Understanding Contracts for SMEs: A Guide for Business Owners

Updated on 8 May 2014

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What every business owner should know before signing a contract


Running any business means you will have to, at one point or another, enter into agreements and contracts, this can be with your suppliers, customers or business partners. Make no mistake, no business can succeed without a solid appreciation of the importance of a contract.
“A written contract is the best way to protect a business relationship. It outlines the terms of the agreement in plain black and white so that there’s no confusion and no misunderstandings,” says Monisha Prem, corporate and commercial lawyer, and CEO at Legal Services Excelsur.

Basic contracts for SMEs
While the specific contract requirements for each business may vary, Prem says there are three common legal contracts every business person should draw up for their business. They include:
Constitutional contracts: These are contracts that regulate powers and limitations such as memorandum of incorporation (which protects the interests of shareholders) and partnership agreements (which detail the partnership relationship).
Relational contracts: These are contracts that establish and manage rights and obligations between various business parties such as suppliers, customers and employees.
Transactional contracts:  These contracts regulate commercial transactions such as the purchase and sale of assets or shares, or raising debt or equity.

“Many people simply sign the contract without reading what is expected of them and the rules that they need to follow”

Where small businesses get it wrong
Prem says one of the most common mistakes made by small businesses is entering into agreements without fully understanding the contract. Many people, she says, simply sign the contract without reading what is expected of them and the rules that they need to follow.
According to Prem, a well-prepared contract protects each of the parties’ business interests. “The parties to the contract are bound by their promise (obligation) and duty as stated in the contract. The contract will stipulate what the consequences of failing to deliver as promised,” she says.

What to look out for before you sign
Prem says one of the first considerations any business person should look at in a contract is an outline of each party’s rights and responsibilities. The contract, says Prem, should also clearly define all relevant terms so there is no room for misunderstandings.

What to consider before signing a business contract

  • Does the other party have the capacity (ability) to agree: a minor will not have the capacity or whether the person signing on behalf of an entity (company or CC) authorised without limitations of power to enter the agreement?
  • Are there any specific laws that apply: such as those regulating the selling or buying of land or dealing with long leases or ante-nuptial contracts?
  • Does the contract have any illegal element that is contrary to any law or society, if so the agreement cannot be enforced.
  • Ensure that the obligations for each party are possible to be performed.
  • Understand clearly how to terminate or exit the contract and under what circumstances you are entitled to do so, such as material breach.
  • Be aware of significant dates or events that apply to each party and the consequences of not complying.

About the authorMonisha Prem (BA  MBA) is the CEO and senior legal practitioner at Excelsur Legal Services. Monisha is an admitted attorney with over 10 years of post-article experience in law. 

See Also: Legal Advice for Handling Contracts

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