“Do I really need to get my agreements in writing?”
Business owners ask us this question on a regular basis. A lot of times, owners enter into an oral, or “handshake,” agreement and walk away thinking they both have the same understanding of the terms to which they just agreed. Sometimes this turns out to be the case, but many times the parties end up having very different perceptions of what they agreed to− and this painful realization generally comes to light after services or goods have been manufactured, performed, or completely delivered.
This could be a recipe for disaster down the road for a business owner. If terms aren’t put in writing, a “He said, She said” scenario arises and it is difficult to determine what the parties actually agreed to and how they are going to prove it.
If nothing else, it is important get at least the main terms of a business agreement in writing, even if it is only in a series of emails between the parties. Ohio courts have found that email communications can constitute written contracts. As attorneys, we prefer to see a formal written contract with all terms agreed to in one document. This eliminates issues of what the terms really were, what the parties thought they agreed to, and avoids entering into a deal where neither party is happy.
Getting the main terms in writing helps to avoid costly litigation down the road. Litigation tends to have an extremely adverse impact on the ability of the business to make a profit. It is better to spend some time upfront putting together your agreements in writing than to argue over them later in court.
Here are some important terms small business owners should include in their written agreements:
- Make sure the agreement is dated and has an end date, if needed.
- If you own an Ohio limited liability company or corporation, be certain to execute the agreement in the name of the LLC or corporation, and not you personally. This will help to prevent personal liability on the agreement should you fail to perform for some reason. Avoiding personal liability is most likely one of the reasons you formed the entity, so make sure you sign in the capacity as an owner of the company.
- Make sure to spell out how payment is to be made or received and timing of payment. If you don’t clearly define this term, you may not get paid in a timely manner, restricting the cash flow of your business.
- Clearly define what constitutes an “event of default,” or what violates the agreement, and how either party can terminate or end the agreement.
- Provide penalties for late payment or non-payment on invoices. This will help to ensure you get paid on time.
- Think about all the potential issues or events, especially events that affect the timing or delivery of services or products, that could affect your performance under the agreement and clearly draft provisions that can assist in the protection of your business in all these possible events.
- Include disclaimers for events out of your control.
- Try to include language that requires all lawsuits to be filed in your county, if a dispute should arise. This will help to avoid costly travel and hiring out of state attorneys. Think about providing an award of reasonable attorney fees and costs of collection if you prevail in a dispute.
- If you have entered into an agreement with a consumer and/or operate your business out of your home, then you may have to comply with the Ohio Home Solicitation Act and possibly other Ohio consumer laws that require certain language to be included in your agreements. Make sure that you are aware of all the major laws that affect your business and put you at risk for liability.
Even though this is not an exhaustive list of terms to include in your agreements, it does point out that an oral, or “handshake,” agreement will not be sufficient to cover all issues that should be addressed in a business arrangement. Your business and its dealings are unique and this factor requires a review of all possible issues/events that may arise in a business relationship with another party. A thorough review of the transaction is necessary so you can draft provisions in your agreements that properly protect your business in the specific transaction at hand.