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Entrepreneurship Series Part 5: Business Contracts

David Montegriffo
Senior Associate

The penultimate piece in this entrepreneurship series, David Montegriffo explores the importance of formalising your important business relationships. Many start-ups begin business on shaky foundations by failing to have legal agreements in place which correctly map out the relationships and obligations between relevant parties. In many cases, parties are not fully aware of their responsibilities or do not want to incur additional costs in putting these affairs in order.

Clear and well-defined terms play a pivotal role in establishing strong relationships between business owners and their clients, suppliers, and other third parties. Failing to establish clear terms can lead to disputes, legal complications, and potential financial losses. Below is an exploration of important matters to consider when dealing with your business contracts.

Lock down arrangements with key suppliers

Locking down terms with key suppliers (of either services or goods) is essential for the success and stability of a business. Establishing a strong and mutually beneficial relationship with these suppliers can provide numerous advantages and contribute to the overall growth and profitability of the organization.

Where favourable terms have been agreed with a key supplier, securing long term arrangements with these parties will ensure that costs can be effectively managed, improve profit margins, and help a business gain a competitive advantage in the market. Strong relationships with key suppliers based on mutual trust create a foundation for long-term partnerships. By committing to each other’s success, businesses and suppliers can foster loyalty, transparency, and collaboration. This can lead to volume discounts, priority access to resources, and the ability to negotiate even better terms in the future.

Aim to structure payment terms

Structuring payment terms with cash flow in mind can greatly benefit a business by ensuring a steady and manageable flow of funds. By negotiating extended payment periods or introducing instalment payments, a business can successfully balance its cash inflows and outflows, reduce the risk of cash shortages and maintain a healthy working capital position.

Avoid informal “handshake contracts”

Although there may be a large degree of trust between individuals going into business together, disputes can take place at any moment and things can easily escalate. Agreements reached informally (through conversations, email, whatsapp, etc) can be legally binding yet they create a risk of conflict arising over what exactly was agreed. This can create messy situations which often lead to further costs when parties eventually seek to tidy up their affairs. Where there is no consensus between parties as to what has been agreed, costly court proceedings could be the logical endgame in order to resolve a dispute.

Where certain arrangements are material to the functioning of the business, efforts should be made to avoid informal “handshake contracts” and instead formalise arrangements at the outset in written agreements. “Handshake contracts” often lack specificity and clarity. Without a formal written contract, the terms and conditions of the agreement may be open to interpretation or subject to miscommunication.

A written contract allows parties to clearly define the scope of work, deliverables, timelines, and any limitations or exclusions. This helps both parties come to a shared understanding of what is expected. This will also assist with future business continuity by providing an agreed framework that transcends individual relationships and maintains stability even where key individuals leave or circumstances change. Formalising arrangements in this manner demonstrates a commitment to clear, professional and transparent business practices which will enhance the reputation of the company and attract more reliable and reputable partners in the long run.

Consider whether particular execution formalities will apply

Finally, it is also important to bear in mind that there are certain forms of agreement (such as deeds) which require particular formalities to be followed in order to be valid. These additional requirements are usually applied to transfers of property and mortgages and often stipulate that agreements must be in writing, signed by the executing party, and witnessed by an independent individual who is not a party to the agreement.



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