Business Contracts for Wisconsin Small Businesses
Small businesses routinely buy and sell goods and services. Many of these transactions involve—or should involve—written contracts. This article provides an overview of important considerations for Wisconsin small businesses entering into business contracts.
What is a contract?
A contract is a legally binding agreement. To be enforceable in court, it generally must have (1) an exchange of value (called “consideration”), (2) a valid offer and acceptance, (3) mutual assent (i.e., an agreement on key terms), and (4) parties with legal capacity (e.g., not a minor or someone legally incompetent).
Is a Written Contract Required?
Written contracts are required under Wisconsin law for some types of contracts but not for others. For example, a written contract is required for, among other things, (1) the sale of land, (2) contracts that cannot be performed within one year, and (3) the sale of goods worth $500 or more.
Oral contracts, on the other hand, are permitted for many types of contracts, including contracts for services that can be performed within one year, and contracts for the sale of goods for less than $500.
Even though an oral contract might be permitted, it is often beneficial to have a written agreement. Memories fade, and a written agreement can help avoid future arguments over what the parties said. Additionally, written agreements can serve as a roadmap for the parties to follow during performance of an agreement. Lastly, written agreements can address important items like insurance, limitation of liability, and indemnification—issues that might not arise in verbal negotiations.
Important Contract Provisions
Business contracts come in many shapes and sizes and cover an array of issues. Although they depend on the context, some of the most important contract provisions include the following:
Goods – For agreements involving the purchase of goods, it is important to specify the exact type, quantity, and quality of goods being purchased. It is also important to specify the return policy and warranty for the goods, if any.
Services – For agreements for services, such as independent contractor or consulting agreements, it is important to specify in detail the services being provided. These are often stated in a scope of work to the agreement. (For a simple independent contractor agreement form, click here.)
Payment – Contracts should clearly specify what payments are due, when, and what methods of payment are acceptable. Contracts should also specify consequences for late payment, e.g., a 1% per month (12% per year) late payment fee assessed on unpaid balances.
Term – A contract’s term is its duration, i.e., how long it will last. Some contracts are for one-off purchases and do not have an extended term. Other agreements have a specified term, such as a certain number of months or a year. It is generally not advisable to have an open-ended term for business agreements.
Intellectual Property – If a party will be creating any intellectual property (IP), the business agreement should say who will own it (e.g., the contractor or the hiring company). Transfer of ownership of intellectual property is commonly called an “assignment,” and IP assignment provisions are common in business agreements. (For an overview of the types of intellectual property, click here.)
Confidentiality – If parties will be exchanging sensitive or proprietary information, they should agree to treat that information as confidential. Confidentiality agreements (also called non-disclosure agreements or NDAs) can be included within a business agreement or be a separate agreement. If the confidentiality agreement is a separate agreement, it is important that the confidentiality terms of the two agreements do not conflict. (For a simple mutual non-disclosure agreement form, click here.)
Termination – Entrepreneurs often don’t like to think about ending a business relationship before it has started. Analyzing and selecting a suitable termination provision, however, is an important part of the negotiation process. Some agreements allow for termination for any reason (also called termination without cause), while others only allow for termination for good reason (also called termination for cause). Termination provisions often include a period, such as 14 or 30 days, for termination to be effective after notice is given.
General Provisions a.k.a. Boilerplate
Flip (or scroll) toward the end of a business agreement, and you will likely see dense legal terms. These terms are commonly called general provisions or boilerplate. Although the terms may be hard to read, don’t skip over them – they can be and may need to be changed for a particular deal. Common general provisions include:
Relationship of the Parties – A common provision states that the parties are independent contractors to one another and not in an employer/employee relationship, joint venture, or partnership (for tax purposes).
Insurance – It is common for business agreements to require insurance, especially where there is a possibility of property damage or personal injury (e.g., where a party is providing services). A party should speak with its insurance agent or broker before signing a contract, if the agreement addresses or should address insurance.
Indemnification – Indemnification is a contractual obligation of one party (the indemnitor) to reimburse or compensate another party (the indemnitee) due to the acts of the indemnitor. Indemnitors should be wary of indemnification provisions that are too broad, and indemnitees should be wary of provisions that are too narrow.
Governing Law – Business agreements commonly include a provision stating which law governs their interpretation and enforcement. Wisconsin small businesses should generally seek for their agreements to be governed by the laws of Wisconsin.
Dispute Resolution – An agreement can specify how disputes are to be resolved, e.g., mediation (where a neutral party mediates the dispute), arbitration (somewhat similar to litigation, but private), or litigation. Mediation might be preferable where the parties will have an ongoing relationship. Arbitration is optimal where parties desire to minimize negative press, and it might be faster and less expensive than litigation. Litigation is resolution of the dispute in a state or federal court.
Forum Selection – Having to resolve a dispute in a forum (court) far away can be expensive and time consuming. As such, Wisconsin small businesses should, when possible, specify in their business agreements that disputes are to be resolved exclusively by federal or state courts in the county where they are located.
Force Majeure – A force majeure clause is a contract provision relieving a party from performing its contractual obligations where circumstances beyond its control arise, making performance inadvisable or impossible. Examples of such circumstances include extreme weather, natural disasters, war, terrorism, civil disorder, and medical epidemics.
Where to Find Good Business Contracts
If it is within a business’s budget, it’s wise to hire an attorney to review and prepare important business agreements. If hiring an attorney is cost-prohibitive, a business can look for do-it-yourself forms online or in bookstores. The internet, however, is replete with poorly written legal documents. Buyers should also beware of online services that upcharge customers for unneeded services or documents.
Wisconsin entrepreneurs in need of a business agreement are encouraged to contact one of the resource providers listed on the Build site.
