What to watch for when preparing business contracts

It is common for businesses to enter into business contracts for an exchange of services for value.  While a contract can be oral or written, it is best to have it written as a written contract is always easier to prove, and reduces arguments as to who said what.  When preparing a business contract, beware of the following:

Parties

Small businesses often make the mistake of not naming a party correctly.  Who are you dealing with?  Is the party an individual or an incorporated company?

If the party is an individual, his or her legal name should be used.  The name can be verified by inspecting a photo identification issued by the government such as a driver’s licence.

If the party is an incorporated company, the name of the company as set out on the Certificate of Incorporation should be used.  Beware of the words “Inc.”, “Ltd.” or “Corp.”.  These are not interchangeable words in a company’s name.

Whether a party is an individual or an incorporated company, a common mistake is using a trade name instead of a legal name.  For instance, Jane Doe may carry on business as “Jane’s Consulting Services” which is not incorporated or registered as a sole proprietorship.  The party to the contract should therefore be Jane Doe, not “Jane’s Consulting Services” as it is not a legal entity.  Similarly, 123 B.C. Ltd. may carry on business as “Jane’s Consulting Services”.  The party to the contract should be 123 B.C. Ltd., not “Jane’s Consulting Services” as it is not the company’s legal name.

Payment Terms

Terms of payment should be set out clearly in the contract.  If the contract refers to certain terms which are set out in another document, such as the payment due date on an invoice, ensure those terms are expressly set out in the other document.

Interest on late payments

Where an interest rate in a contract is set out at a rate payable per day, week, month or other periods less than a year, the Interest Act ofCanada requires the contract to contain an express statement of the yearly rate to which the other rate is equivalent.  Otherwise, no interest exceeding 5% per annum can be charged.

Personal Guarantees

If you are entering into a contract with an incorporated company, you may wish to obtain a personal guarantee or indemnity from an individual so that the individual guarantees the performance of the contract or becomes jointly liable with the incorporated company for all its obligations.

In doing so, make sure the guarantee or indemnity is in a separate paragraph or even a separate document.  Avoid using small print.  Make sure the guarantee or indemnity is brought to the attention of the person signing, and that the contract is signed by both the incorporated company and the individual.  In the event the individual is the person signing on behalf of the company, the individual will sign twice, once on behalf of the company, and once in his/her personal capacity as guarantor/indemnitor.

Contact us if you have doubts in preparing a business contract.  Do not wait until the contract has been signed.  Getting us involved in the preparation stage of a contract will save you many headaches in the future.

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