationship in the same way.


Here are some points to include in your business contracts;

  • Warranties

    • A warranty is a written description of what specifications you guarantee your product or service will meet. This makes it so your customer or vendor knows if it is a good fit for them.

    • Implied warranties

      • An implied warranty specifies that a product or service is for a particular purpose. When a customer comes to you with a particular need and then relies on your advice that a product will fill that need, you have an implied warrant.

      • Another type is an implied warranty of merchantability. It exists for the sale of every product and says that the product will fill the need of the typical client.

  • Breach of Contract Clause

    • Your contracts should include a clause that specifies the maximum amount that you will pay in case of a breach of contract. The amount stated needs to be reasonable or the court will throw out this clause.

    • The maximum amount of time that a client has to inform you of a breach should also be included.

  • Determine what law and what court will handle the breach of contract

    • A clause determining what state will handle a breach of contract is important. Laws are different from state to state so insert 1) a choice of law clause and 2) a jurisdiction clause.

  • Arbitration

    • Disputes that go to court are expensive. By including an arbitration clause in your contracts you and your client agree in advance to submit your case to binding arbitration. This will save you both time and money.

Your business is valuable, a correctly drawn up legal agreement will protect it, and give your client the confidence that they are dealing with a professional company that is going to stand behind their product or service.

Transactional Contract’s

Anyone who has been in a long term relationship knows that two individuals never see eye to eye all of the time. Any two persons can be part of the same conversation, but hear the information very differently. These are the reasons for using transactional contracts.

A transactional contract is used any time you are buying or selling a product or service. It should lay out the full scope of the transaction and be written in a way that will avoid any misunderstandings. Here are clauses that should to be included in a Transactional Contract.

Terms that have specific meaning

  • Any terms that need to be specifically understood, need to be explained at the beginning of the contract.

    • Examples: delivery, default and order. It is important to explain the meaning of important terms at the beginning of the contract, so that at a later time a party cannot come back claiming that they did not understand the words.

Exchange of product or service

  • What is going to be exchanged

    • Be detailed in describing what is going to be exchanged. You may want to include serial numbers, model numbers or any other identification of products. For services be specific about the terms of service.


  • How is payment going to be made?

    • How payment is going to be made and in what time frame, needs to be put into writing. Include also when a payment is considered late and what the penalties are for a late payment.

Delivery and Inspection

  • When is delivery going to be made and who is going to inspect and accept the product or service?

    • This clause avoids individuals making claims after delivery of a product or service. It also suggests that the product or service was adequate at the time of delivery.

Anything Else

  • Anything else that may be specific to your industry or service.

    • You may need to include sections because of the industry that you are in. Examples are: Confidentiality, dispute resolution, guarantees, liability limits etc.