3 Key (Written) Contracts Every Business Needs
Published:
March 2, 2023
Author(s):
All businesses need written contracts. Determining what written contracts are essential depends on many factors, including the nature of the business and its structure. That said, there are some written contracts that just about every business can benefit from having in place. Here are the top three.
1. Employment or Independent Contactor Contracts
It’s best practice to have well drafted and properly implemented written contracts, whether you staff your business with employees or independent contractors or both.
Employees. If your business has employees, then at law you have an employment contract with each of them – even if there’s “nothing in writing”. Without a written employment contract, employment terms are implied by law, and it’s difficult to ascertain them. This can lead to disagreements, lawsuits and expense. A written employment contract can be instrumental in avoiding and resolving employment disputes, saving the employer time, money and stress. But unlike other “commercial” contracts, courts generally interpret employment contracts to protect employees. They scrutinize employment contract terms closely, usually deciding any ambiguities against the employer’s interest. And there are technicalities associated with many employment contract terms – especially termination provisions. It’s important to get the “legalese” and wording right to ensure the contract terms meet the legal tests for a court to enforce them. A standard form employment contract is useful, but employers should always review it for each employee (ideally with legal counsel) and, if required, customize it to the circumstances. It’s also important that the contract terms are set at the time of hiring or before the employee is promoted or transferred. An employer can’t unilaterally impose new employment terms that fundamentally change the employment relationship without giving the employee sufficient prior notice or consideration (something of value in exchange). If it doesn’t, the new terms won’t be enforceable.
Independent Contractors. If your business retains independent contractors, in addition to or instead of employees, it’s equally important to use a written contractor agreement with those contractors. Characterization as an employee or independent contractor is important because it carries certain consequences: employees get certain benefits and protections not afforded to independent contractors (for example, reasonable notice on termination); and employers have corresponding obligations and liabilities to employees (for example, source withholdings). While the parties’ stated relationship of independent contractor in a written contract isn’t determinative, it can certainly help a business reduce the risk that a court will find the arrangement is an employment relationship at law.
2. Shareholders’ Agreement
There are three main ways to structure a business in Canada: sole proprietor, partnership and corporation. While many businesses start off and remain a sole proprietorship or partnership, many eventually grow to an incorporated corporation. A corporation is a legal entity separate from its owners and with all the rights, powers and privileges of a natural person. The shareholders own the corporation. Properly incorporating and structuring from the get-go is important to avoid the time and expense of restructuring later. A key element of doing so is a written shareholders’ agreement to protect everyone’s interests. All shareholders – whether in a startup, a small or large business or a family-owned corporation – can benefit from a written shareholders’ agreement among the company’s shareholders. Without a shareholders’ agreement, the relationship between the shareholders is governed by the applicable corporations legislation. But that legislation might not cover all the matters the shareholders want or do so in the way they would choose. A well-drafted shareholders’ agreement defines the relationship, rights and obligations between the shareholders and the company, and documents their agreement on matters related to the company’s management and operation, financing, organization and the transfer of shares, and addresses potentially contentious issues before problems arise – and, in some cases, it can override the default provisions of the applicable legislation. However, shareholders’ agreements have long-term ramifications; it’s important that each shareholder carefully consider and understand the terms of the agreement.
3. Sale of Service or Goods Contract
A contract for the sale of goods or services clearly sets out the business relationship between the seller and the buyer, creating clarity and reducing the likelihood of a dispute arising in the future. A contract for the sale of goods or services is a written contract in which a seller transfers or agrees to transfer property or services to a buyer in exchange for money. The basics of any goods or services contract will outline: important details about the nature of goods, the services, or both; the relationship between the parties; the price; the payment terms; any representations or warranties on the goods or services provided; the duties each party owes; and the term of the contract and the circumstances under which the contract can be terminated. Depending on the nature of the good or services provided, a standard form contract or some standard terms will work. However, in some situations, it’s appropriate that all or some of the terms be negotiated between the seller and the buyer, and likely that provisions will need to be added.
Please contact your McInnes Cooper lawyer or any member of our Corproate & Business Law Team @ McInnes Cooper to discuss the written contracts your business needs.
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