Q:My business is in catering/event planning, and we are going to be doing business with a local supermarket. What type of contract do you suggest we draw up?

Answer:

Contrary to public opinion, it really is helpful to use contracts when doing business. This is especially true if you are dealing with sizeable sums of money or risk in buying or selling products or services. I've noticed that some people feel guilty for asking that terms be put in writing; they think it conveys a lack of trust in the other party. In fact, using contracts shows you are professional and want to be sure everyone remains happy in the relationship.

At best, the process of drafting and negotiating a contract forces the parties to think through and discuss their expectations and needs. This is a good thing. Parties can end up very unhappy if they have differing expectations and don't discover that until far into the business relationship.

For any transaction, it is important to consult with your attorney about the specifics of the contract you will need. If the project is important enough to merit a contract, spend the couple thousand dollars it takes to have a well-written agreement in place. It's good risk-management for your business.

Contract Provisions

There are standard terms that are included in most contracts. Depending on the details of the business relationship, there will certainly be others as well. Here are some common important terms:

• Confidentiality: With most business transactions, one or both parties will be learning confidential information about the other's business. This information might include trade secrets, customer lists, financial information, vendor sources and others. To protect yourself, make sure that the information important to your business is kept confidential and used only for the purposes of the contract. In other words, you don't want your business partner learning all about your business, terminating the contract and then becoming your competitor.

• Description of the service or product: It is important that the contract include a clear description of the products to be purchased or the services to be performed. When a dispute arises about whether the item shipped was correct or whether the deliverable meets the services description, the parties will look to that contract language. The less detail you include, the higher your risk that there will be no clear or fast resolution.

  For example, let's say you hire a contractor to build your warehouse, and you write in the contract, "The contractor is to build a 3,000-square-foot standard warehouse." The contractor builds the warehouse and uses the materials he thinks are standard. You hate them. He doesn't include the closets and bathroom facilities you need, the water and electrical outlets are not in the locations you need, and so on. If you had written in detail in the contract what you expected and he failed to perform, you would have a good claim against him. With language that is brief and/or vague like in this example, a claim is much harder to win.

  What's that? You say there are "standards" to warehouses? Well sure, to some extent, that's true. The question is, do you want to be forced to file a lawsuit and wait for the depositions of expert construction witnesses to determine what they are, or would you rather just turn to page 7 of the contract?

• Payments: Money, money, money. The payment terms are very important in every agreement for both parties. It is usually best to spread payments, performance and delivery equally throughout the life of the contract. For example, upon delivery of 10,000 hammers, you will pay the vendor $20,000; or upon completion of the foundation for the warehouse, you will pay 25 percent of the overall cost, and upon completion of other milestones, you will make other payments.

• Warranties: Depending on the contract, you almost certainly will have some representation and warranties, and warranty waivers, included. There are many variations on warranties depending on the type of transaction. Typically, warranty waiver language will waive the following warranties usually implied into sales of goods under state law:

• Merchantability: This warranty means that the product will operate as it is expected to. For example, a toaster will toast bread.

• Fitness for a particular purpose: This warranty means that the item will work for something in particular. For example, if you are seeking fishing line that holds 1,000 pounds, then the product information should state that it will hold that amount.

• Noninfringement: This kind of warranty relates primarily to intellectual property matters. Basically, it means that the items contain only original work or that the creator has obtained all the necessary licenses so that no third party's rights will be infringed.

• Title: This warranty means that the seller has good title to the item.

• Limiting liability: In many agreements, liability limits for the parties make sense. These terms seek to allocate the risk among the parties by limiting the amounts one or both parties may be liable for under the contract. A good way to think about this is to consider whether unlimited risk would make sense for a business providing a $5 product or a $10 service. Without liability limits in place, a contract where the business made $5 could cost the business many times more.

• Jurisdiction: Jurisdiction is one of those topics that can make your eyes roll back in your head, but it's one of the most important in any contract. In fact, one of the strongest positions a party has during a dispute is home court advantage. If you are the party paying, you should try to have the choice of law and jurisdiction where you are located. This means that if any dispute ends up in court, the other side is the one who has to hire lawyers in another town and pay for travel and expenses for the depositions, hearings and trial. It also means that the jury and judge will be from your town—sad to say, but that can often make a big impact on the outcome of a dispute.

All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

1 Readers are cautioned not to rely on this article as legal advice as it is
no substitution for a consultation with an attorney and an accountant in your state. Based
on jurisdiction and time, the law varies and changes.